A Bay Street sign is seen in the heart of the financial district in Toronto, August 17, 2009.
Canadian executives are significantly more pessimistic about the shape of the world's economy over the next six months than their counterparts in other countries. When it comes to potential deal making, however, they view the world from more of a glass half-full perspective.
Just 22 per cent of respondents believe the global economy is improving, according to a report to Ernst & Young's Canadian Capital Confidence Barometer report due to be released today, far less than the 43 per cent who expressed optimism in April of this year. The study, which asks over 1,500 senior executive respondents to look six to 12 months into the future, found that Canadians have entered the fall season with much less hope for global recovery.
"We've been insulated more than some other economic environments and I think that's finally coming home to roost," says Tony Ianni, a partner in transaction advisory services at Ernst & Young LLP. "Canadian business people don't see the strength of the global economy, and that's really changed from where we were 12 months ago."
But given that twice as many Canadian executives as American ones think this global slowdown will last more that two years, the outlook for mergers and acquisitions was surprisingly positive. The 44 per cent of Canadian executives who think they'll do a deal in the next year is almost double the figure seen from the U.S.
Mr. Ianni attributes this to the relative strength of the Canadian economy, as compared to the chaos of Europe, or even the struggles of our neighbour south of the border. "There are two elements: our population base hasn't experienced the same kinds of problems with real estate -- bringing it back, right to the home -- we haven't had those foreclosure problems. And then in the business community, our banking system was admired by everyone and we didn't have all the bailouts."
Based on that appetite, it's not surprising that the country ranks as being more open to risk than the U.S. and others. Where many other companies across the globe are more concerned with monitoring the European crisis and keeping an eye on their capital, Canadian organizations report being more inclined to seek out M&A opportunities caused by this turmoil. The global and U.S. interest is low at just 14 per cent and 12 per cent respectively. But in Canada, 35 per cent agreed they were open to such opportunities.
But investors shouldn't expect an onslaught of Nexen and Progress Energy Resources-sized announcements. Nine out of ten respondents planning M&A activity are looking at buys worth less than $500-million (U.S.), and nearly half are looking at deals under $50-million. These aren't companies looking to delve into new businesses; they're just looking to beef up existing ones.
That could have something to do with the earnings projections reported by the survey respondents. Canadians are about half as positive about their corporate earnings outlook in October 2012 as they were six months ago with just 30 per cent predicting good results for Canadian businesses -- a prediction that is a little more harsh than in other countries (although generally not too far off the mark). In fact, Canada's is similarly severe on other confidence indicators such as credit availability.
But when it comes to getting deals done the limiter on transactions continues to be the sellers. "The number of sellers continues to come down from 31 per cent to 23 per cent in this country," says Mr. Ianni. "We've gotten through the time for shedding underperforming business units -- that's come and gone -- transaction volume will be determined by how many sellers there are in the market, because there are plenty of buyers."