FP Dealmakers: More people 'just walking away' from transactions as M&A flow slows in first half

Deals down 14 per cent from same time last year

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Tom Redekopp, managing director of the business law group at Dentons in Toronto, knew there was a seismic shift underway in mergers and acquisitions traffic when deals started abruptly falling apart midstream earlier this year.

Rather than the usual pace of one deal per year stalling out, transactions were suddenly being abandoned on a monthly basis.

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“I think it’s like four deals dying in the last four months,” Redekopp said. The cross-border M&A specialist said factors such as rising interest rates and turbulent earnings were in some cases combining to change the acquirer’s mind.

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“People are either putting the deal on hold indefinitely or just walking away.”

The slower deal flow is spilling over into a tough market for financings, with the total number of debt and equity deals down 16.3 per cent to 468 and the amount raised down 14.3 per cent to $254.7 billion in the first half of the year as compared to last year, according to tallies compiled by Financial Post Data. Corporate debt deals raised just $149.8 billion, down 19 per cent from the same period last year.

Dealmakers summary

There were no preferred equity deals at all, while structured product equity deals fell by 55.6 per cent to just eight deals, with value cratering by two-thirds to $268.71 million.

“It’s been a quiet deal environment for really the last 12 months,” said Trevor Gardner, co-head of Canadian investment banking at RBC Capital Markets.

“I’m speaking in aggregate in most of the measures that we have for our business. So whether you look at announced M&A, whether you’re looking at equity financing, debt financing, most indicators have us down year over year or down over recent periods — but you’ve got to acknowledge 2021 was (an) extremely high level of activity.”

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Equity financings have been in particularly short supply, with notable exceptions such as Brookfield Renewable Partners issuing $500 million in equity through a bought deal underwritten by a syndicate of Canada’s five biggest banks to partially fund the acquisition of Duke Energy Renewables for $1.05 billion. This trend is perhaps not surprising given the public market volatility, Gardner said. 

Carrie Cook, co-head of Canadian investment banking at RBC, said the slowdown in equity issues can also be traced to a shortage of merger and acquisition deals in the first half of the year.

“They are obviously linked and this year we have not seen as many public market financings in support of M&A.”

The market has been so slow, especially compared to the frenzied dealmaking during the COVID-19 pandemic in 2021, that Bank of Montreal reportedly laid off about 100 people from its capital markets operations in June, representing close to four per cent of that division’s staff.

IPOs have been rare in this market and merger and acquisition deals that are getting done are more likely to be bolt-on rather than transformational ones that require billions in equity and debt financing.

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Dealmakers 10-year trend

“We’re doing lots of add-ons, so there’s a lot of opportunity there to expand on the goals of … existing businesses by supplementing them through M&A,” said Kim Le, co-head of the mergers and acquisitions and private equity groups at Stikeman Elliott LLP in Toronto.

While the first half of 2023 was stronger than the back half of last year for IPOs, the deal flow and dollar values were dwarfed by the performance in 2021 and into the first half of 2022, according to Financial Post Data.

In the first half of 2023, Canaccord Genuity Corp. led the pack as full credit bookrunner of operating company IPOs, with just three mandates worth $76.86 million that nonetheless gave them 43 per cent of the market.

Another trend seen in these markets is that banks have been willing to take on smaller deals, even if that sometimes means taking lower fees than they usually command, according to dealmakers.

“I’m on a deal right now for a small startup and it has … a big business plan, but it requires fairly significant financing and one of the big banks is doing the work for them,” said Alex Farcas, co-lead of the national mergers and acquisitions group at Dentons. “I wouldn’t have thought they would have touched a story like this in busy times.”

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Total financings by dealer

This, in turn, is pushing the independent dealers to chase smaller deals than would be typical for them, he said.

“Similarly, the U.S. bulge-bracket investment banks are going down market,” said his colleague Redekopp, adding that while they are trying to hold the line on fees, they are at times making exceptions in order to win M&A work.

RBC’s Cook said declines in fees are in line with an overall drop in business rather than a change in strategy for Canada’s largest bank.

“We think about fee pools as a proxy for transactions, not as any shift in the market in terms of people taking a different fee structure or thinking about fees differently,” she said.

Cook said it is not usual for big banks to do some business traditionally handled by boutique broker-dealers in tough times, with fewer deals to chase.

“I think you probably do see banks doing, maybe, deals that you would have expected a boutique to do,” she said, adding that banks have broader sector experience and a wider range of services so they are able to keep the pipeline full even when certain sectors fall out of favour.

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IPOs issued by operating companies

Canadian banks are also working to keep deals flowing through innovations like “wall cross” financings that give institutional investors access to more information to assess whether or not to participate in an equity deal and convertible bonds that lower the cost of capital and bring in additional investors such as hedge funds, said Dany Beauchemin, co-head of global investment banking and Canadian and U.S. corporate banking at Bank of Nova Scotia.

Deals have been drying up globally, with values falling more than 40 per cent this year to US$1.2 trillion, according to Bloomberg data.

The dealmakers say there is often a gulf between what a seller believes their company is worth and what a buyer is willing to pay in this market, even with safeguards such as representations and warranties to give the buyer recourse if a company’s business, assets, liabilities, and operations don’t perform as billed.

Even when deals are being considered, due diligence is taking longer, giving both sides a chance to reassess as they weigh economic and interest rate conditions.

“When I’m sitting at my desk thinking about what M&A is like right now, if I had one word to describe it, I would say it’s choppy,” said Redekopp. “It’s really choppy.”

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RBC’s Gardner and Cook said signs of stability in the economy, equity market and geopolitical landscape will be key to getting dealmaking fired up again, though a return to the 2021 frenzy is not likely in the near term.

“I don’t think … that we feel like we need to see things go back to where they were three or four years ago,” Cook said, adding that the historic low interest rates of that period won’t be necessary to stimulate financings or close the gap between the valuations that sellers want and what buyers are prepared to pay.

“We don’t need to go all the way back down. We just need (management) teams to get the comfort that they can plan things and get things done with an outlook for stability, and I think we’re sort of hopeful that we’re going to get there in next 12 to 24 months.”

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Beauchemin, at Bank of Nova Scotia, is even more optimistic, predicting that dealmaking could begin to pick up as soon as the back half of this year as predictions have been leaning towards a soft landing rather than recession. However, he noted it could take longer for some deals to reach the stage of being publicly announced.

“We’re working on some deals now. We need to work hard and be creative and innovative just to get the M&A transactions through the finish line,” he said.

“But I think we’re starting to be a little bit more optimistic in that pace of deals getting announced in the second half, certainly into 2024, assuming and hopefully that the rate environment remains more stable — one or two more rate hikes — and we don’t get into talks of a recession again.”

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