Flurry of Acquisitions - Part Three
Welcome to Part Three of my series on Canadian microcap M&A transactions!
I wrote the original post about a year ago and Part Two seven months ago, so I thought we were due for an update. Yes, the list of M&A transactions has been getting longer!
I won’t rehash what I’ve said about the dynamics in the private equity market that have created these conditions (please refer to Parts One and Two). However, just to be clear, these dynamics have not changed. In July 2024, private equity firms were still sitting on record amounts of capital to deploy:
Yes, that’s $2.6 TRILLION currently on the sidelines!
Quality microcaps have done well so far this year, and higher valuations have slowed the pace of M&A in recent weeks. That said, I still expect to see more transactions as this tsunami of capital continues to look for a home.
Here’s a recap of all the M&A transactions below $1 billion during the last 18 months or so. Below the bold line are the new ones since my previous post on this topic:
Besides valuations, some of the crucial metrics to me are the following:
The average premium offered was 63%, with a high of 270%.
A private equity firm was the buyer in 14 out of 26 transactions.
The average transaction value was $194 million, with a low of $0.5 million and a high of $1 billion.
It’s also interesting to examine the subset of technology companies in this list, which typically get valued on Annual Recurring Revenue (ARR) multiples:
You’ll notice a couple of recent transactions at much higher multiples than in the past, showing buyers are willing to step up even at increasing valuations. Ten to fourteen times ARR for companies growing 25-30% annually is quite impressive. It highlights that you don’t need to find companies with explosive growth to get multiple expansions from current levels, where small SaaS companies still routinely trade in the 2-3x ARR range.
Also, one relevant data point I previously mentioned is the percentage of revenues coming from the US. Three of the four latest transactions had a high mix of US revenues, and the blended average of all the transactions was 71%. US private equity firms like to acquire companies doing business in the US, especially if they can buy them cheaply in Canadian dollars.
Now, Who’s Next?
That’s the million-dollar question.
In Part Two, I compiled a list of ten M&A candidates based on low valuations, growth rates, and percentage of revenues from the US.
Seven months later, two of the ten have been acquired: Xybion Digital for an 88% higher price than when I profiled it in Part Two (March 20th, 2024) and Givex for a 95% higher price.
In aggregate, the rest of the group has been pretty much flat. If you had bought an equal-weighted basket of the remaining eight, your return would have been -3%. I still think they are legitimate acquisition candidates, so they will all make the list again, plus two new ones to replace the takeouts.
Here’s my updated list of 10 takeover candidates in the Canadian microcap technology sector with their current financial metrics:
I'm not recommending any of those (read the disclaimer below). However, based on the criteria I’m considering (valuation, growth, and % of revenues from the US), I think they would all make sense as acquisition candidates.
I've highlighted the three best scores on each metric (column) in darker orange. A few companies stand out and rank well on several metrics. For example, Renoworks is relatively cheap with decent growth and almost all revenues from the US. Sangoma Technologies is similar, albeit with no growth on a TTM basis.
When you compare these metrics with the recent transactions, it's evident that there could be several opportunities here. While I'm not making any recommendations, I hope this analysis can be helpful as an idea-generation tool and a starting point for further research.
Do any of them stand out to you?
Which companies did I miss? Please share them in the comments.
You can also follow me on X and LinkedIn, where I post all new M&A transactions as they happen!
Disclaimer
This publication is for informational purposes only. Nothing produced under the Stocks & Stones brand should be construed as investment advice or recommendations. Mathieu Martin, the author, is employed as a Portfolio Manager with Rivemont Investments. This publication only represents Mathieu Martin’s own opinions and not those of Rivemont. Rivemont may own positions and transact on any securities mentioned in this publication at any time without prior notice. At the time of this writing, the Rivemont MicroCap Fund holds positions in Renoworks Software (TSX-V: RW), Ackroo (TSX-V: AKR), OneSoft Solutions (TSX-V: OSS) and Givex (TSX: GIVX). Please also note that the Rivemont MicroCap Fund owns 14.9% of Ackroo’s shares and is considered an insider of the company. Always do your own research and consult a professional before making investment decisions.
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