M&A: Is there a value gap between the US and Canada?
We often get asked by our clients that are considering M&A, whether or not Canadian tech companies trade at a discount to their US peers. In a perfect market there shouldn’t be a difference between the two, but as we all know, markets are rarely perfect.
There are many considerations that go into valuing a company, including geographic footprint, revenue growth, margins (Gross Profit and EBITDA), overall size, product/service mix and competitive advantage, to name a few. Any one of these factors can cause meaningful differences in individual transactions in the tech space, regardless of location. Having said that, a review of the underlying data can tell us something about overall macro trends and whether or not a gap exists.
So let’s look at the data first. We analyzed 924 North American Technology M&A transactions that took place over the last 5 years. Of these, 98 were Canadian companies, or 10.6% - pretty much in-line with what you would expect given the relative size of the tech industries. We then separated the transactions into technology sub-sectors in order to account for any valuation gaps inherent in the different verticals. Below is an overview of the median transaction value as a multiple of LTM revenues in each sub-sector.
So what does this tell us? Unfortunately, this data indicates that, no matter what the tech sub-sector, there has been a discount for Canadian companies versus their US counterparts - and a pretty hefty one at that.
A natural question becomes whether or not this is due to the passage of time - i.e. whether some of the Canadian companies traded a few years before the US ones, and therefore happened at lower multiples simply because the transaction was before the overall rise in valuation multiples that we have seen in the last few years. So we next evaluated each sub-sector on an annual basis. As you can see from the Software example below, the Canadian discount has existed over the last 5 years. The story is pretty similar for the other 4 sub-sectors as well.
Having said all that, the encouraging point in this data is the closing of the gap in 2014 (3.1x vs 4.0x) and 2015 (2.9x vs 3.2x). While 2016 reverted back to a wider gap (1.2x vs 3.3x) this median is based on only 6 Canadian transactions, with two very low multiple transactions that definitely skewed the data.
So what does all this mean? While on the surface the larger data set doesn't seem encouraging for Canadian-based technology companies that want to sell, our belief is that the narrowing of the gap that we saw in Software in 2014-2015 is a trend that is likely to continue in 2016 as more transactions get completed. There have also been plenty of examples of Canadian tech companies trading at multiples that are comparable to or better than their US peers.
In the end, maximizing value at exit all comes down to effectively articulating your story, growth trajectory and demonstrating effective access to the entire North American end-market.
About the author
Ed Bryant is the President and CEO of Sampford Advisors. Ed started Sampford because he wanted to provide world-class Investment Banking and Strategic Advisory that large companies have been accustomed to, to small and medium sized businesses. Ed has over 20 years of experience including over 16 years in Investment Banking with Deutsche Bank and Morgan Stanley in Hong Kong, Singapore and New York. In that time, Ed raised in excess of $20 billion in equity and debt capital and completed over $10 billion in M&A transactions.