Merger and acquisition (M&A) activity in Canada got off to a “red hot start” in the first quarter (Q1 2018), according to a report published on Wednesday from Toronto-based Crosbie & Co.
There were 834 deals in Q1, the highest deal total in six years, Crosbie reports. However, the total value of those deals fell to $47 billion, which ranks at the low end over the past five years.
The drop in value is largely due to a significant drop-off in large deals. “Given that a significant portion of Canadian M&A activity is north/south with the U.S., it is possible that the uncertainty created by the ongoing NAFTA renegotiations has caused acquirers to hit the ‘pause’ button on larger transactions,” the report states.
Additionally, volatile commodity prices and the uncertainty about the status of pipeline construction, “could be having a negative impact on M&A in the resource sectors,” the report states. “Perhaps some clarity on these various fronts will give acquirers the confidence to resume making large bets.”
The energy sector saw deal value drop by 85% from $22.9 billion in the first quarter of 2017 to just $3.4 billion in Q1 this year, “largely due to a lack of mega-deals in the sector.” The metals and mining and precious metals sectors also saw the number and value of transactions decline.
The tech sector was the most active in Q1, with 120 transactions, worth a combined value of $2.9 billion. The real estate sector had 106 transactions, totaling $14.8 billion.
Looking ahead, the conditions for M&A look likely to “remain positive” in the near to medium term, the report states, as “most sectors of the economy are firing on all cylinders, corporate earnings continue to grow at a robust rate, interest rates remain near historical lows, and capital of all flavours is plentiful, cheap and available on attractive terms.”
There are also a couple of risks to the outlook. “Central banks have been raising rates and withdrawing liquidity from the system, valuations are at historical peaks by virtually every measure, energy prices have been inching upwards, and the geo-political environment is fraught with tension. Any sudden change in one or more of these factors could undermine the M&A environment and put a damper on activity,” the report states.