M&A update: constructive small-cap environment

Trump administration’s pro-business, anti-regulation agenda a major catalyst

While the Trump administration’s unpredictable executive orders are sure to cause volatility in equity markets, the core policy agenda and key appointees should provide a constructive environment for U.S. small-cap merger and acquisition (M&A). We believe Trump’s pro-domestic, pro-business, and anti-regulation agenda is set to be a major catalyst for M&A activity in the U.S.

In last month’s commentary we discussed the recent resurgence of horizontal mergers post-election, as management teams seek to secure a competitive advantage and strengthen their competitive positioning through acquiring competitors. We have remained on the sidelines for many of these transactions but are following them closely to see how regulators respond to these deals.

 If approved, these successful mergers would likely demonstrate a clear shift in the regulatory environment, establish new precedents for similar mergers, and unleash a potential wave of consolidation in the US.

North of the border, the weakness in the Canadian dollar is making our universe of Canadian companies, which are already trading at a discount to their U.S. peers, an even better bargain for acquirers. This is most evident in the Canadian IT service space where we have seen several acquisitions in recent weeks.

Quisitive Technology Solutions, Inc. (TSXV: QUIS), Softchoice Corporation (TSX: SFTC), and most recently Converge Technology Solutions Corp. (TSX: CTS) have all received acquisition offers from U.S. acquirers. Softchoice, a Canadian cloud-focused IT solutions provider is being acquired in a strategic transaction to merge with World Wide Technology Holding Co., LLC. Quisitive and Converge are both being acquired by the same private equity manager, H.I.G. Capital in go-private transactions where current management and insiders will maintain equity in the privatized companies.

This structure of what we consider private equity backed management buyouts continues to drive acquisition activity in Canada as insiders and financial acquirers seek to capitalize on discounted valuations amongst Canadian companies

Global M&A activity was over $230 billion in January, down 20% over the same period last year.¹ While activity one month in is down from last year, dealmakers anticipate a surge of activity this year as falling interest rates, a strong economic expansion, ample capital, and favorable regulatory conditions support deal activity.

The materials, energy and power, and financials sectora led M&A activity during the month, indicating a wide-breadth of acquisition appetite across market sectors. Andrew N. Ferguson was appointed Chair of the Federal Trade Commission (FTC) during the month, replacing Lina M. Khan, who had chaired the FTC through one of its most hostile periods over the past four years. Advisors, bankers and corporations appear optimistic about the prospects for M&A under the new regulatory regime with improved visibility on securing regulatory approval removing a key obstacle for deal making.

Markets were off to a strong start in 2025 with the S&P 500 up 2.8%, the Nasdaq advancing 1.7%, the S&P/TSX composite rising 3.5%, and the Russell 2000 up 2.6%. With the Trump administration expected to be active and unpredictable on trade and economic policy, there is likely to be increased volatility for the foreseeable future.

Despite added economic uncertainty, credit markets have been resilient with credit spreads at historically tight levels. This is in sharp contrast to merger arbitrage spreads, which remain in the mid-to-high single-digits for a large part of the our investible universe. With wide spreads and tailwinds for both deal activity and regulatory approval, we have a positive outlook for merger arbitrage returns this year on a relative and absolute basis. Investors seeking to diversify their portfolio with a low-risk, non-correlated and tax-efficient investment strategy should consider an allocation to merger arb in 2025.

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, January 2025. Used with permission.

Notes

1. Michael G. O’Bryan et al, “M&A in 2024 and Trends for 2025,” Morrison Foerster, Jan. 9, 2025.

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