The Year Ahead in Canadian M&A: Growth, Complexity, and Strategic Adaption

As the global economy adjusts to ongoing shifts, Canada’s mergers and acquisitions (“M&A”) landscape in 2025 is poised for a year of both opportunity and intricacy. After a rebound in 2024, which saw a notable increase in deal values despite a slight drop in the number of transactions, the outlook for 2025 remains optimistic. Yet, this optimism is balanced by a series of evolving challenges – from shifting economic conditions and fluctuating interest rates to growing regulatory scrutiny and geopolitical uncertainties. Dealmaking in this environment will require a delicate balance between seizing opportunities across key sectors and navigating an increasingly complex and fast-paced market. For private equity firms, strategic buyers, and legal professionals, 2025 will demand innovative approaches and a proactive stance as they adapt to the evolving dynamics of the M&A market.

Shifting Macroeconomic Conditions Reshape M&A Activity in 2025

The second half of 2024 saw significant macroeconomic improvements that set the stage for increased dealmaking in 2025. Interest rate cuts by the Bank of Canada and the U.S. Federal Reserve Bank stabilized financing conditions, making debt-fueled transactions more feasible. This helped narrow valuation gaps between buyers and sellers, which had hampered deal activity in prior years.

However, the onset of 2025 has also introduced new challenges. Escalating trade tensions, marked by the U.S. tariffs on Canadian imports, have led to retaliatory measures from Canada, reintroducing inflationary pressures and influencing valuation models, with buyers prioritizing resilience and reliability. These developments have heightened economic uncertainty, potentially affecting Canadian M&A activity.

Currency dynamics will continue to influence cross-border transactions. A stronger U.S. dollar has made U.S. assets more expensive for Canadian buyers but has also increased the appeal of Canadian assets for U.S. investors, especially in sectors like critical minerals and technology.

Sector-Specific Opportunities

• Technology and AI: Technology continues to drive M&A activity, fueled by explosive growth in artificial intelligence (“AI”). Companies are racing to acquire AI capabilities, proprietary data, and supporting infrastructure, such as data centers and energy grids to remain competitive. Both strategic buyers and private equity (“PE”) firms are aggressively pursuing deals in this space, with AI-related acquisitions expected to dominate headlines in 2025.
• Critical Minerals and Energy Transition: Canada’s leadership in critical minerals, such as lithium and copper, positions it as a global hub for M&A in the energy transition. These materials are essential for electric vehicle batteries and renewable energy projects, and federal incentives have only bolstered activity in this space. Geopolitical concerns over supply chain security are expected to keep the minerals sector a focal point for domestic and international investors.
• Healthcare and Biotech: The health-care sector offers a mix of opportunities and challenges. Pharmaceuticals and medical technology are poised for growth due to aging demographics and innovation, but PE involvement in health-care services continues to face scrutiny at the provincial level, reflecting ongoing regulatory challenges.
• Energy and Natural Resources: Rising global energy demand, coupled with Canada’s abundant resources, is expected to drive consolidation in oil and gas. Liquefied natural gas infrastructure, particularly for European exports, presents significant growth opportunities. Meanwhile, Canada’s renewable energy projects remain attractive for sustainability-focused investors.

Private Equity’s Continued Dominance

PE firms are expected to play a pivotal role in Canada’s M&A activity in 2025. With record levels of dry powder (over CA$2.9 trillion globally), PE firms are under pressure to deploy capital. Platform acquisitions and add-ons will remain popular strategies, particularly in sectors like technology, health care, and infrastructure.

A backlog of portfolio companies held longer than usual is expected to spur a wave of PE exits. Firms are exploring creative solutions, such as dual-track processes (sale and initial public offering) and partial exits, to meet investor demands for liquidity. The secondaries market, which has matured significantly in recent years, will also provide alternative pathways for PE firms to achieve liquidity.

Regulatory and Geopolitical Complexity

• The Impact of Trump’s Tariff Threats: The Trump administration’s fluctuating tariffs on Canadian imports have created uncertainty for cross-border trade and have prompted retaliatory tariffs from Canada. In response, many Canadian companies are pursuing defensive acquisitions or shifting operations and investments to the U.S. to mitigate tariff risks. These developments underscore the necessity for adaptive strategies in the face of escalating geopolitical challenges.
• Heightened Scrutiny: Regulatory regimes will continue to pose challenges for dealmakers in 2025. Canada’s Competition Bureau has intensified scrutiny of large transactions, especially in concentrated industries like technology and critical minerals. This has lengthened deal timelines and raised execution costs, making early regulatory planning essential. Globally, foreign direct investment regimes add complexity, with national security reviews posing hurdles in sensitive sectors like semiconductors or cybersecurity.

Valuation Trends and Creative Deal Structures

Valuation dynamics will play a central role in shaping Canadian M&A activity in 2025. High-growth sectors like technology, health care, and critical minerals will command premium valuations, while manufacturing may see more moderate activity. To address linger-ing uncertainties, dealmakers are leveraging innovative structures, including:

• Earnouts and Contingent Value Rights: These tools allow buyers and sellers to bridge valuation gaps by tying payments to future performance.
• Deferred Payments and Minority Equity Rollovers: These structures align buyer and seller interests and mitigate risk.
• Representation and Warranty Insurance (“RWI”): RWI has become a mainstay in PE transactions, offering risk mitigation and streamlining negotiations.

The Role of Shareholder Activism

Shareholder activism is expected to intensify in 2025 as M&A activity accelerates. Activists are likely to pressure companies to pursue strategic transactions to unlock value, with cross-border activism on the rise. While environmental, social, and governance issues may take a back seat to financial performance, activism aimed at spurring M&A will remain a key driver of activity.

Conclusion: Seizing the Opportunities of 2025

Canada’s M&A landscape in 2025 is set to offer significant opportunities for growth and transformation. Success will require creativity, agility, and thoughtful planning. Whether you’re a PE investor deploying capital, a strategic buyer pursuing transformative acquisitions, or a business navigating the complexities of cross-border transactions, preparation and adaptability will be key. Early engagement with regulators, robust due diligence, and innovative transaction structures will be critical to navigating the challenges ahead.