Q-News

May 2011

Activity in the M&A and Valuation Directories

Posted in Mike's Commentary

First Quarter M&A Activity

PWC reported that the first quarter M&A activity in Canada reached its highest level since the beginning of the credit crisis.  The firm reported that there were 791 M&A announcements worth $51 billion representing an 81% increase over Q1 2010 activity and a 4% increase over Q4 2010 activity.  Deal volumes dropped by 8% compared to the previous year and quarter resulting in a 31% increase in average deal size to $136 million.  It should be noted that these metrics are based on announced transaction and not closed transactions, for example taking into account TMX Group and London Stock Exchange Group’s agreed on $7.1 billion merger.

Energy (13%), materials (36%) and financials (12%) continued to dominate the transactions with industrials (11%), information telecommunication (9%) and consumer discretionary (9%) following up.

Canadian Venture Results for Q1 2011

On May 17th the CVCA reported Q1 2011 VC market activity indicating that on a year-over-year basis VC investment activity was flat relative to the comparable period in 2010.  During the quarter, 111 companies reported raising $315 million in new capital, virtually the same number as in Q1 2010 and four lower than the 115 companies that received funds in Q4 2010.  While Canada continued to significantly lag the US in terms of average dollar amount per investment at $2.8 million, there is no reason to believe that this long term trend will change.  Thomson Reuters also reported that Canadian investments in foreign companies declined to $21 million versus $51 million in Q1 2010 and $76 million in Q4 2010.

Ontario led the way during the quarter with $133 million invested (42% of total disbursements), up 11% from the $120 million invested in Q1 2010, followed by Quebec investment at $82 million (down from $102 million in Q1 2010), British Columbia at $55 million (compared to $44 million in Q1 2010) and Alberta/prairie provinces at $41 million (representing a 10% increase year-over-year).

We continue to see a shift in the sources of investment capital with the ongoing decline in activity from Canadian Labor Sponsored Investment Funds and increased participation on the part of government sources.  In the quarter, private independent funds accounted for $68 million in capital, government for $61 million and retail funds for $46 million.

VC fund-raising initiatives continue to be challenged, with new commitments to funds coming in at $217 million in Q1 2011, fully 44% below the $386 million received by VC funds in Q1 2010.  Ominously, the CVCA reports that US VC managed new capital commitments of $7.1 billion, representing a 76% year-over-year increase for the first quarter.  Certainly, this disparity does not bode well for Canadian technology companies looking for risk and growth capital to compete on the North American or global stage.  Just looking at some of the highly touted sale transactions that have taken place during the past year it appears obvious that either Canadian entrepreneurs are being forced into the “build it to sell” argument or the lack of available capital is forcing entrepreneurs to sell early as opposed to taking on the challenge of continuing to build and risk not having capital available to fund longer term growth.

The ICT sectors garnered 48% or $150 million of capital invested in 39 companies with communications firms receiving $69 million followed by software firms at $46 million.  Meanwhile, activity in both the clean tech and life sciences sectors declined on a year-over-year basis by 24% ($58 million invested in 11 companies) and 33% ($53 million going to 19 companies) respectively. 

We are also seeing much needed participation from US investors who invested $100 million of the $314 million invested in Q1 2011, with the remaining $214 million coming from Canadian investors.

Additional information was published by the Canadian Venture Capital Association showing that Canadian Buyout and Private Equity transactions increased by 21% in 2010 to $4.9 billion and 7% in terms of the number of transactions completed to 130.  Unlike the general malaise that continues to hang over the Canadian VC market, there appears to be improving sentiment about the prospects for future growth in those sectors.  Activity was generally widespread with a full 64% of disclosed values attributed to transactions below the $500 million mark. Foreign investment activity continued to be strong with Canadian groups participating in transactions valued at $27.9 billion and exits involving buyout or PE firms totaled 72,representing a 106% increase over 2009 levels.

US Results for Q1 2011 VC Activity

US venture activity increased by 5% in dollar terms on a sequential quarterly basis to $5.9 billion but declined 11% in terms of the number of companies funded to 736.  On a positive perspective, PWC MoneyTree reported that for the first time in four years first quarter numbers increased relative to the previous fourth quarter investment amount.

Seed and early stage investment levels increased by 11% to $1.9 billion despite a 14% decline in the numbers of deals from Q4 levels of 329.  The average Seed deal was $2.2 million while early stage deal size was $6.4 million.  Seed investment levels declined from a Q4 level of $2.8 million while early stage increased from $4.8 million, all significant levels when compared to the average $2.8 million invested in all Canadian deals.  Expansion stage investments decreased by 26% with $1.9 billion invested in 211 companies amounting to an average $8.9 investment while later stage deals increased 54% in dollar terms and 11% in deal terms to $2.1 billion invested in 196 deals.  The average late stage deal was $10.9 million compared to $7.8 million in the previous quarter.

The US venture industry continued to support first-time financed companies with a total of $987 million going into 221 deals.  Compared to Q4 2010 levels, dollars invested increased by 12% while the number of deals declined by 9% but first-time financings still accounted for 17% of all dollars and 30% of all deals transacted in Q1.

First-time investments were dominated by Software, Media & Entertainment and IT Services companies with average investment levels of $4.5 million.  Seed and early stage received 61% of the dollars and 75% of the deals.

The NVCA also issued a report on returns in the US VC market.  For comparison purposes I have included the Canadian VC results as of June 30, 2010, the date of the last CVCA returns report.

        Source : NVCA.Org



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