It was not that long ago that Canadians fretted about the hollowing out of the Canadian corporate sector. Foreign acquisitions of large Canadian companies had many wondering if the country wasn't drifting into the hands of foreign owners.
Turns out, the notion is bunk. Canadians firms have been buying a higher number of foreign-owned businesses over the past 10 years than have been bought by foreigners.
So says the new president of M&A International, Howard E. Johnson. His firm recently released a study that found Canadians acquired 4,787 foreign-owned businesses between 2004 and 2013. Over that same time only 3,544 foreign-owned businesses purchased Canadian companies.
"Many people might be surprised to learn that Canadians are more often the aggressor in a deal versus the sellers and we saw that really increase since 2009," said Johnson. "High quality Canadian companies with capital for spending have been quietly buying up companies around the world for the past 10 years and it's across the board in a variety of sectors."
In an interview with WP, Johnson worked out the details. "Canadian companies are becoming of increasing interest to strategic buyers around the world. The strength and performance of Canadian companies and the Canadian economy during the 2008 credit crisis attracted a lot of attention in the international community. Those big deals hit the news
...but the reality is that Canadian companies are quite aggressive in terms of acquisition. Our banks are very acquisitive ....OTPP looking for infrastructure all over the world.”
The reason: Companies are seeing the benefits of geographical diversification. “The old idea that foreign counties are risky is starting to give way in a world that is seamless. People are more comfortable buying firms in foreign countries,” says Johnson.
While the big deals attract the attention, most of the M&A action is in the mid-market. The vast amount of deals over this time involved businesses that sold for less than $50 million. Some of the activity is a matter of demographics. “This has been going on for a few years. The population is aging. Boomers who own companies are looking for an exit strategy. You've got a lot of capital looking for a home.”
Johnson expects the good times to continue. There is a lot of money in private equity. Public companies have a lot of money. They have to get that money to work. “I think the next 12 to 24 months to be good for sellers. He mentions the sectors that are doing well--tech, food and beverage, business services. “These are the hot sectors. There is a lot of interest in branded food companies.” Any company that has a food product with a good brand name will have multiple bidders he says. “These companies are perceived as stable. If there is brand recognition, there is stickiness among customer base. That's a key trait. In tech, anything with a recurring revenue streams and subscriptions will do well.”
That said, the market is unlikely to any more frothy. Valuations are where they were at in 2007. There is more downside risk than there was. Lenders are becoming a little bit light on covenants applied to debt agreements, as they did in 2007. “That is a bit of a danger signal. Buyers more are more prudent. But I don't think we'll see the maker drop off,” says Johnson.