M&A update: Tariffs, rate uncertainty stall activity

Larger deals and leveraged buyouts on hold

Global merger and acquisition (M&A) activity surged in the final month of the first quarter before stalling due to the mounting trade war, with $885 billion of deal value announced through March.¹ There was a pick-up in mega-cap mergers during March with three deals announced, bringing the first-quarter total to seven transactions greater than $10 billion in size. Even with the end-of-quarter boost, mega-mergers were down compared with a year-ago while small-cap M&A has had the best start to the year since 2021, with a 42% increase in deal value for transactions in the $1 billion to $10 billion size range.

The strong initial run of merger activity is likely to stall as tariffs weigh on the market, but similar to most macro shocks, the impact will be greater for larger deals, and we would expect to see a steady flow of small cap M&A.

When President Trump was elected in November, analysts and dealmakers were anticipating a rush of deal making following three years of stagnant activity. High interest rates, increased market volatility, and a hostile regulatory environment previously weighed on M&A markets, keeping many dealmakers on the sidelines waiting for a more conducive environment. With the Trump administration’s pro-growth and anti-regulation agenda, the market was optimistic that the tide had turned for M&A, with new appointees at key regulatory touting a pro-business agenda.

However, the Trump administration’s trade and tariff policy has quickly dampened those expectations with increased volatility, a lack of clarity on implementation, and concerns that tariffs will lead to higher inflation, all creating an environment fraught with uncertainty. Strategic acquirers typically analyze a target company looking to determine the potential synergies that could be realized post integration, but that calculation is nearly impossible with shifting tariffs which might impact the target business.

Stalled M&A activity makes for buyers’ market

The market for deal financing is also struggling, with the lenders of several leverage buyout deals who have committed to providing financing at a specific rate now unable to syndicate that debt, forcing them to hold them on their balance sheet and dampening the risk appetite for other lenders. With this added uncertainty in the markets, M&A activity has stalled, particularly for larger deals with global operations. However, for savvy dealmakers willing to deal with some uncertainty or make a bet on where tariff rates will ultimately settle, this is a buyers’ market where bargains abound.

Larger deals and leveraged buyouts will likely see a longer pause as credit markets have been disrupted, making it more difficult to syndicate larger debt deals. The inflationary impact of tariffs is also adding to uncertainty with the Fed in a tough spot as growth expectations decline while the risk of higher prices becomes a key concern.

In these volatile market environments, investors would benefit from adding non-correlated alternative exposure like merger arbitrage, which can complement or be a substitute for fixed-income exposure with better tax efficiency. While we believe that the Trump administration is likely to capitulate and roll back disruptive tariffs, it may prove difficult to restore confidence. With erratic announcements and an uncertain end-goal, markets could remain turbulent for the foreseeable future.

Amar Pandya, CFA, is Portfolio Manager of the Pender Alternative Arbitrage Fund and the Pender Alternative Special Situations Fund at PenderFund Capital Management. Excerpted from the Pender Alternative Arbitrage Fund, Manager’s Commentary, March 2025. Used with permission.

Notes

1. M&A in 2024 and Trends for 2025

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