2025 Sector Specific M&A Outlook

2025 Software and Consumer Products Outlook

Software:

The rosy picture of 2025 outlook for software sector is mainly driven by two main pillars- Cybersecurity and AI. For the past few years, cybersecurity space has seen a decline in funding since investors have been skeptical to the changing macro-environment. What this means is that the we will witness more M&A activity than before and lesser IPOs in the space. The reasoning is two-fold. One, big companies will prefer growing their offerings to consumers by acquisitions rather than building them from scratch. Second, the growing difficulty for mid-market companies to raise capital for growth makes them attractive to bigger companies fueling M&A activity. Another deal trend is that bigger companies are focusing on bundling many cybersecurity tools in one package which makes it easier for their costumers to manage security. This trend also highlights the optimism for the space. Its hard to talk about software and leave out AI. Anchoring investments from hyperscalers, infrastructure supporting AI growth has seen unprecedented money flow. A jump to $1T in 2026 is expected from the hyperscalers’ investments of ~$200B. Along with the projected wave of industry transformation, there has already been a spike in mergers and acquisitions in functional and vertical software companies, with an emphasis on long-term business strategies and upside potential.

Consumer Products:

The 2025 M&A outlook for consumer products sector is rosy, but not precisely florid—a continuance and possibly strengthening of the previously seen increase in deal volume and size. The sector is aiming for some reasonable push balanced by some offsetting factors. Talking about the tailwinds, first is the cash on balance sheets that the companies have been able to build. This means that the companies will be able to acquire more, fostered by the need to optimize and reshape portfolios. This in turn, comes at a cost of divestitures of some business lines to focus on key strengths. Another tailwind is the closing of gaps (perceived worth from buyers and sellers’ lens) in the valuations of companies. Although valuations have already evolved, they are predicted to close even more. This closing of gaps will entice PE players to set eyes on the sector as well. Talking about the headwinds now, although valuations have come down, they still remain high, demanding substantial premiums of 30-40% which can pressurize companies for the post-acquisition performance. Another challenge is the interest rate environment and financing challenges. Trump coming into power is being seen as a light at the end of the tunnel but recession risks loom over the economy that might mitigate the M&A activity fueled by lack of consumer spending.

M&A Activity due to Macroeconomic factors:

The M&A market over the next 12-24 months will hinge on interest rate adjustments and political stability in Canada and the US. In Canada, government incentives for energy transition and a potential rate cut by the BoC could boost deal activity, particularly in infrastructure and natural resources. However, risks such as persistent inflation and stricter foreign ownership regulations may temper this optimism.

In the US, the 2024 elections' aftermath and potential antitrust crackdowns could shape M&A trends. A Trump presidency may signal reduced regulatory restrictions, as suggested by his appointment of Andrew Ferguson as FTC chair. However, his tariff policies, aimed at boosting domestic spending and addressing recessionary concerns, carry risks of unintended consequences, as seen in 2019 when steel tariffs hurt downstream industries. While these dynamics could create headwinds for large-scale deals, mid-market transactions and distressed asset buyouts in sectors like tech may thrive as private equity firms seek undervalued opportunities.