Trump’s tariffs could cause short-term pain for Canada’s M&A market

US President Donald Trump’s proposed tariffs could squeeze the Canadian mergers and acquisition (M&A) market in the short term, according to a report from KPMG Canada.

President Trump earlier this week announced his intention to place 25% tariffs on Canada and Mexico starting on February 1, 2025. The Canadian government has responded that it will propose counter-tariffs in response.

A North American trade war would severely impact Canada’s manufacturing and resources sectors – with the United States accounting for approximately three-quarters of Canada’s total exports.

Although private company M&A dynamics have improved materially over the last 12 months due to lower interest rates and large amounts of available capital, tariffs would dampen optimism.

“In the immediate term, we will see some deal activity stall as both buyers and sellers take time to assess the impact US tariffs will have on earnings," said Marco Tomassetti, president of KPMG Corporate Finance. "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."

Tomassetti notes that buyers will also want time to assess tariffs impacts – with earnings uncertainty making business valuation and deal financing more difficult.

However, private companies that are services-based and have low US exposure will not be materially impacted by tariffs, and their owners are likely to still bring them to market.

“The pipeline for deals is healthy, and we are seeing in-market transactions generate lots of interest at fulsome valuations,” Tomassetti said. “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.”

In the longer term, structural changes such as a renegotiation of the Canada-United States-Mexico Agreement (Cusma) may encourage Canadian firms to buy assets in the US.

“Looking further ahead, a trade war will spur cross-border deals as Canadian companies and investors consider strategic acquisitions in the US,” said Neil Blair, national leader of KPMG Canada's deal advisory practice. “We'll likely see deals where a Canadian entity acquires a manufacturing plant in the US to comply with new supply chain requirements, for example.”