M&A in uncertain times: The opportunity in Canada

“Innovation is the ability to see change as an opportunity, not a threat." — Steve Jobs

As the tariffs threatened by President Trump against Canada, Mexico and China have been announced (although there is still uncertainty around their implementation, duration, and quantum¹), we believe that there is an opportunity for businesses to find opportunity in geopolitical uncertainty, particularly in mergers and acquisitions. On February 2, 2025, the Royal Bank of Canada released its initial reaction to the U.S. tariffs,² which, among other things, noted that the tariffs, if they were to continue, would be recessionary for Canada and would result in a weaker Canadian dollar.

In these turbulent times, we see opportunity – there is a buyer’s market, and an opportunity for sellers as well:

• valuations may become more attractive for acquirers
• a lower Canadian dollar against the U.S. dollar means that Canadian companies may be more attractive targets
• sellers may consider divesting themselves of non-core assets or those that would be most affected by U.S. tariffs

Looking back on other recessionary turbulent times, notably the financial crisis of 2007-2009, Bain and Company, in its Global M&A Report 2023,³ noted the following:

• “Companies that were active in M&A during turbulent times, the data shows, consistently outperformed those that stayed away from deals. Companies that acquired during the last economic downturn achieved an average annual total shareholder return (TSR) of 5.9% compared with 4.7% for those that did not.”
• “Those companies that were active acquirers before the recession performed best by staying active—their average annual TSR was 6.1% compared with 3.8% for those that decided to move to the sidelines. For those companies that were inactive before the recession, a change in their M&A behavior toward becoming an active acquirer resulted in an annual TSR of 5.5% compared with 5.0% for those that remained inactive.”

The message is clear:

• Seek M&A. Businesses that have a history of acquisitions, coupled with enough dry powder should seek M&A opportunities. This is a particularly good time for private equity, which has a history of outperforming the public markets, in part due to the “active role that private equity investors play as owners and operators of businesses”.⁴
• Engage a financial advisor. From a seller perspective, while valuations may be historically lower, there is an advantage in exchange rates – and there will be buyers looking for transactions. Businesses that are seeking to be acquired should consider engaging external financial advisors in order to realistically determine value.
• Expect different deal structures. Deal structures, such as earn-outs, roll-over equity, and deferred payments, will become more common as investors seek to reduce financial risk in uncertain economic times. Deals may also be structured as asset sales rather than share sales in certain circumstances.
• Expect more due diligence. There will be more emphasis on due diligence as buyers seek to mitigate any impact on investment returns. Buyers will be seeking more financial and operational certainty.
• Expect regulatory risk to become standard in acquisition agreements. We expect to see more “material adverse change” clauses and termination rights to include regulatory risk as a seller-assumed risk and a termination right for a buyer.
• Expect longer deal times. Deals will take longer to close as buyers balance the need for some degree of certainty against losing a good deal.

There is always an opportunity even in turbulent times. We are here to help you identify and capitalize on these opportunities.