Watch for a paradigm shift as boomers retire.
Mergers and acquisitions (M&As) are on the rise globally – especially between the most progressive, fastest growing and most agile companies – as a way to boost their businesses, according to research from the Grant Thornton International Business Report. But there are some potentially serious ramifications for the Canadian economy as baby-boomer owners cash in and M&A activity in the US heats up.
The report, which draws from interviews of 12,500 senior executives worldwide, shows 40% of the Canadian businesses surveyed plan to grow through M&As in the next three years, compared to 38% last year. Planned M&A activity in the US has really picked up the pace at 48%, up 11% from last year. Both are well above the global average of 31%.
In terms of taking action, 39% of businesses confirm they’ve seriously considered at least one acquisition over the past 12 months. Canada is above the average at 45% but behind the US at 55%.
When asked where the acquisitions will take place, 84% of Canadian executives cite domestic buys while only 27% identify cross-border deals. In the US, 91% expect to grow through domestic acquisition and 51% through cross-border activity.
Jeff Pocock, national leader of Grant Thornton LLP’s private equity practice in Canada, says a large proportion of privately held businesses are looking to transact in the next five years, “consistent with the growing demographics of succession-based businesses,” and he warns the numbers should be watched closely.
“According to economic forecast numbers released last year, 20% of Canadian businesses are owned by those 55 and over, and in the coming five years, nearly $2 trillion in business assets are poised to change hands, significantly increasing the liquidity in the Canadian market.”
An increasing number of US and global private equity firms are entering Canada. He says if their acquisitions continue at an increasing rate and (all levels of) government don’t enhance their current programs, “we could see a re-shaping of the economic landscape that lasts into the next generation. Loss of businesses could also have devastating regional impacts.”
Pocock notes it’s much harder to raise $2 million than it is to raise $100 million, and it takes just as much effort. Therein lies the difficulty for SME owners looking for an exit.
“There’s not nearly as much money chasing small businesses, which is where the nuts and bolts of the Canadian economy really is. My fear is if they start to sell to non-Canadian investors, management might leave Canada, head offices might move somewhere else, or plant rationalization might occur. I think there could be a paradigm shift if we don’t keep [SMEs] Canadian owned.”
Although he acknowledges governments have programs to facilitate some of these kinds of transactions, he says they need to do more. For example, a manufacturing company worth $10 million looking at a management-led buyout by a general manager may need a few million dollars, but small equity financing is hard to find in Canada. Pocock would like to see governments step up in some way to help facilitate the financing with other options.
“When you look out a few years, I see that 74-year-old owner who doesn’t know what to do with the business so one alternative is to just turn it off, which means he has to let his 30 employees go. We need to educate business owners across Canada there are alternatives.”
This article appears in the September 2014 issue of PLANT.
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