Canadian M&A: A Look Ahead at 2024

First, it appears likely that interest rates in Canada are going to stabilise over the coming year. For example, the Bank of Canada held its key interest rate steady in both September 2023 and October 2023. In any event, even if interest rates increase further in the future, these increases will be subtle in nature, given the interplay between the Canadian Federal Reserve and the impending US presidential election.

With the US presidential election looming and the current volatile global geopolitical environment, there is unlikely to be much appetite for rocking the boat over the next 12 months. No institution wants to take on that sort of responsibility or blame in this environment.

Second, once interest rates stabilise over the coming year, pricing will adjust. This means that if Canada maintains its prime interest rate at 7.2% for another 12 months, then people are going to accept that relatively higher interest rates are here to stay for a while. Consequently, those who really need to sell are going to come to that acceptance, and commit to a sale.  

As a result, there will likely be more sales happening based on a non-opportunistic metrics, or based on needs – whatever those may be.

Third, there is the question of whether there will be an increase in M&A activity in any particular sectors over the next 12 months. For example, in the mining sector, commodities go up and down in value by their very nature, so it is possible that there will be more M&A activity in mining. Another potential sector that may see a large amount of activity is the construction sector. With the immense emphasis from all levels of government being placed on building homes, there is likely to be increasing activity in house-building in general, as well as in the businesses and services connected with construction. In turn, this will lead to a rise in activity in the supply chain for construction and house-building.

In support of this view,  there have been recent mandates to build homes in Canada, including in the province of Ontario and at federal government level, to address the country-wide housing supply shortage. As a result, there will be an increase in offshoots related to house-building, and more opportunities available in relation to building-related college courses, skills training or apprenticeships.

To summarise, over the coming year, Canada is going to see a continuation of the pattern of sales out of necessity, not out of opportunity. Canada is also going to see a lot of activity around house-building, and by extension around anything related to construction or infrastructure. This is because all levels of government in Canada are pushing a mandate around the need for housing, due to its supply being so short at present in the country.

In addition, it is likely that 2024 will be a bumpy economic year in general, due to the overall volatile geopolitical environment and the impending US presidential election. In this respect, the Bank of Canada do not operate in a vacuum – the Bank will be responsive and adaptable to the US Federal Reserve and other G7 banks. The reason for this is that low interest rates are what has fuelled a lot of the economic growth in Canada; now that rates are higher, economic growth has slowed. Another point to note is that the Bank of Canada is currently trying to strike an equilibrium between interest rate variability and currency. This is because if the Bank sets the prime rate too low, then the Canadian currency will decline against the US dollar. Given that the United States is Canada’s largest trading partner, a weak Canadian dollar puts Canada at an overall disadvantage.

Ultimately, the US presidential election will take centre stage next year and will have a bearing on all economies, not just Canada’s. It will be interesting to observe how the US Federal Reserve will react and see what steps it decides to take – whether it is dependent or independent.

While it is difficult to predict with certainty what 2024 will bring for the Canadian M&A market, we can expect potential volatility. While deals will still get done, they will get done at different prices, on different conditions, and for different motivations. Bluntly put, the US presidential election could not happen at a worse time for the market, as the independent factors affecting the market will no longer be as clearly defined during 2024 as they have been in recent times.

Overall, it seems the Canadian economy is in for a bumpy ride over the next 12 months. This volatility will of course have a knock-on effect on the Canadian M&A market, although the precise nature and extent of the effect remains to be seen.