Why M&A activity was comparatively flat in 2023

M&A can be a barometer for the economy, and the economy has clearly cooled

Mergers and acquisitions were down in Canada in 2023. | Peter Dazeley, The Image Bank, Getty Images

Mergers and acquisitions in the private sector in Canada were comparatively flat in 2023, according to BDO Canada – a reflection of economic malaise and uncertainty.

And it will likely remain flat until the second half of 2024, predicts Michael Morrow, partner and managing director of M&A and capital markets for BDO Canada.

“M&A is a barometer of a healthy economy and M&A activity is down this year, and that is certainly signalling that we’re in a slow-down, maybe mild recession,” Morrow told BIV News. “And that may linger for a quarter or two.

“We had a lot of headwinds and challenges to deal with, whether it was inflation or soaring interest rates or uncertainty over economic conditions, and that lingered through much of 2023. We saw some clients who were potentially looking at selling their business deciding to hold off for a while.”

Morrow added that 2023 M&A activity was actually fairly normal, if the pre-COVID period was a basis of comparison, “but certainly down from the tear that they were in in 2021 and 2022.”

According to PwC, there were 1,218 M&A deals in Canada from January to May 2023 valued at $85 billion – a 17 per cent decline over the same period for 2022 in terms of volume, but up 10 per cent in terms of value.

Some of the biggest deals were in energy, such as a $4 billion buyout of Total Energies’ share in the Surmont oil sands project by ConocoPhillips (NYSE:COP), and Suncor Energy’s (TSX:SU) $1.5 billion buyout of Total’s stake in the Fort Hills oil sands project.

Morrow noted that there are lot of Baby Boomers who are ready to sell their businesses, but who have been holding off, due to the economic uncertainty introduced by inflation and rising interest rates. And for potential buyers, those rising interest rates means higher borrowing costs.

“There is a lot of pent-up demand to do transactions,” Morrow said. “We’ve got a huge number of Baby Boomer business owners that need to sell their business as part of this big wealth transfer that’s happening across Canada. And that pipeline has just been on the sidelines for a big part of this year.

“But those business do need to get sold, and once the market opens a little bit more, and there’s more confidence and valuations are better and the banking environment is more accommodative, you’re going to see lot of those business owners try to do deals.

“I think that would set us up for some record years in 2025 and beyond, just because we know that there’s a huge volume of businesses that need to transact just because of succession planning issues.”

The high-tech sector has been especially hard hit by a drying up of investment and decline in valuations. Morrow thinks that may turn a corner later in 2024.

“It’s been a tough year for tech,” Morrow said. “I think we’re going to see a resurgence in tech activity flow in this upcoming year.”

He expects companies in the cloud, AI and cyber security spaces to benefit, when deal flows get back to normal.

Morrow said he does not expect to see M&A activity in private markets pick up until the second half of 2024.

“We think there’ going to be recovery for sure in M&A volume, most of that in the back half of next year.

"A deal process, for us, takes typically six to eight months. We’re putting into the market a significant amount of deal flow in January but that won’t close until probably in Q3. I think Q1 will continue to be slow. From there we should see a continued uptick.”