The past year witnessed the highest volume of deal activity in Canada in the last five years. However, recent challenges may result in some uncertainty in the dealmaking environment of 2015.

The predictions of 50 leading Canadian executives were gathered in interviews commissioned by Citi and conducted by Mergermarket. This study, entitled “Charting the course: the future of Canadian M&A in volatile markets”, reveals an insightful picture into some of the challenges, drivers, and other factors impacting Canadian M&A over the upcoming year.

The study reveals that 68% of the respondents expect that the overall volume of Canadian deal activity will either stay the same or increase in 2015. The majority of the respondents view inorganic growth as the primary driver of dealmaking in 2015, while other commonly-cited drivers include the sale of non-performing assets by companies and the strong valuations of companies.

Challenges of market volatility

Volatility of global commodity prices was perceived by the most respondents as the greatest challenge to Canadian M&A in 2015. As a result of fluctuating prices, a valuation gap is often created between buyers and sellers. Companies who are faced with lower valuations of their businesses are unwilling to sell their company at these depressed prices, whereas buyers are expecting such prices due to the market conditions. As a result, deal volume may be reduced as parties find it harder to reach a compromise in negotiations.

In addition to contributing to the spread of this valuation gap, the study explains that the recent drops in oil prices may also cause companies to focus more particularly on deal value, rather than deal volume, as conducting deals becomes increasingly difficult.  Secondly, companies most affected by the falling prices may be faced with the choice of either functioning under heavy debt, or selling their business.

Deal activity in energy and consumer sectors

The study finds that respondents are most bullish about the energy and consumer sectors. Oil prices will cause some smaller energy companies to be forced to sell their business, while lower valuations will cause energy companies to become attractive targets for inbound M&A. On the other hand, the consumer sector will see increased spending by businesses as lower oil prices result in cheaper gasoline and heating costs.

The author would like to thank Matthew Lau, articling student, for his assistance preparing this legal update.