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GVPOD is the podcast of the Greater Vancouver Board of Trade. President and CEO Bridgitte Anderson talks to leaders in the business community about the challenges and opportunities they experience, as well as issues impacting our region.
0:00:01.8 [BRIDGITTE ANDERSON]: Welcome back to GVPOD everyone, Greater Vancouver's business podcast. I am Bridgitte Anderson, President and CEO of the Greater Vancouver Board of Trade. We are continuing our series, the R-word, with a focus today on mergers and acquisitions. 2021 was an exceptionally strong time for M and A activity, but the economic challenges and a potential recession, activity is slowing. Joining us today to talk strategy in a down market is Craig Hoskins, Partner Chair in private equity and venture capital group at Clark Wilson LLP. Nice to see you Craig.
0:00:38.4 [CRAIG HOSKINS]: Good to be here, thanks for having me.
0:00:40.7 [BRIDGITTE ANDERSON]: So as I mentioned, 2021 was a very strong year, did that surprise you, given the economic challenges that were happening at that time, just a year ago.
0:00:53.1 [CRAIG HOSKINS]: I think it surprised everybody sort of who was coming out of the pandemic year, which is very surprising in hindsight, and I guess at the time as well, for M and A deal making, just because the expectation with the entire world economy being shut in was it, you would see a cliff sort of effect on deal making, but as we saw during the - as people quickly get their legs under them and understood how to communicate during a pandemic 2020, actually it was a fairly fairly active year, and it did set up 2021 coming out of that as people started to emerge to be one of the record high deal years in terms of deal volume and deal sizes, so it was a huge 2021 is a super busy year, 2020, sorry, 2022 in the trends, quite a significant fall off, there was a 40-percent decline, according to one study I saw in North American transactions being completed in the M and A and equity financing space. Of course, we also saw last year that the capital markets being battered and bruised significantly, and sectors like the technology secure and others, which have been a bit of the driver of the market boom proceeding that...
0:02:16.7 [CRAIG HOSKINS]: So there was lots of things going on.
0:02:19.9 [BRIDGITTE ANDERSON]: Now there's certainly no shortage of things going on, and maybe before we jump ahead and look to see what's in the forecast and some strategy for the current conditions.. you know speaking of the pandemic, you joined Clark Wilson in the midst of the pandemic in 2020. But the area of focus around mergers and acquisitions isn't new for you. Talk a little bit about sort of the cycle that you have seen over the last several years, and maybe a bit more about what you see on the horizon.
0:02:52.0 [CRAIG HOSKINS]: Yeah, well, I've seen a lot of cycles in my career, I think this is a podcast that people can’t see my gray hair, but I've been around for counting the decades now, so I've seen everything from the dot com crash and oil and gas boom... Oil sands development in Alberta, where I practiced for many years. So it is a cyclical area, everyone already knows that, it's hard to keep your confidence up when we're seeing the kind of headwinds we're seeing in any number of areas these days, but yeah, and there's no doubt that the last couple of years, until sort of the middle of last year, people have forgotten that money costs something that first time in the living memory for a lot of people in the workforce, the fact that the interest rates are a factor in how you make decisions, so...
0:03:46.4 [BRIDGITTE ANDERSON]: Isn't that true? If you've got young people in your lives, whether you work with them or you've got young people in your family, or it really is quite a reminder, you and I were through the 80s, and I definitely remember interest rates in a double digit... But my kids who are in university, this is quite a change for them, and so it is important to remember... It's cyclical.
0:04:09.8 [CRAIG HOSKINS]: Yeah, and I think for advisors like us lawyers and investment dealers and accountants, and part of our job is just to bring that experience with having seen different cycles and reminding clients that there are ways to get through this and there are strategies and tactics you can use to try to take advantage of opportunities. The opportunities are fewer. The execution risk is higher. That's kind of my mantra. But if you're willing to be a bit proactive, there are ways to address some of the challenges.
0:04:47.4 [BRIDGITTE ANDERSON]: So maybe that's a good jumping off point to talk about strategy and the tactics. So definitely fewer opportunities, so maybe from a macro level, do those opportunities exist in certain sectors right now, or there are certain conditions that make an opportunity better than others?
0:05:06.2 [CRAIG HOSKINS]: Well, rather than getting into sector by sector basis, I'll leave that to financial advisors and the clients are way smarter to speaking to sectors in general, when they see Vancouver and British Columbia, it is a bit more of a diverse economic base in some of the other provinces, so we do have the advantage that there are investors looking at all sorts of different opportunities that our economy does tend to generate, but maybe I’ll just respond to you with just referring to one of our heroes in B.C. Jimmy Pattison featured actually just coincidentally today...
0:05:43.8 [BRIDGITTE ANDERSON]: I read it this morning...
0:05:45.1 [CRAIG HOSKINS]: A fascinating to read.
[BRIDGITTE ANDERSON]: 94 years old!
[CRAIG HOSKINS]: yeah, yeah. But he characterized, he corrected the interviewer who quoted something to him about how to make money, and he said, No, that's... I don't remember saying that, that doesn't sound right, but his response was basically making money is all about finding the right opportunity and then execute it. So it's as simple as that. And it's something I've actually been saying to clients for many years, a lot on the same lines is the opportunities in a down market are fewer, so you do have to be prepared to be visible to where those opportunities are coming from and be ready to seize onto them, so that takes preparation, you can't just wait for some knock on the door and then to just be responsive and reactive, you need to be prepared for when it's there, and then the other thing is in the down market, the execution risk, which is a big part of every transaction is a big part of what the legal advisors are in charge of managing for clients, it's great, you can get a great deal and sign of golden letter of intent, and everybody's gung-ho about how the deal is gonna be the best thing ever and in a down market, the risk that something's gonna come up in the course of due diligence and negotiating the definitive ancotations is much higher, so that's an area where you need to spend more time with your legal advisors, you need to get legal advisors set and financial advisors who have extensive M and A and equity financing experience, so you don't get caught just responding, 'cause if you're just responding in a market like this, there's a huge risk that your deal is gonna flounder or fail, it's not gonna be...
0:07:27.4 [CRAIG HOSKINS]: Not gonna get done, so you do need to take a little bit of extra and invest some extra time, and money is somewhat counter-intuitively when you... Time and money are a little bit short in these environments.
0:07:38.8 [BRIDGITTE ANDERSON]: So what are the most important things to do than you talked about preparation and due diligence, so what does that look like when you're talking to your clients? What are you highlighting for them?
0:07:50.8 [CRAIG HOSKINS]: Well, it's about sitting down and budgeting to invest in, getting some of advice, getting a process under way to get your business ready for either finding... And I'm talking, this is... We're talking the sell side and the invest in companies side here for getting your company to be an attractive, either M and A target or an investment or opportunity, so getting the right team of advisors and formulating some short meeting terms, strategies and tactics to sort of understand what the market is and to clarify how your business's value proposition fits into that market and in specific/current cycle the market is in, and that's probably where the financial advisors are helpful for helping you to frame that and then really formula what your objectives are, what the story is behind them, with the rationale is for the value that you're offering in this context on the other side, so that's attracting, that's giving yourself ready to attract and be able to be responding to opportunities. The other piece of that is more legal-heavy is managing execution risk and being prepared for making the most of the opportunities when they do arise, so adding the substance to your story, inspiring confidence, getting attention of the fewer players out there with the opportunities and then reducing the factors that contribute to the execution risk, and there's a whole bunch of specific tactics that flow from there.
0:09:19.4 [BRIDGITTE ANDERSON]: What would you say are some of the common... Maybe, I'm gonna say mistake, but it might be an oversight or something that gets missed quite frequently in times when there is this activity that's happening?
0:09:36.0 [CRAIG HOSKINS]: Yeah, there's some mundane things from the legal side, just like are your corporate records up-to-date and accurate and complete... Don't wait for the buyers or the investors, legal team to start reviewing and identifying deficiencies in your Minute book, which you'd be surprised how often you get pretty serious issues as part up, and those are things that are easily fixed in advance. Doesn't take a lot of time, but you do need to think it through, get someone to do... And so it's really what we call a sell-side due diligence, which again is something that isn't quite as common, everybody understands due diligence in the sense of you find a Conner party they want do to deal with you, they throw Legal accounting financial advisors at you and they do diligence you, so that's the buy side due diligence -buyer due deligence your business. What I'm talking about, which is a little bit counterintuitive, takes a little more proactive foresight is to invest the time to do your own due diligence of your own business in advance with your legal team to clean up... Clean up the problem, because in this environment where execution risk is higher, it's way easier and more common for your counter parties to just walk away from a deal for reasons that different up-market kind of cycle would have been something they could have got over...
0:10:59.4 [CRAIG HOSKINS]: I would have figured, it's not as big a deal here. Those kinds of relatively small things can actually take on a life of their own, and we've seen in fact, our experiences last 2022 year was we had fewer, but not terribly much fewer actual LOIs and deals come to us from clients. But the big difference we saw was how many of those actually got done and how many of them just wither on the fine and for a variety of reasons, often legal due diligence, things spreaded up and it just killed the momentum and there wasn't enough energy because of the economic circumstances of both the parties to get to overcome, so that's the risk, 'cause your execution risk is much, much higher in a down market.
0:11:47.3 [BRIDGITTE ANDERSON]: Well, and you make a good point that when it's a hot market, deals get done sort of regardless sometimes because people are really feeling the pressure to get a deal done, but in times where there's a down market, it's maybe a more thoughtful, slower process and more things come to the surface. So even in that situation, I suppose in every crisis there's an upside, so in every situation where it's a down market, there is upside as well that can benefit both sides.
0:12:16.7 [CRAIG HOSKINS]: Yeah, that's right, but to find that you're gonna have to take the time to proactively think it through before the opportunity comes that we try to encourage clients to think about.
0:12:28.4 [BRIDGITTE ANDERSON]: What are you seeing then as far as trends, knowing that the activity has fallen off, and certainly a lot of this series has been talking about whether there is a recession or is going to be a recession. I think that there's still some debate about that regardless, there is agreement that we are in a downturn and that there's some pretty significant economic headwinds our way, and I'd say there's a consensus that, you know... That looks like it's going to continue for the rest of this calendar here. Would you agree that on the M and A side that your clients are sort of looking that far out and thinking, Well, maybe I'll hold off because it's a bit rocky right now...
0:13:11.7 [CRAIG HOSKINS]: Yeah, I think... Sure, answer is yes. M and A trends and the people way smarter than me are predicting that the downturn we saw in the pace and scale of M and A and equity investment in North America from last year is gonna continue at least to the middle of this year, and I think at this stage is beyond the middle of this year so as you said, this year is not gonna see a quick recovery, it's gonna be a bit more sketchy, so I think what we try to go through with our clients, I think you kind of to serve an on-off-switch that, as you said, you can wait it out. Because really what we're talking about is in this kind of market, the bid ask spread is so wide in terms of what the sellers think their assets worth and what the buyers think it's worth, is just so far apart that it's really hard to get a serious negotiation going on a transaction to the uncertainty and just the way the conditions are. Cost of borrowing for M and A and equity investment - those counter-parties are often reliant on leveraging strategies, which are way more expensive for them these days, so they're...
0:14:31.4 [CRAIG HOSKINS]: What they need to make a deal work goes up in price, so you can choose, as you said, you can choose to wait it out, wait for that spread to come back together before you decide to go and do a deal... That's one strategy. Some businesses don't have the luxury of doing that, where they're maybe in a situation or financial pressures are mounting, so they're compelled to do something, so if you can't afford to wait it out then you... You know, the way I talked about it is looking at, as we said, you can do get yourself ready for a deal as we discussed, and then also think about what's it gonna take to structure a transaction, just maybe bridge that... Could ask, spread that we've made a deal to focus and that... I think the advice is try to think like a venture capitalist.
0:15:21.4 [BRIDGITTE ANDERSON]: What do you mean by that? Maybe talk a little bit more about that structuring and the mindset that would make a deal successful.
0:15:27.8 [CRAIG HOSKINS]: Yeah, well, I say think like a venture capitalist – bid fictitiously, but really what I'm getting at is venture capital investments where you even in upmarket, they're used to dealing with a transaction which valuations really difficult to pay down, specifically, it's a moving targets, high growth of... So those kinds of that kind of mindset is what's at play in a down market where no one really knows what the value of a lot of assets are these days because of capital markets and the potential recession, etcetera. So thinking like a venture capitalist, I just mean by that, think of structure, structural elements in how you negotiate and put a deal together that can have you overcome some of that uncertainty or bridge that gap evaluation, so things like in a sale agreement, coming up with some form of earn-out, so you can have a portion of the purchase price, which is, you know, deferred pending some kind of either financial metric being met or a period of time, or business develop and milestone, that kind of thing. And there's a bunch of issues around how you best structure those things to get rid of the risk, and one of the big risks of doing that is you need to often as a purchase or provide operational covenants, which we've seen in the past can be problematic when buyers want to have the freedom to run that business the way they wanna see it, and sellers wanna be able to have some control over being able to run the business in a way that it meets their earn out target and in good times, you can have litigation and bad times it could really get ugly so
0:17:10.6 [CRAIG HOSKINS]: You wanna think that through. But that is one strategy. The other is for on the equity investment side, get more into a lot of bells and whistles around preferred shares rather than just a common share investments, so that you can build in liquidity preferences for investors, so if you get a bit of a floor on their return, as a preference to the rest of the investors, and they can protect themselves that way, you can tier different investors with a waterfall around who's getting what at what price, there's a suite of side agreements you can have in place with investors for providing with more governance input, which can be mutually beneficial, the investor gets to have a closer finger on the pulse of what's happening in the business, the business gets the advantage of if you've got a good investors got the experience, you can have a benefit of them helping out, so you can structure all of those kinds of... Extra bells and whistles, and often it can be like three or four, five significant transaction agreements that go along with an equity investment, but they're just... All the permutations of how that works are available to you, if you think through what it is your business has in terms of strengths and weaknesses, and which one of those tools fits best without maybe attracting, and as I said, bring that data...
0:18:35.1 [CRAIG HOSKINS]: that spread together.
0:18:36.7 [BRIDGITTE ANDERSON]: Yeah, and that provides a bit more assurance on both sides too, I imagine, to be able to think through some of those factors that you're talking about. Certainty course is the one thing that everybody is looking for on both sides, and there's never any certainty, but in the way that you structure it can add more certainty for sure. We've talked a little bit about the pitfall, so maybe a way to round out the conversation, here's some hallmarks of successful mergers and acquisitions, and also some really clear takeaways for people who might be listening in.
0:19:14.0 [CRAIG HOSKINS]: Yeah, I think just to summarize, be, you wanna have a clear and a Clean credible story when you go to the market when the markets were frothy and tech was hot and everybody was creatively seeing all these opportunities from the pandemic, and even before that, in the up market, there was a lot more, little roughly referred to as financial engineering driving what you thought your value proposition was, and investors were buying into that kind of thing. In a down market, advisors, financial advisors and others who are telling us that nuts and bolts operational performance is really what's more attractive when there's all these uncertainties and the G-Wiz bells and whistles around financial engineering or other high growth kinds of excitement that we saw driving deals in recent years is not where you should be focused. Get yourself cleaned up, have a good, clear strategic vision of what it is you have to offer, and then highlight your operational performance and have your team ready to do the deal. And we've seen as well, I guess the last maybe take away would be where a lot of companies are increasingly under this financial distress, talk to insolvency advisors as well, because we've...
0:20:45.3 [CRAIG HOSKINS]: In our firm, we have a strong insolvency group, and I've got working on a couple of M and A transaction right now that are gonna be really positive transactions for our clients, but they were driven by peering over abyss into insolvency.
[BRIDGITTE ANDERSON]: Yeah great point.
[CRAIG HOSKINS]: But getting advice to sort of find maybe sometimes the insolvency situation can open up structural opportunities, solve your problem without actually having to pull a pin in on doing a CCAA or some other kind of...
0:21:13.8 [BRIDGITTE ANDERSON]: Yeah, thinking about what the options are certainly more vast, and I think maybe one other good take away is to have the mindset of Jimmy Pattison and to look for those good ones.
[CRAIG HOSKINS]: Always a good idea.
[BRIDGITTE ANDERSON]: I know, I know, I think even at 94 to look for those good deals, 'cause there's always good deals out there to be had. Craig, thanks very much for joining us today.
0:21:35.9 [CRAIG HOSKINS]: It was a pleasure. Enjoyed talking with you.
0:21:38.8 [BRIDGITTE ANDERSON]: There's a lot to discuss on the subject of mergers and acquisitions, thanks so much to Craig Hoskins for joining us today. Next week, we're gonna dive into the subject of employment, and we'll speak to Andrea Rosso from Clark Wilson. Join us them.