Economic downturns—like the one recently experienced by Canada's oil and gas (O&G) sector—call for innovative thinking. To survive, organizations must do what it takes—and in many cases, that involves finding power in numbers through mergers and acquisitions (M&A).
According to the Grant Thornton and JWN Energy 2017 Service and Supply Outlook Report, that's exactly what Canadian O&G service companies are doing as they emerge from one of the most painful downturns in recent memory. Respondents from businesses of all sizes cited M&A as a priority moving forward, including those with revenues from $5 million to $20 million (23%); $21 to $50 million (27%); $51 to 100 million (29%); and $101 million-plus (30%). The only group of companies that didn't cite M&A as a priority were those bringing in less than $5 million annually. For these smaller businesses, financial restructuring (17%) was their primary financing mechanism for survival.
M&A is a preferred financing mechanism across O&G service subsectors as well. Respondents from all subsectors cited M&A as a high priority—if not their top priority— in 2017, including: distribution (36%), exploration and development (20%), EPCM (13%), instrumentation and control (29%), maintenance (18%), manufacturing (18%), oilfield services/field operations (24%) and transportation (14%).
While a top priority, however, it's important to remember that successful M&As don't happen by chance. Below are a few steps you may want to follow, whether you're a prospective buyer or seller—in O&G or another industry—to maximize the benefits to both parties:
If you're presented with an opportunity to buy a competitor, consider:
- Bridging a valuation gap with a performance-based incentive payment. Not only does this minimize up-front risk, but it gives you an upside if and when the business starts to improve.
- Proposing a partial purchase at a lower valuation with a gradual take-out at a valuation that is revised annually or after a few years.
- Negotiating better terms if the valuation is unmovable (e.g. less cash up front and a higher vendor take-back; or interest-only on the vendor take-back for a period of time).
If you would like to sell, consider:
- Being realistic on your price expectation if the businesses financial performance has declined. Bridge the potential upside with performance-based payments.
- Targeting potential strategic acquirers that are able to see beyond today's market, and willing to pay a higher price for the synergies your organization offers them (e.g. strong geographic presence in a coveted market).
- Inviting your management team to buy into the business at a favourable valuation.
If you're looking for growth and/or diversification by M&A, consider:
- Merging with or acquiring a company in a geographic region that you don't currently sell to.
- Merging with or acquiring a company that offers a product or service that would complement your current offerings.
While sometimes it makes sense to weather an economic downturn on your own, M&A can be a viable option for companies looking to increase their strength and resilience in times of economic uncertainty.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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