U.S. tariffs could slow M&A activity, KPMG in Canada says

U.S. President Donald Trump’s proposed tariffs on Canadian goods could cause a slowdown in merger and acquisition activity in the first six months of the year, but structural changes in trade could spur cross-border deals in the long-term, according to KPMG in Canada Deal Advisory leaders.

On his first day in office, President Trump issued a memo directing federal agencies to assess trade practices with other nations, and suggested 25 per cent tariffs on all Canadian goods would be imposed in February. Canada’s government has said it would consider proposing counter-tariffs in response.

The uncertainty facing companies with exposure to the U.S. could make them less attractive to potential acquirers in an M&A market that was gaining significant momentum, says Marco Tomassetti, President of KPMG Corporate Finance Inc., the #1 M&A advisor in Canada in 2024 according to LSEG (formerly Refinitiv).

Across North America, private company M&A dynamics have improved materially over the last 12 months, driven by lower interest rates and continued record levels of capital available on strategic and private equity balance sheets. However, the positive M&A backdrop is clouded by the announcement of U.S. tariffs and the resulting earnings uncertainty of impacted businesses, Mr. Tomassetti says.

“In the immediate term, we will see some deal activity stall as both buyers and sellers take time to assess the impact U.S. tariffs will have on earnings,” he says. “Owners looking to bring their businesses to market might pause to wait for the 'uncertainty dust' to settle as tariffs could impact their costs and customer demand. This uncertainty results in downward pressure on valuations and increases the likelihood of a failed deal – two outcomes that business owners want to avoid.”

Likewise, buyers will need time to understand how U.S. tariffs will impact a specific industry or business they are targeting, Mr. Tomassetti notes.

“Earnings uncertainty makes business valuation and deal financing more difficult and generally leaves buyers with two alternatives to manage the risk: either introduce deal structure and related protections -which most sellers won’t accept - or simply wait to see how things play out before triggering M&A. Regardless, this uncertainty for both the buyer and seller will take some momentum out of the M&A markets for the first half of the year,” Mr. Tomassetti says.

He notes that despite uncertainty facing many businesses, private companies that are services-based, have low U.S. exposure or have pricing power will not be materially impacted by tariffs. Owners of these types of businesses are still bringing them to market, and many are generating lots of interest, Mr. Tomassetti says.

“The pipeline for deals is healthy, and we are seeing in-market transactions generate lots of interest at fulsome valuations. So, despite the impact of tariffs on a subset of Canadian private company M&A, momentum remains robust and we expect a strong year for deals,” Mr. Tomassetti says.

In the longer-term, structural changes in trade such as a potential renegotiation of the Canada-United States-Mexico Agreement (CUSMA) might encourage Canadian firms to consider buying assets in the U.S. to circumvent trade restrictions, says Neil Blair, Partner and National Leader of KPMG Canada’s Deal Advisory practice.

“Looking further ahead, a trade war will spur cross-border deals as Canadian companies and investors consider strategic acquisitions in the U.S. We’ll likely see deals where a Canadian entity acquires a manufacturing plant in the U.S. to comply with new supply chain requirements, for example,” Mr. Blair says.

“Further clarity on Canada’s political situation – and the fate of the capital gains tax increase, for example – will be another long-term catalyst for doing deals in the U.S.,” he adds.

In line with Mr. Blair and Mr. Tomassetti’s views, a KPMG in Canada business survey conducted just prior to the U.S. election showed nine in 10 CEOs of large Canadian organizations are considering making acquisitions in the next three years to help boost growth - with four in 10 planning major deals. The survey also revealed that nearly three quarters of small and medium-sized businesses are considering making acquisitions.

In this new era of Canada-U.S. trade relations, KPMG’s Deal Advisory teams are advising acquirers and sellers to consider the following:

• Conduct an impact assessment: Organizations should understand how their business could be impacted by trade restrictions or tariffs and identify top vulnerabilities, including an assessment of costs, supply chains and pricing strategies.
• Start scenario planning: Firms should create strategic plans to address the cost of tariffs or other non-tariff barriers and assess how those plans could impact a potential merger or acquisition.
• Build mitigation strategies: Firms seeking to be acquired should have a plan to demonstrate to potential buyers how they will continue to create value through strategic synergies amid U.S. tariffs.
• Rigorous due diligence: Acquirors should employ robust, data-driven due diligence strategies that thoroughly assess the impact of various trade scenarios on acquisition targets, paying close attention to the granular impact on business models, related cash flows, and the ultimate valuation of the business.
• Using a trusted advisor: Engage professional deal advisory team who have experience in U.S. or cross-border M&A, tax, transfer pricing, logistics and supply chain, and pricing strategies.

KPMG Corporate Finance in Canada acted as the financial advisor on 46 transactions last year according to data compiled by LSEG (formerly Refinitiv) earning it the top spot in LSEG’s league table rankings (by volume) and ranked No. 1 over a five-year period from 2020-2024 in Canada, advising on 246 deals. League table rankings include eligible mergers, acquisitions, repurchases, spin-offs, self-tenders and minority stake purchases.

Canadian completed deals - Advisor ranking
 

^{Source: LSEG Deals Intelligence Global Financial Advisory Review 2024, Number of Completed Deals, Full to Each Advisor - Any Involvement, Full market. As at Jan. 21, 2025. Represents the Canadian Corporate Finance practice of KPMG International's network of independent member firms. *Represents a tie in ranking}

KPMG Corporate Finance focuses on providing a broad range of investment banking and advisory services to its domestic and international clients, in both the public and private sector. Our professionals have deep industry experience and knowledge in advising clients on mergers and acquisitions, divestitures, raising capital buyouts, financings, debt restructurings, equity recapitalizations, infrastructure project finance, capital advisory, portfolio solutions, fairness opinions, and other advisory needs. The team has a distinguished track record working with a wide range of Canadian businesses with diverse transaction objectives and delivering successful outcomes for our clients.