'Entrepreneurs are pretty resilient and they kind of moved forward': Tomassetti on tariff threats

Key Concepts

• Mergers & Acquisitions (M&A): The consolidation of companies or assets through various types of financial transactions.
• Canadian Business Landscape: The current state of the Canadian economy and its impact on business activity.
• Trade Tariffs (US-Canada): Imposed taxes on imported goods, specifically between the US and Canada, impacting business strategies.
• Nation Building Agenda: Government-led initiatives involving large-scale infrastructure projects and investments.
• Earnout Structure: A portion of the purchase price in an M&A deal that is contingent on future performance.
• AI Value Chain: The ecosystem of technologies and businesses supporting the development and deployment of Artificial Intelligence.
• Mid-Market: Refers to companies generally defined by revenue and employee size, falling between small businesses and large corporations.

Canada’s M&A Outlook: A KPMG Report Analysis

Introduction

A recent report by KPMG indicates a positive outlook for Mergers & Acquisitions (M&A) activity in Canada, driven by a favorable business environment and a significant nation-building agenda. Approximately one-third of Canadian businesses are planning major acquisitions in the coming year. This analysis details the key findings of the report, as discussed with Marco Thomasetti, President of KPMG Canada Corporate Finance.

1. Macroeconomic Conditions & Capital Availability

The Canadian business landscape is currently characterized by stabilizing interest rates, having peaked in 2023, and a substantial availability of capital from both domestic and international sources. This creates a generally favorable macroeconomic environment for M&A activity. Thomasetti notes that “directionally [interest rates] are quite stable more towards a kind of a long-term norm.” The report highlights that this capital influx is being fueled by both government-funded projects and private investment, particularly in areas like data centers supporting the Artificial Intelligence (AI) value chain.

2. Impact of US Trade Tariffs & Entrepreneurial Response

The implementation of US tariffs on Canadian goods has created uncertainty for businesses, described as “a lot of fog in their front windshield” by Thomasetti. This has prompted Canadian entrepreneurs to seek innovative growth strategies, including acquisitions, to navigate the changing trade landscape. The tariffs, initially perceived as rhetoric, proved to be a tangible reality, impacting business planning and cash flow predictability.

3. Canadian-to-Canadian Acquisitions & Cross-Border Activity

The KPMG report focuses on the intentions of Canadian-domiciled companies, revealing that a third plan to pursue acquisitions. While some Canadian firms may acquire US assets to mitigate the impact of tariffs, the majority of transactions are expected to be Canadian-to-Canadian, aimed at building capacity and expertise. This represents a historically high intention rate for acquisitions.

4. Sector-Specific M&A Activity

M&A activity is expected to be broad-based in the mid-market, but certain sectors are poised for significant growth. These include:

• Infrastructure: Engineering firms, electrical contractors, and HVAC businesses are experiencing increased activity due to large-scale government projects and the demand for supporting services.
• Healthcare: Historically active, the healthcare sector is projected to maintain strong M&A momentum through 2026 and beyond.
• AI & Software: The burgeoning AI sector is attracting substantial capital, driving transactions in software and related technologies.
• Sectors Impacted by Tariffs: Sectors heavily affected by tariffs are facing challenges in predicting future cash flows, potentially slowing down acquisition activity.

5. Deal Structuring & Risk Mitigation – Earnout Structures

Businesses are adapting their deal structures to address the uncertainty surrounding potential future tariffs. Thomasetti explains that companies are increasingly utilizing “earnout type structures,” where a portion of the purchase price is contingent on future performance. This provides a degree of protection against potential risks associated with tariffs.

6. Concerns Regarding USMCA Renegotiations

There is definite concern among businesses regarding the upcoming renegotiations of the Canada-United States-Mexico Agreement (CUSMA, formerly NAFTA). The initial implementation of tariffs last year caused a slowdown in M&A activity, and a similar disruption is anticipated if renegotiations lead to further trade barriers. However, Thomasetti expresses confidence that entrepreneurs will find ways to navigate these challenges, potentially by diversifying their markets or innovating their access to US customers.

7. The Role of Government Investment & Project Scale

Large-scale government projects and private investments, particularly in the AI sector, are driving demand for specialized skills and capacity. The scale of these projects often exceeds the organic growth capabilities of individual companies, necessitating M&A activity to acquire the necessary expertise and resources. These projects require components, skilled labor, and technical expertise, creating opportunities for ancillary businesses.

Conclusion

Despite ongoing trade uncertainties, the outlook for M&A activity in Canada remains positive. Stabilizing interest rates, abundant capital, and a robust nation-building agenda are key drivers. Canadian businesses are demonstrating resilience and adaptability, leveraging M&A as a strategic tool to navigate challenges and capitalize on growth opportunities. The emphasis on Canadian-to-Canadian acquisitions, coupled with innovative deal structures like earnouts, suggests a proactive approach to risk management and a commitment to long-term growth. Thomasetti concludes with an optimistic outlook, stating, “we continue to believe that there’s going to be a lot of activity and that entrepreneurs will kind of see through and see around the tariffs.”