M&A appetite among Canadian execs strongest since 2009; continuing prudence signals a thoughtful market: EY

The percentage of polled Canadian executives with mergers and acquisitions (M&A) plans in the works has tripled over the past year, notes a report released Tuesday by Ernst & Young.

Buoyed by optimism about the domestic economy, 73% of surveyed executives have M&A plans for the next year compared with just 24% in October of 2014, notes EY’s latest Canadian Capital Confidence Barometer.

“This finding, combined with a positive M&A outlook from the United States (74%, highest global response) and Global (59%) respondents, speaks to a healthy global and Canadian M&A market,” states the barometer.

“Executives are embracing M&A as a tool for generating long-term growth as part of a bigger strategy to make their companies more competitive in the next decade,” Doug Jenkinson, EY’s transaction advisory services partner, says in a statement from the global provider of assurance, tax, transaction and advisory services.

The biannual barometer – the 13^th since the series was launched in late 2009 – reflects input from 1,600 senior executives from large companies around the world and across industry sectors who were surveyed in August and September.

With respect to having a bullish outlook on M&A, Canada trails only senior executives in the U.S. “Canada is bullish in its pursuit of acquisitions,” says Jenkinson (pictured left). “We’re seeing a very healthy market overall,” he continues.

Canadian respondents are also optimistic about the domestic economy. Specifically, 38% of executives polled see the Canadian economy improving, almost triple the 13% in April 2015. “This optimism is leading to more Canadian respondents focusing on growth (41%) than their counterparts in the U.S. (29%) and Global (33%).”

As it relates to M&A, 66% of surveyed companies say they are investing in domestic deals in the coming year. “This optimism is reflected in the steady growth of deal pipelines, with almost 90% of Canadian respondents looking at more than one M&A opportunity at once,” EY notes, adding this is almost double from this past April, when 48% of respondents reported doing so.

Only 6% of Canadian respondents report allocating more than 10% of M&A capital to emerging markets, compared to 36% in April 2015.

“In addition, the valuation gap is closing, with 57% of respondents seeing a gap of less than 10% in October 2015, compared to only 28% in April 2015,” the barometer adds.

“There are signs that the Canadian oil and gas industry will see an increase in transactions in the coming year as players address balance sheet pressure,” notes the statement from EY. Globally, with respect to M&A, 90% of oil and gas executives surveyed expect the M&A market to accelerate in the next 12 months — a sharp increase from 50% of respondents a year ago.

“After an extended period of a wait-and-see approach in M&A, we’ve seen very robust activity during the last few quarters,” Jenkinson reports, adding that the responses received suggest “this strength will continue for some time.”

Appetite and optimism, however, does not equate to Canadian executives being imprudent. “Executives told us they’re being extremely prudent in evaluating opportunities,” Jenkinson notes, saying 82% of respondents report they are “willing to walk away from deals that aren’t fully aligned with their corporate strategy. This is a sure sign of a strong, but thoughtful market.”

Overall, prudence is also being demonstrated in the fact that senior executives – despite being upbeat – are also bracing for uncertainty in the next year. Among other things, this includes volatility in commodities and currencies, political instability in the Eurozone, and the upcoming U.S. presidential election.

“They’re taking a measured, prudent approach to corporate strategy and are increasingly focused on cost reduction and operational efficiency,” EY notes.

Canadian executives, for their part, “are also taking a prudent approach to corporate strategy, with 57% of respondents focusing on cost reduction and operational efficiency in October 2015, up from 31% in October 2014,” the barometer points out.

The barometer seeks to gauge corporate confidence in the global and domestic economic outlook, understand boardroom priorities in the next 12 months, and identify emerging capital practices that will distinguish those companies building competitive advantage as the global economy continues to evolve.