Mergers and acquisition (M&A) activity is expected to ramp up in Canada for 2017 despite rising uncertainty about the direction of U.S. trade policy, according to a new report from banking giant Citigroup Inc. and research firm Mergermarket based on surveys of M&A professionals.
Overall, two-thirds of M&A professionals surveyed expect Canadian M&A deal activity to rise in 2017, with most dealmakers expecting moderate growth in deals while 14% foresee a “significant” increase.
Optimism about M&A activity in the year ahead is driven by several factors, the report says, including large cash holdings on many companies’ balance sheets; demand for growth amid a weak economic outlook; and a strong appetite for acquisitions at private equity firms.
In particular, the energy, industrials and financial services sectors are expected to lead the increase in dealmaking, the report notes.
“Canadian companies, buoyed by strong balance sheets and eager to find new sources of growth are increasingly keen to make cross-border acquisitions,” the report says. “Those deals will be conducted in potentially fast-moving markets in regions such as Asia and Africa, as well as in traditional hunting grounds such as Europe and the U.S.”
At the same time, the report indicates that M&A professionals say that they expect foreign buyers will continue to see Canada as an attractive place to make acquisitions.
In particular, the Asia-Pacific region is seen as offering the greatest potential for cross-border deal activity in the year ahead, the report says, noting that 72% of M&A professionals believe Asia will be one of the top two sources of inbound M&A and 62% see Asia as one of the top two target regions for Canadian buyers.
However, the expected rise in deal volume also faces political uncertainty, the report says, citing concerns about possible shifts in trade policy under the new U.S. administration.
“This signals a dramatic shift from 2016, when respondents felt the greatest challenge was the valuation gap between buyers and sellers,” the report notes.
Along with political concerns, the other potential headwinds that dealmakers see include high valuations and stronger competition for the best deals, the report notes.
Conversely, Canada’s government is seen as a potential positive for M&A activity, the report says: “In particular, the commitment of Prime Minister Justin Trudeau to increase investment in the country’s infrastructure – including the launch of a Canadian infrastructure bank with a mandate to invest $35 billion over the coming decade – has the potential to boost M&A transactions.”