Practical analysis for investment professionals
08 December 2023

Mergers and Acquisitions in Quebec

Quebec — La Belle Province — has experienced a significant uptick in mergers and acquisitions (M&A) deal activity among small-cap companies since early autumn. To date, private equity firms and strategic investors have acquired several Quebec-based companies at healthy premiums.

What do they know that other investors don’t?

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For some time, my colleagues and I have been beating the drum in our commentaries and webinars about the value that the current gulf between the intrinsic value and market prices of some of these Quebec-based companies represents. There are appealing risk/reward attributes and the potential for high future returns at bargain prices.

The list of recent transactions spans sectors and industries from semiconductors (OpSens) to water treatment (H2O Innovation) and marine terminals (Logistec).

Why the sudden interest from investors? Two key drivers have propelled the surge in dealmaking, and we don’t anticipate them easing up anytime soon.

1. Mind the (Valuation) Gap

The divergence between small- and large-cap companies reached historic levels. In November 2023, the S&P 500 was up 17% for the year compared with the Russell 2000, which had only risen 2%. Investors noticed the difference and the premium underlying it.

2. Buyer, Meet Seller

Pent-up demand created a more favorable match-up between motivated buyers and sellers. Private equity funds have $2.5 trillion in dry powder, and sellers are slowly realizing that it’s 2023, not 2020, and company valuations should be adjusted accordingly.

Indeed, frustrated shareholders have increasingly taken an activist stance and called on company boards to unlock value at the current market price. Investors have capitalized on this environment. For example, in the completed acquisition of Magnet Forensics and current offers for H2O Innovation and Q4 Inc., private equity–led management buyouts and insiders rolled their interest into the privatized company.

Aimia Inc. is also in the midst of a hostile takeover from its largest shareholder, Mithaq Capital, amid a contentious battle among insiders. Such conditions constitute a favorable environment for small-cap-focused equity funds. Companies are trading at deep discounts to their intrinsic or private market value. This presents a favorable tailwind for arbitrage funds since M&A activity in the small-cap universe tends to drive performance in this space.

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Several additional market dynamics make small-cap M&A particularly compelling right now and particularly in Quebec:

  • Smaller companies have a larger pool of potential suitors, including strategic buyers, management buyouts, private equity funds, pension/sovereign funds, and industry consolidators.
  • The end-market for small-cap businesses is often domestic or transborder. Amid geopolitical uncertainty and governments promoting reshored supply chains, these are appealing characteristics.
  • It’s not 2021 when it comes to financing conditions either. Borrowing rates are much higher and large-cap mergers and leveraged buyouts (LBOs) require large syndicates of financiers. Smaller acquisitions are easier to finance with cash on hand and more flexible funding options.
  • Many companies that went public in 2020 and 2021 are trading well below their initial public offering (IPO) price. Even with positive growth and good fundamentals, many of these businesses will find it challenging to gain new public market investors because of anchoring bias, among other reasons. Once bitten, many investors are twice shy. These companies can be attractive insider buyout targets.
  • The regulatory environment in both Canada and the United States is more restrictive when it comes to mergers. Smaller mergers may avoid the regulatory pushback.
  • In the current economic environment, well-heeled strategic buyers looking to leverage scale and synergies by acquiring competitors have more leeway to negotiate favorable conditions.

While these conditions may not be unique to Quebec, recent M&A activity suggests the province has more than its share of opportunities. We believe investors should pay attention.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / naibank

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About the Author(s)
Amar Pandya, CFA

Amar Pandya, CFA, is the portfolio manager of the Pender Alternative Arbitrage Fund, Pender Alternative Arbitrage Plus Fund, Pender Alternative Special Situations Fund, and Pender Small/Mid Cap Dividend Fund. He joined the company in October 2017. He began his investment career in 2011 in the portfolio management training program at a large global financial services company. He moved to pursue his passion for equities becoming an associate portfolio manager at a large-cap equity value firm before joining Pender. As an advocate of a contrarian value investing approach, Pandya works to identify out-of-favor, high-quality compound growth businesses, as well as opportunistic close-the-discount investment opportunities trading at a significant discount to intrinsic value. He has also developed expertise in event-driven special situations with a primary focus on M&A and balance sheet-driven special situations. Top contributing special situations he has uncovered include Maxar Technologies, Bausch Health, MAV Beauty Brands, Alcanna, Corus Entertainment, and Athabasca Oil. Pandya holds a bachelor's of commerce degree in finance (honors) from the University of Manitoba. He earned his chartered financial analyst (CFA) designation in 2015. He is actively involved with CFA Society Vancouver where he serves on the CFA Vancouver Programs Committee. He also sits on the Steering Committee for the Vancouver chapter of Women in Capital Markets.

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