Quebec — La Belle Province — has skilled a big uptick in mergers and acquisitions (M&A) deal exercise amongst small-cap corporations since early autumn. To this point, non-public fairness companies and strategic buyers have acquired a number of Quebec-based corporations at wholesome premiums.
What do they know that different buyers don’t?
For a while, my colleagues and I’ve been beating the drum in our commentaries and webinars concerning the worth that the present gulf between the intrinsic worth and market costs of a few of these Quebec-based corporations represents. There are interesting danger/reward attributes and the potential for prime future returns at cut price costs.
The checklist of latest transactions spans sectors and industries from semiconductors (OpSens) to water remedy (H2O Innovation) and marine terminals (Logistec).
Why the sudden curiosity from buyers? Two key drivers have propelled the surge in dealmaking, and we don’t anticipate them easing up anytime quickly.
1. Thoughts the (Valuation) Hole
The divergence between small- and large-cap corporations reached historic ranges. In November 2023, the S&P 500 was up 17% for the 12 months in contrast with the Russell 2000, which had solely risen 2%. Traders seen the distinction and the premium underlying it.
2. Purchaser, Meet Vendor
Pent-up demand created a extra favorable match-up between motivated patrons and sellers. Personal fairness funds have $2.5 trillion in dry powder, and sellers are slowly realizing that it’s 2023, not 2020, and firm valuations needs to be adjusted accordingly.
Certainly, annoyed shareholders have more and more taken an activist stance and known as on firm boards to unlock worth on the present market value. Traders have capitalized on this surroundings. For instance, within the accomplished acquisition of Magnet Forensics and present gives for H2O Innovation and This autumn Inc., non-public fairness–led administration buyouts and insiders rolled their curiosity into the privatized firm.
Aimia Inc. can be within the midst of a hostile takeover from its largest shareholder, Mithaq Capital, amid a contentious battle amongst insiders. Such circumstances represent a positive surroundings for small-cap-focused fairness funds. Firms are buying and selling at deep reductions to their intrinsic or non-public market worth. This presents a positive tailwind for arbitrage funds since M&A exercise within the small-cap universe tends to drive efficiency on this area.
A number of further market dynamics make small-cap M&A very compelling proper now and notably in Quebec:
- Smaller corporations have a bigger pool of potential suitors, together with strategic patrons, administration buyouts, non-public fairness funds, pension/sovereign funds, and trade consolidators.
- The top-market for small-cap companies is usually home or transborder. Amid geopolitical uncertainty and governments selling reshored provide chains, these are interesting traits.
- It’s not 2021 in terms of financing circumstances both. Borrowing charges are a lot larger and large-cap mergers and leveraged buyouts (LBOs) require giant syndicates of financiers. Smaller acquisitions are simpler to finance with money available and extra versatile funding choices.
- Many corporations that went public in 2020 and 2021 are buying and selling properly beneath their preliminary public providing (IPO) value. Even with optimistic progress and good fundamentals, many of those companies will discover it difficult to achieve new public market buyers due to anchoring bias, amongst different causes. As soon as bitten, many buyers are twice shy. These corporations may be engaging insider buyout targets.
- The regulatory surroundings in each Canada and the US is extra restrictive in terms of mergers. Smaller mergers could keep away from the regulatory pushback.
- Within the present financial surroundings, well-heeled strategic patrons seeking to leverage scale and synergies by buying opponents have extra leeway to barter favorable circumstances.
Whereas these circumstances might not be distinctive to Quebec, latest M&A exercise suggests the province has greater than its share of alternatives. We consider buyers ought to listen.
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