potential software M+A
Tariffs or no tariffs, Canadian software M&A is set to soar
Adi Filipovic does not spend any time thinking about tariffs.
If Donald Trump does make good on his threat to slap 25-per-cent levies on Canadian imports to the U.S., the co-founder of Atlanta-based private equity company Resurgens Technology Partners expects his business of buying software companies will be just fine.
Despite tariff-related uncertainty putting a broad chill on Canadian deal-making and legal experts warning that software may not be spared should tariffs actually arrive, Mr. Filipovic is among many expecting Canadian software-related merger and acquisition activity to rise this year.
“We continue to actively pursue and look for Canadian businesses for a lot of reasons,” he said. “And I do think the next 12 months are going to look better with respect to volumes.”
Buyers have always been eager to acquire quality assets. What is different now, experts say, is that the weak Canadian dollar, combined with expectations for tariff exemptions and a ticking clock on higher capital-gains taxes, have conspired to bring sellers back to the bargaining table.
“If you are a Canadian seller, this might be a pretty good time to attract U.S. buyers,” according to Mr. Filipovic.
Ed Bryant, chief executive officer of Sampford Advisors, a mid-market tech-focused M&A advisory company based in Ottawa, said “sellers who haven’t wanted to sell for two-plus years are now coming back to market and asking what they could get.”
He believes Canadian software M&A is on the verge of another deal deluge on par with the flurry of activity that dominated late 2021 and early 2022.
“Literally in just the last 10 days, we have won three new mandates, and we closed four deals all of last year,” Mr. Bryant said. “It has literally been like a light switch.”
He has spoken with hundreds of tech CEOs since the tariff question first arose and the only ones who expressed any concern were those with businesses that sold hardware or other physical products.
“But the software guys, the IT services guys, I literally ask the question every time I speak to someone now and nobody is worried about it,” he said.
Vancouver-based Garibaldi Capital Advisors, another tech M&A advisory company focused on the mid-market, is also tracking an acceleration in its business as both buyers and sellers have largely ignored the tariff threat.
“We have been working under the assumption in the tech industry that digital goods will not fall into this because, quite frankly, they are a little hard to track,” Garibaldi CEO Brent Holliday said. “It is not like they show up in a truck at the border.”
Sellers are getting valuations that are closer to 2019 levels, he said, as financial buyers are “very much back, they are scouring for companies.”
Mr. Holliday said the federal government’s decision in late January to delay the implementation of higher capital-gains taxes until 2026 is giving sellers a sense of urgency.
“Unfortunately that all got lost in the tsunami of tariff stuff that happened,” he said. “But for Canadian tech companies, this should be your year if you’ve been really wanting to sell your business, because 2026 will have uncertainty around capital gains and there is certainty this year.”
“We are starting to see these entrepreneur-owned, bootstrapped, not-venture-capital-backed companies showing up in droves,” Mr. Holliday said.
Because most Canadian software companies generate much of their revenue in U.S. dollars but their cost base (mostly in the form of staff compensation) is in Canadian dollars, the currently low Canada-U.S. currency exchange rate is also encouraging software entrepreneurs to consider selling.
“These businesses are now much more profitable than they have been because they have USD revenues and Canadian-dollar costs,” Sampford’s Mr. Bryant said. “Their profitability looks much better than it has historically.”
“The number of deals haven’t really played through yet, but we are seeing these early signs that will translate into deals nine months later,” he said.
Jim Osler, co-chair of Toronto-based independent investment bank Origin Merchant Partners, said the currency trend is already helping to drive tech deals.
“In Canada, a couple of the bigger deals we did this year were IT services and software businesses where having a Canadian dollar-denominated employee base with U.S. dollar-denominated revenue certainly didn’t hurt,” Mr. Osler said. “And they are not affected by tariffs so I think you could see more of that activity.”
Mario Di Pietro, head of Origin’s Canadian tech practice, has been doing Canadian tech M&A for decades. Part of the team that took Constellation Software Inc. public in 2006, said deal making in the sector this year is already likely to surpass 2024.
“I have seen a lot, and I’ve seen a lot of the cycles in tech, especially in Canada and I’m sitting here thinking, ‘yeah, we are in a great position,’ ” Mr. Di Pietro said.
In addition to more startups getting snapped up, he said the trend of Canadian tech companies that have recently gone public being taken private is likely to accelerate. Softchoice Corp. and Converge Technology Solutions Corp. are two recent, multibillion-dollar examples of that trend, but Mr. Di Pietro said it is going to be “much more acute in the small-to-mid-cap space.”
“There is going to be a heck of a lot more take-privates,” he said.