Quebec — La Belle Province — has skilled a big uptick in mergers and acquisitions (M&A) deal exercise amongst small-cap corporations since early autumn. Thus far, non-public fairness corporations and strategic traders have acquired a number of Quebec-based corporations 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 concerning the worth that the present gulf between the intrinsic worth and market costs of a few of these Quebec-based corporations represents. There are interesting threat/reward attributes and the potential for top future returns at discount costs.

The listing 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 corporations 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 observed 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, pissed off shareholders have more and more taken an activist stance and referred to as on firm boards to unlock worth on the present market value. Traders have capitalized on this surroundings. For instance, within the accomplished acquisition of Magnet Forensics and present affords 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 good surroundings for small-cap-focused fairness funds. Firms are buying and selling at deep reductions to their intrinsic or non-public market worth. This presents a good 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 notably in Quebec:

• Smaller corporations have a bigger pool of potential suitors, together with strategic consumers, administration buyouts, non-public fairness funds, pension/sovereign funds, and business consolidators.
• The tip-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 in terms of financing circumstances both. Borrowing charges are a lot larger and large-cap mergers and leveraged buyouts (LBOs) require giant syndicates of financiers. Smaller acquisitions are simpler to finance with money readily available and extra versatile funding choices.
• Many corporations that went public in 2020 and 2021 are buying and selling nicely beneath their preliminary public providing (IPO) value. Even with optimistic progress and good fundamentals, many of those companies will discover it difficult to achieve new public market traders due to anchoring bias, amongst different causes. As soon as bitten, many traders are twice shy. These corporations could be engaging insider buyout targets.
• The regulatory surroundings in each Canada and the USA is extra restrictive in terms of mergers. Smaller mergers could keep away from the regulatory pushback.
• Within the present financial surroundings, well-heeled strategic consumers trying to leverage scale and synergies by buying opponents have extra leeway to barter favorable circumstances.

Whereas these circumstances might not be distinctive to Quebec, latest M&A exercise suggests the province has greater than its share of alternatives. We imagine traders ought to concentrate.

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All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the writer’s employer.

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