The next M&A cycle will be more complex. Here's why
John Cho is a partner and national leader of KPMG in Canada’s deal advisory practice and Johanna Gerrie is a partner and national leader of the firm’s M&A tax practice in Canada.
There’s some good news for pension funds that hold private equity investments: After a three-year long slumber, falling interest rates, easing inflation, and about US$3.9 trillion of private capital sitting on the sidelines, Canada’s M&A market is set to reignite. However, the market is going to look very different from before.
If the last burst of M&A activity was driven by buyers bidding more aggressively due to the lower cost of capital, this market will be led by agility, heightened intentionality, and more intense due diligence aided by technology.
Buyers armed with more advanced tools and techniques will be able to be more selective about their targets. Pension funds with assets to sell, hoping to attract competitive bids, will not only have to meet these higher expectations but exceed them – or risk being left behind.
A recent KPMG in Canada survey showed four in five mid-sized organizations are planning to acquire or be acquired over the next three years. But nearly 80 percent say the M&A landscape is far more complex than five years ago, thanks to new and evolving technology, data, privacy, and environmental, social, and governance (ESG) considerations.
Buyers with a strong grasp of these dynamics will make the most significant deals. They’ll be looking for digitally mature companies with ESG strategies in addition to strong fundamentals. As deal competition intensifies, buyers will conduct deeper due diligence, but they’ll need to do it more quickly and efficiently. Data and analytics, and tools like generative artificial intelligence, will become table stakes to accelerate that process.
Sellers hoping to attract the best offer will need to improve operational performance and demonstrate a path to value creation. In addition to solid company fundamentals, sellers will need to focus on the following.
Generative AI
Businesses that have successfully implemented generative AI will have a competitive advantage, and they’ll attract higher valuations as a result. KPMG’s survey showed 83 percent of organizations believe integrating generative AI into their operations would make them more valuable to prospective buyers. Sellers will need to demonstrate clearly how generative AI is bringing value to their organization.
Digital maturity
Companies with an established level of digital maturity will garner higher valuations in the next wave of M&A. For sellers, this means using data insights to improve performance and having the right tools and systems in place to automate certain tasks and processes. Sellers will also need to demonstrate an appetite for and culture of digital innovation – a critical component in deriving more value from a deal.
Tax implications
Tax considerations and efficiency across the deal structure continue to be critical. For instance, a share sale might allow a seller to benefit from the Lifetime Capital Gains Exemption or avoiding additional taxes on the sale of assets and double taxation on the post-sale proceeds. Buyers, on the other hand, often prefer asset acquisitions due to the higher tax shield from a step-up in the fair market value of the acquired assets. Increasingly, the global minimum tax rate of 15 percent could factor into the sale of large multinational corporations. Complex cross-border rules could expose companies to a top-up tax if their effective tax rate falls below the global minimum.
Sustainability
In today’s environment, ESG considerations can make or break a deal. Buyers with ESG expertise will want to know how challenges like carbon reduction could affect a target’s operations and financial results. Sellers will need to craft a strong ESG strategy, stay current on evolving regulations, assess risks and opportunities, and effectively communicate and show progress if they want an acquirer to grow their business.
There’s always been pressure to get things right in the deal market, especially for pension funds mindful of their members. The difference now is that due diligence is becoming more rigorous, the list of considerations is getting longer, and there is a greater risk if things go wrong.
As the pace of M&A accelerates, pension managers will need to modernize their approaches. With more use of data and AI, buyers will want richer discussions when considering a transaction – but they also want to execute as quickly and efficiently as possible.
Sellers will need to go to greater lengths to prove their long-term value and arm themselves with data and insights that tell their story. The result will be a more vibrant, innovative, and competitive M&A landscape.
