Value Unleashed

Market Update

Thirty-four Canadian M&A transactions were announced this past week. Year to date, M&A deal count has been 4% lower compared to 2016. The Canadian dollar fell by 0.27 cents, ending the week at 76 cents. The TSX underperformed the S&P 500 by 1.2% in U.S. dollar terms.

The new issue environment for U.S. middle market loans remains robust, with average total leverage of 5.0x EBITDA, while new issue clearing yields are 0.27% lower than last year’s levels. Total leverage levels rose by 0.3x from last week indicating a more accommodating lending market.

Solving the Value Creation Dilemma - How to become an “Extraordinary Acquirer”

A recent McKinsey article crossed my desk this week.  The article highlighted value creation inherent in organic growth versus growth by acquisition.  The author noted that over a 15-year period, companies with more organic growth generated higher shareholder returns than those relying heavily on growth by acquisition.  Curious about these findings, I delved in to find an explanation, and to determine whether there was an argument in support of growth by acquisition.

Given my perspective (Valitas Capital is, after all, an M&A advisory firm), you may not be surprised to learn that I did find a persuasive argument.  Shareholder value creation through an acquisition strategy can be achieved, particularly where an acquirer focuses effectively on post-acquisition integration.  In fact, a 2014 academic paper published in the Journal of Financial Economics identifies a category of “Extraordinary Acquirers”, companies that consistently create shareholder value through their acquisitions.

In examining a sample of more than 12,000 transactions over 4,128 firms, the authors concluded that extraordinary acquirer returns could not be explained by target or deal characteristics, and were not CEO or industry specific.  They suggested, rather, that this persistent shareholder value creation might reflect “acquisition skill… [such as] expertise residing in internal M&A/corporate development teams, or particular practices in terms of post-merger integration” (PMI).

A recent KPMG report provides further support for this thesis.  The report, aptly titled “Why Most Acquisitions Fail”, suggests that more than 60% of M&A deals don’t deliver on their expected value, with 32% of deals actually eroding shareholder value, and attributes this failure primarily to poor post-deal execution (or PMI). 

Source:  KPMG Global Research

The KPMG authors point to “common integration errors” including:

1. Inadequate integration planning

2. Lack of post-merger “program” leadership

3. Lack of formal and fast decision making process

4. Loss of focus on everyday operations

5. Major synergies not driven through

6. Customers get forgotten

We would add to this list:

7. Lack of awareness of organizational/culture differences

8. Lack of accountability across departments for integration success

Value enhancing deals (31% in the KPMG sample), on the other hand, consistent with the “Extraordinary Acquirer” thesis, can attribute their success in large part to effective PMI, with a management team that creates an integration plan to address the issues listed above.  

 Being an “Extraordinary Acquirer” isn’t the result of a particular CEO or senior leadership team’s abilities but rather, is tied to their ongoing commitment to effective deal integration. PMI is a key part of the deal that is sometimes just the subject of lip service, and often overlooked outright.

A key step to becoming an "Extraordinary Acquirer" is to create a measurable PMI strategy tailored to deal imperatives, cultural requirements, and organizational capabilities. In effectively building and executing on such a strategy, companies reduce complexity, mitigate risks, speed integration and enable shareholder value creation.  

So where does this leave us?  Certainly, given the rate of failure to deliver shareholder value through acquisition, organic growth is, on its surface, an attractive option, albeit a tough one to pursue in the current low organic growth environment.  However, firms that invest in building M&A skill, including a framework for PMI, can successfully create shareholder value through acquisition.  They might even become “Extraordinary Acquirers”.

Thanks to Tim Morton, Valitas Advisor, for lending his expertise to this article.  Tim is the Managing Partner and founder of Prompta Inc., a leading consultancy, and has 20 years of experience successfully leading transformational change for over 20 organizations across 12 industries. He is a post-merger integration (PMI) specialist having enabled mergers, acquisitions and divestitures of valued at $32 billion in aggregate.

M&A Deal Summary

Announced Deals

Volaris Group to Acquire Telepin

Volaris Group Inc., a Canadian venture capital arm of Constellation Software specializing in start-ups and early stage companies, has agreed to acquire Telepin, Inc., a Canadian company that provides mobile transaction infrastructure software for mobile operators. No transaction terms were released.

ICE Data Services to Acquire TMX Atrium

ICE Data Services Limited, an American electronic trading platform operator that offers a suite of pricing, market data, analytics, and related services, has agreed to acquire TMX Atrium, a company that provides Internet protocol-based network connectivity solutions to the financial services community in Europe, North America, and South America. No transaction terms were released.

Seabridge Gold to Acquire Paulson Gold Holdings

Seabridge Gold Inc. (TSX:SEA), a Canadian company that engages in the acquisition and exploration of gold properties located in North America, has agreed to acquire Paulson Gold Holdings, LP. Transaction value is estimated to be $19.9 million.

Deep-South Resources to Acquire Haib Minerals

Deep-South Resources Inc. (TSXV:DSM), a Canadian company engaged in the acquisition, exploration, and development of mineral properties in British Columbia and Africa, has agreed to acquire Haib Minerals (PTY) Ltd., a company that provides copper exploration services. Total transaction value is estimated to be $73.8 million.

Maha Energy AB to Acquire Gran Tierra Finance

Maha Energy AB (publ) (OM:MAHA A), a Swedish company that offers oil and gas exploration and production services, has agreed to acquire Gran Tierra Finance (Luxembourg) S.Á.R.L, a subsidiary of Gran Tierra Energy. Total transaction value is estimated to be $45.5 million.

Closed Deals

BURNCO Rock Products Acquires Bestway Concrete Company

BURNCO Rock Products Ltd., a Canadian supplier of ready-mix concrete, and asphalt and aggregate products, has acquired Bestway Concrete Company, an American manufacturer of ready-mixed concrete services. No transaction terms were released.

Element AI Acquires mldb.ai

Element AI Inc., a Real Ventures and Microsoft Accelerator backed Canadian operator of an online platform that helps businesses identify opportunities to use artificial intelligence (AI) and machine learning, has acquired mldb.ai inc., a Canadian AI and machine learning company. No transaction terms were released.

Innomar Strategies Acquires Wyatt Health Management

Innomar Strategies Inc., a Canadian company that provides patient support services to pharmaceutical manufacturers and healthcare professionals in Canada and internationally, has acquired Wyatt Health Management Inc., a Canadian company that provides consulting services for public and private sectors primarily in healthcare. No transaction terms were released. 

Strad Energy Services Acquires 6228756 Manitoba

Strad Energy Services Ltd. (TSX:SDY), a Canadian company that provides various well-site infrastructure solutions to the oil and gas industry in Canada and internationally, has acquired 6228756 Manitoba Ltd., a Canadian supplier of access mats, rig mats, and crane mats. Total transaction value is estimated to be $4.5 million.

Medgate Acquires regAction

Medgate, Inc., a Norwest Venture Partners, Georgian Partners and Adventure Capital Inc. backed Canadian company that provides environmental, health, and safety (EHS) software, has acquired regAction, Inc., an American company that develops environmental compliance management software. No transaction terms were released.

Airbnb Acquires Luxury Retreats International

Airbnb, Inc., an American company that operates an online community marketplace for people to list, discover, and book accommodations worldwide online, has acquired Luxury Retreats International Inc., a Canadian company that provides luxury travel rental services. No transaction terms were released.

SpeeDee Your Office Experts Acquires Mills Printing & Stationery

SpeeDee Your Office Experts Ltd., a Canadian company that supplies office products, office furniture, and business machines, has acquired Mills Printing & Stationery Co. Ltd., a Canadian distributer of office supplies. No transaction terms were released.

Greenestone Healthcare Acquires Cranberry Cove Holdings

Greenestone Healthcare Corporation (OTCPK:GRST), a Canadian company that provides medical services to patients in a clinic located in the regional municipality of Muskoka, Ontario, has acquired Cranberry Cove Holdings Ltd., a Canadian company that owns and operates real estate property. Total transaction value is estimated to be $10.0 million.

NIBE Industrier AB Acquires CGC Group

NIBE Industrier AB (publ) (OM:NIBE B), a Swedish heating technology company in Europe, North America, Australia, and Asia, has acquired CGC Group Inc., a Canadian company that develops and sells hybrid heat pump systems. No transaction terms were released.

Gracepoint Mining Acquires Inversiones Durango San Luis

Gracepoint Mining Corp., an American company that acquires, explores, and develops metal producing assets, has acquired Inversiones Durango San Luis, S.A. C.V., a company that operates a fully permitted smelter. Total transaction value is estimated to be $5.2 million.

UPP Investments Luxembourg S.à.r.l. Acquires UPP Investments Canada

UPP Investments Luxembourg S.à.r.l., a Luxembourg-based company, has acquired UPP Investments Canada Limited, a Canadian company based in Vancouver. Total transaction value is estimated to be $29.5 million.

Shippam & Associates Acquires Xposure Marketing Services

Shippam & Associates Inc., a Canadian company that retails promotional products and recognition gifts for corporate clients online, has acquired Xposure Marketing Services Ltd, a Canadian company that provides promotional products such as corporate gifts. No transaction terms were released.

ICON Digital Productions Acquires Toronto Trade Printers

ICON Digital Productions Inc., a Canadian visual communications media company that provides large format and display graphics, digital signage, and commercial printing services in North America and internationally, has acquired Toronto Trade Printers Inc., a Canadian company that provides offset commercial printing services. No transaction terms were released.