Quebec — La Belle Province — has skilled a big uptick in mergers and acquisitions (M&A) deal exercise amongst small-cap firms since early autumn. So far, non-public fairness companies and strategic traders have acquired a number of Quebec-based firms at wholesome premiums.
What do they know that different traders don’t?
For a while, my colleagues and I’ve been beating the drum in our commentaries and webinars in regards to the worth that the present gulf between the intrinsic worth and market costs of a few of these Quebec-based firms represents. There are interesting threat/reward attributes and the potential for prime future returns at cut price costs.
The record of latest transactions spans sectors and industries from semiconductors (OpSens) to water treatment (H2O Innovation) and marine terminals (Logistec).
Why the sudden curiosity from traders? Two key drivers have propelled the surge in dealmaking, and we don’t anticipate them easing up anytime quickly.
1. Thoughts the (Valuation) Hole
The divergence between small- and large-cap firms reached historic ranges. In November 2023, the S&P 500 was up 17% for the yr in contrast with the Russell 2000, which had solely risen 2%. Traders seen the distinction and the premium underlying it.
2. Purchaser, Meet Vendor
Pent-up demand created a extra favorable match-up between motivated consumers and sellers. Private equity funds have $2.5 trillion in dry powder, and sellers are slowly realizing that it’s 2023, not 2020, and firm valuations must be adjusted accordingly.
Certainly, annoyed shareholders have more and more taken an activist stance and referred to as on firm boards to unlock worth on the present market worth. Traders have capitalized on this atmosphere. For instance, within the accomplished acquisition of Magnet Forensics and present gives for H2O Innovation and This autumn Inc., non-public fairness–led administration buyouts and insiders rolled their curiosity into the privatized firm.
Aimia Inc. can be within the midst of a hostile takeover from its largest shareholder, Mithaq Capital, amid a contentious battle among insiders. Such circumstances represent a positive atmosphere for small-cap-focused fairness funds. Corporations are buying and selling at deep reductions to their intrinsic or non-public market worth. This presents a positive tailwind for arbitrage funds since M&A exercise within the small-cap universe tends to drive efficiency on this house.
A number of further market dynamics make small-cap M&A very compelling proper now and significantly in Quebec:
- Smaller firms have a bigger pool of potential suitors, together with strategic consumers, administration buyouts, non-public fairness funds, pension/sovereign funds, and trade consolidators.
- The top-market for small-cap companies is commonly home or transborder. Amid geopolitical uncertainty and governments selling reshored provide chains, these are interesting traits.
- It’s not 2021 with regards to financing circumstances both. Borrowing charges are a lot greater and large-cap mergers and leveraged buyouts (LBOs) require massive syndicates of financiers. Smaller acquisitions are simpler to finance with money readily available and extra versatile funding choices.
- Many firms that went public in 2020 and 2021 are buying and selling properly beneath their preliminary public providing (IPO) worth. Even with constructive progress and good fundamentals, many of those companies will discover it difficult to realize new public market traders due to anchoring bias, amongst different causes. As soon as bitten, many traders are twice shy. These firms could be engaging insider buyout targets.
- The regulatory atmosphere in each Canada and america is extra restrictive with regards to mergers. Smaller mergers might keep away from the regulatory pushback.
- Within the present financial atmosphere, well-heeled strategic consumers seeking to leverage scale and synergies by buying opponents have extra leeway to barter favorable circumstances.
Whereas these circumstances will not be distinctive to Quebec, latest M&A exercise suggests the province has greater than its share of alternatives. We imagine traders ought to listen.
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All posts are the opinion of the creator. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially mirror the views of CFA Institute or the creator’s employer.
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