Defence spending helps fuel uptick in M&A activity in Ottawa

When it comes to mergers and acquisitions, three local experts say the past few years have been sluggish in Ottawa, but there’s been an uptick in activity, with businesses from multiple sectors ready to buy or sell.

When it comes to mergers and acquisitions, three local experts say the past few years have been sluggish in Ottawa, but there’s been an uptick in activity, with businesses from multiple sectors ready to buy or sell.  “There’s a lot of activity in Ottawa and I don’t think we talk about it,” Jennifer McMullan, director of RBC’s corporate client group, told OBJ recently. “I don’t think it’s publicized. A lot of it is relationship-based, and it kind of goes under the radar.” According to McMullan, who is based in Ottawa, the majority of M&A activity locally is among small and medium-sized enterprises. Most recently, she said, two types of businesses have been especially active. 

On one side, the Ottawa tech and startup community has been working to scale and sell as investment pours into the defence sector and larger companies look for innovative products. On the other side, more owners of established local businesses, especially in the trades and industrial services sectors, are preparing to retire and are leaning toward selling.  In both cases, McMullan said companies are looking close to home for potential buyers.  “Twenty years ago, the conversation was that we were seeing a lot of Canadian companies moving to the States as they scale up,” she said. “Now, that conversation has sort of evolved. You’re seeing these great Canadian companies that grew, became mature and are now exiting right here in Canada. It shows how far we’ve come now as a business community, at least here in the Ottawa region.” McMullan is also the co-president of the Ottawa chapter of The M&A Club, a national network of corporate finance professionals in the M&A space. RBC recently joined the group as a member.  Daniel Thiruganaratnapathy, vice-president of mid-market commercial at RBC, said the event brings together local experts involved in all parts of the M&A process, including tax accountants, lawyers, advisers and brokers.  This type of networking, he said, is especially important in Ottawa, where trust and personal relationships are cornerstones of the process.  “In Toronto and other markets, it’s very transactional,” he said. “It’s not as emotional. But in Ottawa, if there’s a business owner who’s thinking about buying or selling a business, they usually go to the people they trust. (The process) is not as defined as in markets like Toronto, where you know where to go and who the players are. Here, it’s more relationship-based and introductions are more organic.”

Economic turmoil forcing owners to rewrite succession plans

According to Thiruganaratnapathy, M&A among established business owners was slow before the pandemic. But over the past year, the conversations he’s having with clients have changed.  “We would have a discussion about what that exit strategy would look like for an owner of a $20 to $50 million business and a lot of the timelines were 10 years, 15 years. We had folks that wanted to work until they died and there wasn’t an exit strategy,” he said.  Now, economic challenges and geopolitical tensions are key concerns for aging business owners. Thiruganaratnapathy said many are worried their business can’t keep up long-term in increasingly competitive sectors and they might have a hard time selling if they wait. As a result, he said a growing number of owners are looking to sell.  “Post-COVID, post-tariffs, post-geopolitical tension, we’ve seen Canadian businesses have been resilient but it has created a level of anxiety and concern,” he said. “Ultimately, it’s really fast-tracked these exit strategies. They may have initially thought they were 10 or 15 years away from wanting to sell, but now, after going through a lot of turmoil, some folks are thinking it’s maybe time to reconsider.”

At the same time, McMullan said larger companies have spotted the trend and are keeping an eye out for possible acquisitions.  “They’re looking at businesses that are $5 to $10 million, at these guys that want to retire, and thinking maybe it can be a great tuck-in (acquisition) to grow your market share, your client base, and do some cross-selling,” she said.  While Ottawa companies could reap rewards in the short-term, McMullan said activity could slow again if the market becomes oversaturated or if large companies stop buying. Smaller businesses are feeling that pressure, she added.  “I’ve seen several of my clients exit in different ways,” she told OBJ. “One of them went to a U.S. company. He’s in the construction trades and he looked around and was like, ‘There’s a lot of consolidation. If I don’t consolidate now and sell my portion of the business, I’m going to be competing against much larger companies.’” 

Large defence companies looking for acquisition targets

While economic concerns and geopolitical tensions have created anxiety among established business owners, those same issues have spurred opportunities for Ottawa’s tech community.  Brian Kells, a corporate and securities partner specializing in M&A at law firm Perley-Robertson, Hill and McDougall, said defence-tech is emerging as the next frontier for Ottawa entrepreneurs.  While the city’s tech community is always active, he said federal investment into defence has created demand from larger companies in the sector, which are looking to buy small businesses and startups developing innovative technologies.  As a result, Kells said he expects M&A activity to pick up in Ottawa. 

“The federal commitment to increase defence spending sends a signal to the defence industry as a whole that there’s going to be a lot more buying going on in the future,” Kells told OBJ. “And I think that signals to the industry that it’s time to potentially see if there are smaller defence firms that are worth acquiring.”  In times of heightened demand, Kells said large companies in tech-forward industries often turn to M&A to bolster their product lines, and many defence companies are currently looking for their next asset.   “Some of the technologies and products take a long time to develop, so if you see one now that has potential down the road, based on what Canada is saying about its defence intentions, then now is the time to buy it and start developing and integrating it into an already existing, larger defence firm.” Kells added that Ottawa is well-positioned to take advantage.  “We’ve always had a really strong tech sector,” he said. “A number of global defence players have local Ottawa offices and there are local firms that have started here that are growing into larger ones. There’s definitely opportunity for synergy. Defence procurement programs want to have a local presence. So there’s a lot of opportunity for Ottawa to stand out compared to Toronto, Montreal or others.”