Pandemic winners could lead M&A spree

For all the damage the pandemic has caused the Canadian economy, many businesses will emerge stronger and ready to make acquisitions after being forced to innovate, a CIBC portfolio manager says.

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Third-wave lockdowns are beginning to lift in many parts of the country as more Canadians are vaccinated and Covid-19 case counts decline. While many small businesses are barely hanging on as they await a return to full operations, other companies accelerated changes to their operations and are now in a position to seek greater market share, said Colum McKinley, senior portfolio manager with CIBC Asset Management. Equity investors will want to identify the latter group.

“We have seen many companies redefine how they do their business, how they approach their market, how they reach out to consumers, and how they work with their employees,” McKinley said in an interview last month.

One major change is the acceleration of online sales. For a number of companies across industries, online sales penetration is about five years ahead of schedule, he said. “We knew that was a secular trend that was taking place. The Covid experience has only pushed it further.”

Perhaps the most relatable adaptation is the number of companies that shifted to working from home more than a year ago. McKinley, who manages the CIBC Monthly Income Fund, described a recent conversation with a company’s management team.

“They said, ‘Look, if we had studied and talked about [having] our whole workforce work from home, it would have cost us hundreds of millions of dollars to do the study, and we would have come back with the conclusion that it can’t be done yet.’ Yet, the pandemic forced us into that reality,” McKinley said.

Companies that managed to innovate now find themselves in an enviable position, with stocks at record highs and the lowest cost of capital they’ve ever experienced, he said. He expects that to drive mergers and acquisitions in the second half of this year and into next, as companies take advantage of low interest rates to increase market share.

Equity investors should look for companies that have navigated the pandemic, thus demonstrating their ability to adapt and manage shocks, and where the reopening of the economy isn’t fully priced into the stock price, he said.

Some real estate investment trusts, including Toronto-based RioCan, fit into this group, McKinley said. RioCan has sold and redeveloped properties to move from retail to more mixed-use retail and housing. The company made tough decisions, including slashing its dividend last year, to be able to execute its strategy, he said.

As for the broader economic recovery, McKinley is optimistic that the mix of ongoing government support and increased household savings will allow consumers to lead the rebound. Between 2000 and 2019, he said, the average Canadian household savings rate was less than 4%; last year it was approximately 15%.

“We can’t wait to get back to going on vacations, going to restaurants, getting back out there, which will mean spending money, which will fuel the economy,” he said.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.