The tech industry is often characterized by significant M&A activity. Given the economic climate, interest rates, and solid markets, it is predicted that strong deal making activity will continue into 2020. Though there was some undeniable volatility as a result of political and economic uncertainties and the negotiations of major international trade deals, M&A activity within Canada has been trending at a historically high rate- from both the perspective of number of transactions and enterprise value.
The total deal value increased from $265.8 billion in 2017 to $331.2 billion in 2018. In 2019, the tech industry was the second largest in Canada for private deals, representing 20% of deal volume for the first half of the year; equivalent to 104 deals worth just under $5 billion. This was up from 15% the year prior.
Trends in EBITDA/EV
In the tech sector, the average EBITDA/EV multiple during the first 6 months of 2019 declined slightly from 12.3X in 2018 to 11X in 2019. The number still sits above the industry average, which was 10.9X. The fall could be due to the increase in interest rates in the recent past.
Economic conditions and M&A
Expected increases in market volatility are predicted to slow M&A activity across all sectors, but this shift could also present an opportunity to acquire undervalued targets.
Canada’s relationship with China, our second largest trading partner, should also be considered. In 2018, inbound M&A deals with China accounted for $2.98 billion, and outbound deals $16.32 billion. When the Canadian government blocked the sale of Aecon Group Inc. to the CCCC International Holding Limited, they risked spurring long lasting impact on M&A deals with other Chinese companies.
Private companies are expected to continue to account for the majority of M&A activity. In the first half of 2019, they represented 91% of total Canadian deals. Given the plentiful capital available from these private enterprises, it is predicted that buyers will outnumber sellers, which could increase valuations.
That being said, volatility and interest rates could partner to drive down valuations. Debt pricing is expected to tighten, which could lead buyers to increase scrutiny when evaluating opportunities.
M&A strategy: Is there a ‘right time’?
For more than 60 years, the team at Zeifmans has supported clients as they weathered the storms of volatile markets, fluctuating interest rates, and emerging industries. We’ve assisted clients in preparing their businesses for sale, and also as they planned the purchase of new entities. As their trusted advisor, we’ve worked with them to make sure they’re choosing the type of action that will help build their legacy over the long term, in a sustainable and successful manner.
Our tech experts have unique subject matter expertise, equipped with both industry-specific knowledge, and innovative financial strategies. If your tech organization is considering an acquisition or a sale, we can help you to navigate both the planning and the execution. To learn more, read Foundational elements of a successful business acquisition or to start a conversation, contact our team today.
 Duff and Phelps, “Canadian M&A Insights: Winter 2019”, https://www.duffandphelps.com/-/media/assets/pdfs/publications/mergers-and-acquisitions/canadian-ma-insights-winter-2019.ashx
 Torys LLP, “Big Deals, Trade Tensions and Sector Shifts: Mid-Year M&A Update”, https://www.torys.com/insights/publications/2019/07/big-deals-trade-tensions-and-sector-shifts