Back to due diligence basics.
The spectacular collapse of FTX and several other crypto and
digital asset companies is causing acquirors and investors, particularly in the technology sector, to recommit to fundamental due diligence procedures that may
have been relaxed in recent years due to FOMO and groupthink.
Anticipating a slower growth economy for some period, acquirors and particularly investors will re-prioritize demonstrated or nearer-term cash flow over forecasted growth potential in their acquisition and investment decisions.
A shift from growth to cash flow.
Some predict 2023 will be a tipping point for wider-scale commercial deployment of AI technologies such as last mile delivery by autonomous vehicle. Look for investment in and acquisition of developers of these technologies, as well as tech companies involved in the energy transition.
A time for newer technologies to shine?
Increased interest rates and the prospect of a recession have
already caused a drop in deal activity. Buyers are expected to slow-play transactions to buy
as much time as possible
to gauge performance
and hopefully ride out the
M&A won’t dry up
completely, but is expected
to come down from the
highs of 2020 to 2022.
Lower and slower.
Layoffs, insolvencies, divestiture of “non-core assets” and general market disruption caused by a downturn will lay the groundwork for a new generation of technology-driven companies that will prove to be leaders in their newly defined fields in two to five years.
New stars will emerge.
Recent changes to Canada’s competition laws mean increased penalties and new factors for merger reviews, including network effects and non-price considerations
such as privacy. Many of these changes, both passed and proposed, are aimed at the digital sector. Similarly, proposed amendments to foreign investment laws may result in foreign investors facing greater scrutiny if their Canadian targets include large data sets or AI.
Increased investment scrutiny.
Canada is adopting new cybersecurity laws and modernizing its privacy legislation with new individual rights, robust regulatory enforcement and significant financial penalties. In response, acquirors will increase legal and operational privacy and cyber due diligence to identify and allocate risks and avoid losses and liabilities for sellers’ non-compliance.
Normalizing privacy and cyber risk mitigation.