Canada-U.S. M&A: Navigating Uncertainty in the Trade War Era

This article originally appeared in the Spring 2025 issue of the American Bar Association Mergers and Acquisitions Committee’s Deal Points newsletter and is republished with permission.

The trade relationship between Canada and the U.S. is long-standing and one of the largest bilateral partnerships in the world. In 2024, the combined value of goods traded between the two countries was approximately US$762.1 billion, comprised of US$349.4 billion in exports from the U.S. to Canada and US$412.7 billion in imports from Canada to the U.S.^[1] Against the backdrop of this deep economic integration between the two countries, merger and acquisition (“M&A”) activity continued to flourish. In the final quarter of 2024 alone, the aggregate value of M&A transactions completed between Canadian and American businesses was approximately US$293.2 billion – a significantly larger sum than the aggregate value of M&A transactions completed between European businesses (approximately US$117.7 billion) and Asia-Pacific businesses (approximately US$110.7 billion) in the same quarter.^[2]

The trade and transactional relationship between the U.S. and Canada is a deep and robust relationship. It is therefore both surprising that this relationship could so quickly change and, at the same time, evident that material economic changes in the relationship will have unprecedented impacts in trade and M&A transactions across the Canada-U.S. border. This article explores how Canada-U.S. M&A activity is being impacted by rising trade tensions, outlines strategic and risk-mitigation approaches for dealmaking during economic uncertainty and emphasizes the importance of thorough diligence and careful structuring to navigate the shifting landscape.

Strategic M&A During Periods of Economic Uncertainty

Effects of the Trump administration’s trade war and other geopolitical clashes are already being felt across the M&A deal landscape. The Trump administration’s policies have stoked uncertainty among dealmakers, which has had the effect of tightening an already slow economic market. In its preliminary stages, the Canada-U.S. trade war will result in increased costs of doing business (by virtue of increased importation and supply chain costs), lower profit margins and currency fluctuations that will affect the purchasing power of Canadian and U.S. businesses alike – the sum of these impacts to date have resulted in a general reluctance to pursue cross-border M&A transactions.

Canadian and U.S. businesses have begun evaluating alternative markets in which to expand. As a result, the total number of cross-border M&A transactions completed with U.S. businesses during the first two months of 2025 dropped to a five-year low and decreased by 21% compared to the same period in 2024.^[3] As dealmakers remain in “wait-and-see” mode, activity in sectors that are heavily reliant on Canada-U.S. trade, including the manufacturing and automotive sectors, may experience the greatest deceleration, particularly if trade uncertainties escalate.

Particularly given the unpredictability of the Trump administration’s economic policies and the fact that the Canada-U.S. trade war has only recently commenced, it is difficult to anticipate with a sufficient degree of confidence how long uncertainty will continue to slow activity in the M&A deal landscape. Most experts agree, however, that any slowdown in M&A activity is temporary, as the general strategic value of pursuing M&A transactions (including the fortification of supply chains, diversification of portfolios and ability to enter into new markets) will prevail. Furthermore, companies that have pursued M&A transactions in turbulent times – including during the global financial crisis of 2007-2009 – have consistently outperformed peers that refrained from engaging in such activity.^[4] Therefore, completing M&A transactions – even across the Canada-U.S. border – may be required to adapt to any long-term, structural and even permanent damage to the economy^[5] and to meet other macroeconomic risks, such as tax hikes, margin pressures and cash-flow concerns.^[6]

Canadian businesses are already considering pursuing defensive acquisitions in the U.S. in order to establish a local presence and mitigate tariff risks.^[7] PricewaterhouseCoopers predicts that there may be an increase in the number of M&A transactions involving Canadian companies that are looking to expand into the U.S. as part of an effort to potentially reduce the risk of losing their share in that market.^[8]

Risk-Mitigation Strategies in Deal Structuring

In light of the benefits of a forward-thinking M&A strategy during turbulent times and the anticipation of continued M&A activity across the Canada-U.S. border, it is crucial that prospective buyers and targets, be they Canadian or U.S. businesses, remain cognizant of the risks inherent in pursuing these cross-border M&A transactions. At present, buyers may choose to take advantage of an opportunity to purchase Canadian or U.S. targets at lower prices resulting from the diminished profitability of businesses operating in sectors affected by new tariffs on either side of the border in the longer term. Buyers may tend to adjust their valuation models downward to reflect increased operational costs, increased costs of imported goods and materials, and associated risks.

Experts recommend that, when evaluating targets, buyers conduct extensive supply chain mapping and thorough tariff impact assessments, complete with scenario planning, to better understand how any newly imposed tariffs could affect the business activities at hand and to evaluate whether strategies can be implemented to effectively mitigate these challenges.^[9] In addition, targets may consider engaging external advisors in order to evaluate general tax implications and transfer pricing policies, and consider whether any restructuring (e.g., divesting costly tariff hit divisions) ought to occur in order to ensure the business remains attractive to a buyer.^[10]

Prospective buyers may also favour deal structures that provide investors with reduced financial risk in the face of economic instability. Earnout structures may be implemented in order to reduce upfront financial commitment and allow buyers to pay the purchase price based on actual performance rather than uncertain projections. Rollover equity structures may be favoured to hedge against regulatory and trade turbulence by aligning incentives and sharing risks by ensuring targets have a vested interest in the targets’ post-transaction success over the long term.

Finally, deferred payment structures may be utilized to preserve liquidity for the buyer, allowing for financial flexibility in uncertain trade environments, and provide a buffer in case tariffs, supply chain disruptions or regulatory changes negatively impact business performance.

Focus Areas for Enhanced Due Diligence

Assuming the parties are able to align on the valuation of the target and the structure of the deal, at a preliminary stage, rigorous data-driven diligence will need to take centre stage. Buyers ought to implement robust due diligence strategies that consider a wider range of:

1. trade and tariff exposure issues (including an evaluation of whether the target entity uses duty drawback programs, tariff engineering or special trade zones to minimize costs);
2. supply chain dependencies and contractual vulnerabilities (including whether suppliers may be able to pass on tariff-related costs to the target and whether supplier contracts include force majeure clauses that mean trade war-related disruptions may trigger contract termination, price adjustments or penalties);
3. regulatory matters (including an evaluation of whether regulatory bodies in Canada or the U.S. may block or impose conditions on the transaction due to market concentration concerns); and
4. trade-related litigation and contingent liabilities (including evaluating whether the target is involved in any ongoing or threatened litigation related to tariff classifications, customs audits, trade compliance violations or contract renegotiations due to trade-related cost increases).

Diligence checklists and M&A reporting documentation should be updated to include such evaluations and ensure that requests capture this information from the target.

As in any M&A transaction, issues uncovered in the diligence stage may result in an adjustment of the purchase price and the structuring of protective deal terms for buyers and/or targets. There are a number of deal terms that buyers can update or include in purchase agreements to mitigate the risk of these uncertain times, such as:

1. including or strengthening representations and warranties related to tariff exposure, pending tariff disputes, customs penalties, supplier cost increases, supply chain disruptions and regulatory compliance;
2. obtaining representation and warranty insurance to cover losses from breaches of representations and warranties related to trade risks;
3. negotiating specific indemnities or holdbacks related to covering potential trade-related liabilities;
4. insisting on the inclusion of material adverse change clauses to account for trade-related uncertainties, regulatory changes or government interventions, and to allow for termination or price adjustments. Buyers should be careful to ensure that force majeure clauses are not inadvertently broad enough to provide targets (and selling shareholders) with a defence from some of these material changes;
5. including covenants to ensure the target maintains relationships with key suppliers and customers and maintains operations in a manner that minimizes trade-related risks; and
6. carefully selecting governing law and dispute resolution mechanisms to provide more favourable perspectives on a dispute or more neutral jurisdictions to avoid bias in disputes.

Conclusion

Additional diligence and deal terms provide some level of protection to companies pursuing M&A during these times. However, given the long-standing relationship between the two countries, as well as the enduring strategic benefits of pursuing M&A transactions, dealmakers, while hesitant, remain optimistic that any disruptions caused by recent trade-related disputes will be short-lived.

In the face of so much economic and political uncertainty, however, one fact remains clear – it is incumbent on all parties involved to proceed thoughtfully, using the tools at hand to mitigate risk and maintain a robust M&A market between Canada and the U.S., even in the face of the political jousting between Ottawa and Washington, D.C.

The Capital Markets Group and Mergers & Acquisitions Group at Aird & Berlis LLP assist clients with the complexities of cross-border M&A by advising on deal structuring, risk mitigation strategies and comprehensive due diligence. Please contact the authors or a member of the groups if you have any questions or require assistance.

[1] Canada | U.S. Trade Representative