As 2025 begins, what can we expect in Canadian M&A in the year ahead?
The second half of 2024 saw a resurgence in M&A in Canada, a welcome development after the depressed deal volumes of 2023. There are conflicting signals regarding the road forward, but with cause for optimism overall.
On a positive note, numerous encouraging market trends have continued building, including: (1) the Bank of Canada’s steady and significant interest rate cuts since June 2024, (2) a narrowing of valuation gaps between buyers and sellers, (3) ample cash on hand for both corporate and private equity (PE) buyers, and (4) an increasingly robust financing market. On the other hand, factors threatening downward pressure on Canadian M&A in 2025 include (1) continued global geopolitical tension and conflict, (2) public policy uncertainties both north and south of the border, and (3) heightened risk of regional and international trade wars.
The aggregate result is a swell of positive market momentum coinciding with an unusually elevated level of political and economic policy uncertainty. On balance, we see promise that deal levels will remain healthy as boards and management teams seize on evolving opportunities to drive growth and create value.
For more Fasken M&A thought leadership, visit our Capital Markets and M&A Knowledge Centre.
Corporate vs. Private Equity Dealmaking
The M&A slowdown since the heights of 2021-2022 saw corporate buyers reverse previous trends by growing their share of overall M&A activity relative to PE buyers. Market watchers expect a forthcoming move in the opposite direction with PE clawing back M&A market share from corporates in 2025.
That said, corporates are expected to remain quite active. As many would-be corporate buyers sat on the sidelines awaiting more normalized financing conditions they simultaneously built healthy balance sheet reserves. Strategic imperatives to dealmaking have also been accumulating, including adding capabilities amid the continuing digital transformation and the “once in a generation” disruptor that is AI. Other examples include strategic imperatives flowing from the energy transformation, addressing supply chain issues, and enhancing enterprise resilience. The pursuit of value creation and continued market uncertainties may also lead to corporate reorganizations, divestitures and spin-offs as some corporates chase simplification, management focus and optimized capital allocation.
Sell-side PE activity should be propelled by the abnormal backlog of portfolio companies amassed over extended hold periods coupled with limited partners still waiting on distributions. Recent market conditions have seen buy-side PE focus more on add-ons and platform growth than new platform creation, but this could balance out going forward, including because of still near record levels of PE dry powder. In cross-border M&A, we expect to see continued popularity of exchangeable share structures in Canadian acquisitions by U.S. PE buyers involving rollover equity. Overall, the turbulence of the last five years has proven the impressive adaptability of PE strategies and structures – from expanding their investment scope into more targeted niches of the mid-market to the greater regularity of consortium deals and continuation funds – and we expect similar evolution and adjustment going forward.
Industry Areas and Transaction Types
We expect a good portion of deal volume in Canada to continue to be weighted toward the middle market. So long as significant political and economic policy uncertainty persists, we don’t expect a wave of mega-deals, but would not be surprised to see several significant strategic tie-ups punctuate the landscape. Hotspots of dealmaking activity may also form, particularly where supported by stimulus or in response to new government policy, whether in Canada or the United States. We would hope for continued and greater government support for Canadian mining and critical minerals, including greater clarity regarding the federal government’s approach to national security reviews.
Improved financing conditions should stimulate a more meaningful return of the leveraged buyout market as buyers gain confidence and as valuations improve. For similar reasons we expect an uptick in go-privates. Minority equity investments, including private investment in public equity transactions (PIPE), remain a potentially attractive option, and deal volumes here remained generally consistent pre and post-pandemic. By contrast, the Canadian initial public offering (IPO) market remains in a holding pattern since the IPO boom of 2021 and early 2022, and since then the pipeline of late-stage startups has only grown. The second half of 2024 saw a minor awakening of the U.S. IPO market, but the Canadian IPO market continues to lag behind. Should meaningful IPO sprouts start to show in 2025, momentum could quickly build as we saw in 2021, particularly in the tech sector.
Foreign Investment and Competition
A flashpoint in 2024 has been the increased national security scrutiny applied by Canadian regulators to foreign transactions, particularly involving China or Russia. The backdrop is a broader shift in global geopolitics, friendshoring and deglobalization trends. A goal of regulators is to strengthen domestic and regional supply chains, particularly in respect of critical minerals, including for their role in the green energy transition (e.g. EV battery production) and high-tech applications (artificial intelligence and military applications). Inbound M&A and foreign investment is therefore attracting markedly more intense national security scrutiny and this is resulting in both protracted review periods and greater regulatory uncertainty. This has also resulted in rejected or abandoned transactions.
While we understand the government’s policy goals, the task also remains promoting Canadian mining through a fully co-ordinated, consistent and committed approach. On the regulatory side, this requires Ottawa following through on its dedication in its 2024 budget to stimulate mineral exploration and streamline mining permitting. On the national security side, this requires greater predictability and consistency regarding which types of transactions will face enhanced scrutiny and on what grounds, as regulatory uncertainty threatens investment in Canadian mining across the board and not just from jurisdictions deemed to raise national security concerns. The market will therefore be watching developments in this area very closely in 2025.
Dealmaking in 2024 was also noticeably impacted by the Competition Bureau’s increased powers and scrutiny. This has necessitated more proactive and sophisticated merger analysis and planning from a transaction’s outset and has also impacted related M&A negotiations and deal terms. We don’t see any reason to expect any significant reversal on these fronts in 2025.
Concluding Comments
M&A dealmaking has continued trending toward greater complexity on multiple levels, and we expect this progression to continue in 2025. A common observation is that transactions are taking longer to close, and here statistics unsurprisingly show a direct correlation between larger deal size and average length to completion. However, mid-market deals can also include remarkably complicated aspects. Deeper due diligence often remains a priority. Additional deal terms such as RWI and earnouts can add negotiation workstreams. Novel or more complex structures take longer to devise. Deals with more synergies or market consolidation typically attract greater competition scrutiny. Deals that potentially raise national security concerns require a particularly deft hand. The cumulative result is additional pressure on deal teams and their advisers, and this challenging M&A environment will differentiate those groups adept at foreseeing and navigating these complexities from those who are less prepared. Overall, teams must be alert and agile to identify and seize on opportunities and assist in creating value while also mitigating risk.
