Quebec – La Belle Province – has seen a major increase in mergers and acquisitions (M&A) activity amongst small-cap corporations since early fall. So far, private equity firms and strategic investors have acquired several Quebec-based corporations at good premiums.
What do they know that other investors do not know?
For a while now, my colleagues and I actually have been banging the drum in our commentaries and webinars in regards to the value represented by the present gap between the intrinsic value and market prices of a few of these Quebec-based corporations. There are attractive risk-reward characteristics and the potential for top future returns at bargain prices.
The list of recent transactions covers sectors and industries of Semiconductors (OpSens) To Water treatment (H2O Innovation) And Ship terminals (Logistec).
Why the sudden interest from investors? Two key aspects have driven the recovery in deal-making, and we don’t expect them to decelerate any time soon.
1. Be aware of the (valuation) gap
The divergence between small and huge cap corporations has reached historic levels. As of November 2023, the S&P 500 was up 17% for the 12 months, in comparison with the Russell 2000, which was up just 2%. Investors noticed the difference and the underlying premium.
2. Buyer, meeting with the vendor
The pent-up demand led to a more favorable interaction between motivated buyers and sellers. Private equity funds have $2.5 trillion in dry capitaland sellers are slowly realizing that that is 2023, not 2020, and company valuations ought to be adjusted accordingly.
In fact, frustrated shareholders have increasingly taken an activist stance, calling on corporate boards to unlock value at the present market price. Investors have benefited from this environment. For example, in the finished acquisition of Magnet Forensics and the present offers for H2O Innovation and Q4 Inc., private equity-led management buyouts and insiders have pooled their interest within the privatized company.
Aimia Inc. can be in the midst of a hostile takeover from its largest shareholder Mithaq Capital. amid a contentious battle amongst insiders. Such conditions provide a positive environment for small-cap equity fund-focused corporations. Companies trade at significant discounts to their intrinsic or private market value. This represents a positive tailwind for arbitrage funds, as M&A activity within the small-cap universe tends to spice up performance on this space.
Several additional market dynamics make small-cap M&A very attractive right away, particularly in Quebec:
- Smaller corporations have a bigger pool of potential suitors, including strategic buyers, management buyouts, private equity funds, pension/sovereign wealth funds and industry consolidators.
- The end marketplace for small capitalization corporations is commonly domestic or cross-border. These are attractive features given geopolitical uncertainty and governments encouraging supply chain restoration.
- It can be not 2021 in terms of financing conditions. Borrowing rates are much higher and large-cap mergers and leveraged buyouts (LBOs) require large financial syndicates. Smaller acquisitions are easier to finance with money and more flexible financing options.
- Many corporations that went public in 2020 and 2021 are trading well below their initial public offering (IPO) price. Even with positive growth and robust fundamentals, lots of these corporations will find it difficult to draw latest investors in the general public market due, amongst other things, to their entrenchment orientation. Once bitten, many investors are doubly shy. These corporations might be attractive insider buyout targets.
- The regulatory environment in each Canada and the United States is more restrictive in terms of mergers. Smaller mergers could escape regulatory resistance.
- In the present economic environment, well-heeled strategic buyers in search of to leverage economies of scale and synergies by acquiring competitors have more leeway to barter favorable terms.
While these conditions might not be unique to Quebec, recent M&A activity suggests the province offers greater than just opportunity. We consider investors should listen.
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