Canadian Tech Sectors Driving M&A Activity: Software, IT Services, and Beyond
M&A activity in the Canadian technology industry has gone through several phases over the last few years. From the Covid-era explosion of activity to a steep drop off into 2023, with 2024 acting as a transition year in the space, and early readings indicating 2025 to be the potential start of an upswing. Over these years, there are several macroeconomic factors that can attributed to the changes in volume, however this month’s blog will a retrospective analysis of which sectors specifically have been driving M&A activity in Canadian tech from 2020 until the end of 2024.
The chart below provides a high-level overview of the key sectors:
From the chart, it is apparent that the main drivers are the Software, IT Services, and Hardware sectors. We’ll be taking a closer look at these three and how they have evolved over time.
Software
Similar to the overarching trends in technology M&A, software has been the driving sector in Canadian tech, accounting for over half of the transaction volume since 2020. Software businesses often employ a subscription revenue model, allowing for recurring and predictable revenue streams, and attracting a lot of attention for both financial and strategic buyers. Additionally, software firms are known for having gross margins consistently above 80%. As a result of the unique combination of these traits and perceived operating leverage, M&A in Canadian tech has favoured these companies, as seen in the chart.
Another unique trait about software companies is that because of the profile mentioned above, in the M&A market SaaS companies will typically trade off of a multiple of revenue or annual recurring revenue (ARR), as opposed to a multiple of EBITDA which will be shown with the IT Services and Hardware analysis. For example, in January of 2021 Toronto-based financial performance management software company Prophix was acquired by Hg, a private equity firm based in London, England for US$500mm, a 10.0x multiple of their revenue.
A significant deal in Canadian software occurred recently in November of 2024. Payment technology solutions software provider Nuvei was acquired by numerous financial buyers in a US$6.3bn public-to-private LBO. Another 10-figure deal that occurred was that of Plusgrade in March of 2024. We covered the story of Plusgrade in our last blog, which can be found here.
IT Services
IT Services as a sector casts a wide net, but mainly consists of some key sub-sectors. These include IT Consulting, Managed Service Provider (MSP), Managed Security Service Provider (MSSP), Cybersecurity Consulting, Digital Transformation Services, and Value-Added Resellers (VAR) among others. The sector as a whole has accounted for ~20% of Canadian technology M&A deal volume since 2020.
As mentioned above, these companies will typically trade off an EBITDA multiple, with revenue models usually being project-based for consulting firms, or transactional for VARs. MSP’s and MSSP’s are often found to have multiple year-contracts allowing for a recurring revenue stream, attracting significant interest from buyers albeit at lower gross margins than a standard SaaS business. However, while a lot of IT Services companies may not have contracted recurring revenue, they can often transact at strong multiples by showing that their revenue is re-occurring in nature (multiple projects with the same customer, track record of continued transactions, etc.).
One of the largest Canadian deals in the IT Services sector was that of Akkodis, a Toronto-based IT Consulting firm who’s serves several industries with a diverse range of offerings. Akkodis was acquired by the European strategic buyer Adecco Group on February 24, 2022, in a deal worth ~US$920mm.
Hardware
The hardware sector encompasses a much clearer (albeit broader) definition than that of the IT Services space, as selling a physical technological product are the basis for this sector. However, the revenue models for hardware firms can be quite diverse at times. A lot of hardware firms have developed their own proprietary software that is embedded in the hardware or have implementation or maintenance services contracts associated with each sale. These instances vary for each company, but similar to IT Services firms, hardware companies also typically trade off of an EBITDA multiple in the event of an M&A transaction. Hardware companies are slowly becoming more active in M&A, accounting for 5.6% of deal volume in 2020 to 7.2% of 2024’s deal volume in the Canadian tech environment.
A prominent deal in for the Canadian hardware sector occurred in October of 2023, as Clearpath Robotics, a manufacturer and developer of self-driving technology was acquired by Rockwell Automation in a deal worth ~US$609mm.
Conclusion
To conclude, the Canadian tech landscape includes a wide variety of companies, and sectors that each have their own unique value propositions and network of acquisitive buyers. While we have seen peaks and valleys in the industry over the past few years, there are material indications that the M&A markets will be active in Canadian tech this year. We would expect the Software, IT Services, and Hardware sectors to continue to be the driving force in this regard as they have been in recent history.
Thanks for reading, if you have any questions regarding M&A don’t hesitate to reach out here!