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M&A update: Building confidence

Published on 11-22-2023

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Conditions ripe for increasing small-cap M&A activity


Global merger and acquisition (M&A) activity totaled $2 trillion through the first three quarters of 2023, a 27% decline from the same period last year.1 This level represents the slowest nine months for global deal activity in a decade as merger and acquisition activity globally remains in a slump.

Rising interest rates, persistent inflation, elevated market volatility, and flaring geopolitical conflicts have resulted in higher levels of uncertainty for dealmakers, making it harder to get a deal across the line. Despite the depressed levels of deal activity, there are signs that it is set to increase with financing conditions improving, bankers becoming more creative in how they structure deals and, increasingly, relying on private credit providers for financing.

While M&A activity in the U.S. has declined, it has fared much better than the rest of the world with the U.S. accounting for a 44% share of worldwide M&A up from 42% a year ago. Deal activity in Canada remains strong with volumes up 13% in the quarter as financing conditions improved despite the impact of high interest rates.2

Deal activity in Canada through the third quarter ending September 30 reached $46.6 billion, up from $41.2 billion at the same period last year. This represents a level more in line with pre-pandemic and long-term average levels. The boost to higher deal-flow in Canada can be partly explained by the country’s unique market exposure to hard assets benefiting from higher pricing and increased demand.

Signs of improving confidence

Another potential sign of improving confidence in capital markets has been the return of “IPOs,” or initial public offerings. IPO activity has remained muted in 2023 with 120 IPOs completed in the U.S. through the end of September, down from the 163 deals completed at the same time last year.

In addition to a decline in IPO volumes, the size of IPOs this year has also lagged until September, which witnessed some sizeable and well-known debuts. Arm Holdings PLC (NSD: ARM), Instacart (NSD: CART), and Klaviyo Inc (NYSE: KVYO) all had their IPOs in September, with strong initial reactions and subsequent wobbles with share prices moving closer to or below their IPO price.

Bankers, would-be issuers, and private equity firms looking at exit opportunities will be watching the market reception to these IPOs closely, weighing if the market is signaling whether they should join them.

In the M&A market, the spread between the buyer and seller valuation expectations remains a key determinant for a deal to get done, with sellers generally having to accept a decline in valuations. Similarly, the IPO market is signaling that a reduction in valuation is necessary to bring buyers to the table.

Instacart’s IPO raised $660 million, valuing the company at roughly $10 billion, making it one of the largest IPOs of the year but deputing at a fraction of its $39 billion valuation set in a fundraising round in 2021.

Sellers recalibrating expectations

In this new market environment with profitability, pricing power, and persistency of growth weighted with much higher relevance, sellers of businesses – whether to an acquirer in an M&A transaction or in an IPO selling shares to new investors in the public markets – need to be realistic in their expectations.

Within the small-cap sector in Canada and the U.S., we have followed several strategic review processes where sellers remained anchored to high historical valuations and buyers’ offers overweighted the worst-case outlook for a business. This stubbornly wide gap between expectations has impeded deal activity this year. But as frustrated shareholders pressure boards to seek out ways to unlock value and buyers weight the risk of overpaying versus losing a competitive advantage, this gap should narrow.

As we see buyers and sellers of businesses analyze and incorporate new information and data points into their valuation expectations, there should be more opportunities where an equilibrium is found, and a deal can get done.


September was marked by the resurgence of government bond yields and further pressure on equity markets, which experienced sizeable declines during the month. The one sector that has exhibited persistent strength has been Energy, with higher oil prices and the rising cost of gasoline further adding to inflationary pressures.

The material rise in longer-term Treasuries indicates the market is realizing that central banks could keep rates higher for longer and that the first rate cut could be further away than expected. In an environment wrought with uncertainty, portfolio diversification and holding non-correlated investments is a favorable strategy.

The risk-off market in September saw a decline in equity prices especially among small-cap companies, thus expanding the already wide valuation gap with large cap companies. With this widening disconnect between market value and intrinsic value, we believe conditions are ripe for an increase in M&A activity within small caps as frustrated shareholders are more receptive to offers at a premium to the current market price.

Unlike their large- and mega-cap counterparts, small-cap companies benefit from a larger pool of buyers including strategic buyers, management buyouts, private equity funds, pension/sovereign funds and industry consolidators. The end-market for small-cap businesses is also typically domestic or trans-border, which is an attractive characteristic in an uncertain geopolitical environment where governments are promoting reshoring supply chains.

While financing conditions remain challenging, smaller acquisitions are much easier to finance with flexible financing options available to many buyers. Given these conditions we see an environment that could see a rise in small-cap deal activity.

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Amar Pandya, CFA, is Portfolio Manager of the Pender Alternative Arbitrage Fund and the Pender Alternative Special Situations Fund at PenderFund Capital Management.


1. Source: Refinitiv – Deals Intelligence

2. Source: Reuters (


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