Technology takes centre stage in Canada dealmaking in 2024

2023 in review

While Canadian dealmakers were hopeful for an M&A rebound in 2023, activity levels continued to slump, with reports of Q3 2023 being the lowest quarter in terms of Canadian deal volume since 2017 and Q4 2024 not expected to show more promise.  This data is consistent with global M&A trends in 2023.

Several factors contributed to the continued decline in dealmaking during 2023. The Bank of Canada further increased interest rates by a total of 75 basis points in 2023  to curb rising inflation, similar to the actions taken by other major central banks around the world. These hikes, which on the heels of previous rate increases in 2022, were not entirely unexpected, increased the cost of capital for investors and acquirers and made debt and other fixed-income investments more appealing. The sudden collapse of Silicon Valley Bank in March 2023 also had ripple effects on the tech sector during a time when dealmaking was already lagging.  In addition, geopolitical instability added further volatility and uncertainty to global macroeconomic conditions throughout 2023.

Despite the turbulence, certain tech subcategories, such as AI, clean tech/critical minerals, and renewables have attracted keen interest from investors and acquirers. In 2023, we participated in many exciting tech M&A transactions.

With the introduction of platforms such as ChatGPT, generative AI dominated headlines in 2023, and the use of new and emerging technologies by organizations is more pervasive than ever. This marked shift in the landscape has refocused companies, investors and service providers on how they can leverage emerging technologies, particularly AI, in their business processes, including their M&A activities. It has also prompted governments to incentivize investment in this space.

Government of Canada tech initiatives

In 2023, the Government of Canada adopted key initiatives in support of the tech sector, including a new clean tech investment tax credit and tech talent strategy. These initiatives demonstrate the Government of Canada’s commitment to establishing Canada as a tech hub. Such initiatives will continue to nurture attractive M&A targets, which in turn has an accretive effect by injecting capital into the Canadian tech ecosystem.

In August 2023, the Department of Finance (Canada) released draft legislative proposals to enact the clean tech investment tax credit, which is intended to “encourage investment of capital in the adoption and operation of clean technology property in Canada” such as wind and solar equipment, and is one of five new federal “clean investment” tax incentives being introduced. 

Tech employers worldwide, particularly those in highly specialized areas such as AI, continue to be challenged by a scarcity of highly skilled workers. In June 2023, Immigration, Refugees and Citizenship Canada announced significant additions and enhancements to its immigration programs as part of Canada’s first-ever Tech Talent Strategy. These measures aim to address labour shortages, promote innovation, and support economic growth in Canada’s thriving tech sector by attracting highly skilled workers and start-up founders.  

Companies have long relied on ‘acquihires,’ that is a strategic acquisition undertaken to gain the employees of another company, to fill their talent gaps.  We expect talent-driven M&A will become increasingly significant in light of the rapidly changing tech landscape in highly specialized areas.

2024 Canadian tech M&A outlook

Time will tell the extent to which Canada’s tech-specific initiatives will support an M&A rebound in 2024. In addition, the Bank of Canada and certain other major central banks around the world are expected to begin gradually cutting interest rates in 2024, which should normalize the cost of capital for acquirers and investors, in turn leading to an increase in deal flow.

Despite the recent deal volume declines, we are optimistic that 2024 will be an exciting year in Canadian tech M&A, including from players in the small-to-mid-cap range that have spent the last couple of years on the sidelines.  Current market conditions will favour acquisitive tech companies with strong balance sheets, as well as established strategic buyers from other sectors that are looking to leverage technology in their operations or offerings. This may be a good match with prospective sellers that are no longer willing (or that no longer have the cash) to wait for higher valuations, particularly as the cost of running their business has increased over the past two years due to inflation and access to venture capital has been more limited.  Deal terms may reflect market uncertainty, including earn-outs, as well as M&A alternatives such as minority investments or joint ventures and partnerships, all with the aim of sharing acquisition and investment risk.

Many M&A practitioners and bankers are watching private equity firms with interest. On the one hand, private equity activity is affected by higher costs of borrowing and more limited access to capital. On the other hand, certain private equity firms and other financial investors have a lot of dry powder that needs to be deployed, and have greater flexibility with the M&A alternatives discussed above as compared to corporate acquirers. 

We also expect that 2024 will bring new developments in how M&A acquirers leverage AI to source and evaluate deals. As legal practitioners, alongside our clients, we are exploring the use of AI in performing due diligence, a time-consuming but critical part of any M&A transaction. More broadly, deals involving AI are characterized by unique risks that need to be understood by acquirers and their counsel. For example, regulatory risk will continue to evolve in 2024 as governments around the world adopt AI-specific laws (in Canada, the Artificial Intelligence and Data Act (AIDA), which was introduced as part of Bill C-27, is currently under consideration by the Standing Committee on Industry and Technology).

On the whole, we remain optimistic that Canada tech M&A deal flow will increase in 2024, with favourable conditions for strategic buyers, private equity firms and other financial buyers. In subcategories of robust activity, acquirers should be prepared to move quickly to finalize the transaction, all while effectively mitigating risk.