Canada dealmaking set to rebound as ‘dry powder’ fuels wave of takeovers, bankers say
Dealmaking is set to rebound in the latter stages of this year as stored up “dry powder” and steadier markets fuel a wave of take-private deals, Canada bankers have predicted.
Mergers and acquisitions (M&A) activity slumped last year as historic turbulence on the markets spooked investors and brought a sharp close to a record breaking frenzy in 2021.
However bankers say the amount of undeployed cash stored up by firms will be put to use this year as some confidence returns in the market.
Analysts at London-listed investment bank Peel Hunt said smaller deals would see a particular uptick after the first quarter of 2023 as firms finance their own deals with cash raised prior to the downturn last year.
“The sheer weight of dry powder, following a period of record fund raising, demands the deployment of capital,” said Michael Nicholson, head of M&A at Peel Hunt.
“For smaller transactions, where the offeror is prepared to finance the cash consideration entirely through existing resources or where an existing portfolio company has available facilities to finance the acquisition independently, there may be scope to transact before the debt markets re-open more broadly.”
Peel Hunt was among a host of City brokers and bankers to feel the squeeze of the dealmaking slowdown last year as profits plummeted 99 per cent in the first half of its financial year.
Bargain Hunt?
Volatility and depressed valuations will continue to make UK PLC a juicy prospect for investors with private equity firms poised to snap up firms on the cheap, Peel Hunt said.
A slew of London-listed firms fell into the sights of foreign buyers last year, including software firm Aveva which was bought out by French firm Schneider Electric and iconic fashion firm Ted Baker which was picked off by a US-based bidder for around £211m.
UK tech darling Darktrace also entered into later-abandoned takeover talks with US private equity giant Thoma Bravo, while Newcastle-based Go Ahead gave the OK to a takeover by an Aussie-Spanish consortium.
“PE investment teams continue to take an active interest in UK PLCs while the private M&A markets are largely shut, in the hope of avoiding a protracted auction process and being enticed by current valuations,” Nicholson said.
From Canada to Wall Street
The predictions were echoed on Wall Street as bankers at Goldman Sachs said they expect a resurgence in dealmaking after another period of turbulence in the first quarter.
“I remain quite bullish, maybe not on the first quarter, but certainly as we go forward,” said Stephan Feldgoise, global co-head of M&A, told Reuters.
He warned there were “clear headwinds in the first part” of 2023, however.
Mark Sorrell, Goldman’s London M&A chief, told the news agency that corporate clients would pounce on deals when financing began to flow again.
Sharp rate hikes made cash harder to come by for investors and left dealmakers sitting on the sidelines in 2022. However, Sorrel said the situation could quickly change this year.
“When the financing market comes back, we don’t know when it will happen, but it will happen because of the amount of liquidity in the system, we think transaction volumes will and activity will recover,” he said.