M&A deals are poised for significant shifts in 2025. Dealmakers anticipate increased activity driven by evolving economic conditions and strategic imperatives. This article delves into the key trends and challenges shaping the M&A outlook for 2025.
Increased Deal Volume Projected
Drivers of Growth
Beyond general market confidence, there are some specific drivers of growth that could result in increased deal volume. Companies seeking to enhance supply chain resilience are one driver of this upward trend. For example, a company may acquire a critical component supplier to secure its supply chain, similar to the recent increase in semiconductor industry acquisitions.
Responding to shifts in consumer behavior and capitalizing on emerging market opportunities are additional potential growth drivers.
Technological disruption is also viewed as a significant catalyst for growth. Companies are considering acquisitions to gain access to new AI, data analytics, and automation capabilities.
An additional growth driver comes from the large amount of capital that has been raised and needs to be deployed by private equity firms.
As companies streamline portfolios to focus on core competencies, corporate divestitures will contribute significantly to deal volume.
Market Dynamics
We expect to see a rise in cross-border M&A as companies seek to expand their global footprint. An example of one such scenario is a European renewable energy company acquiring a US solar panel manufacturer.
Mid-market M&A activity is also projected to increase as smaller companies become attractive targets for strategic acquisitions. In this scenario, we might see a regional software company acquired by a more prominent national competitor to expand market reach.
With increased debt and equity financing availability, capital Market strength will also allow for larger deal sizes.
Private Equity Activity
“Dry Powder” and Deployment:
The sheer volume of “dry powder” or cash reserves held by private equity (PE) firms today creates intense pressure to invest, leading to competitive bidding and potentially higher valuations.
PE firms increasingly focus on operational improvements and value creation within their portfolio companies rather than solely relying on financial engineering.
Private credit markets are playing a more significant role in PE deals, giving more options for deal financing.
Strategic Focus:
Sector specialization is becoming more prominent, with PE firms developing expertise in specific industries like software, healthcare, and renewable energy.
There is a growing interest in ESG-focused investments (Environmental Social Governance), with PE firms seeking to acquire companies with strong sustainability credentials.
Exit strategies are being refined, with PE firms exploring a wider range of options, including strategic sales, IPOs, and secondary buyouts.
Focus on Growth and Transformation
Digital Transformation:
Companies are acquiring tech startups to accelerate their digital transformation initiatives and enhance their digital capabilities. Data analytics and AI are key drivers, with companies seeking to gain insight into customer behavior and optimize operations.
Strategic Realignment:
Companies are divesting non-core assets to focus on their core business and improve profitability.
Portfolio optimization is a key driver, with companies seeking to streamline their operations and enhance their competitive position.
Supply chain resilience is a huge factor, with companies purchasing supply chain-related businesses to ensure continuity of supply.
Tech and Healthcare Sectors
Technology:
AI remains a dominant theme, with companies acquiring AI startups and developing AI-powered solutions.
Cybersecurity risk assessment is also a growing concern, with companies investing in cybersecurity technologies and acquiring cybersecurity firms.
Cloud computing and software-as-a-service (SaaS) are also driving M&A activity.
Healthcare:
Biotechnology and pharmaceuticals continue to be active sectors, with companies seeking to acquire new drugs and therapies.
Digital health is a rapidly growing area, too, with companies investing in telemedicine, remote patient monitoring, and digital therapeutics.
Consolidation among healthcare providers is also expected to continue as companies seek economies of scale.
Some Potential Challenges
Geopolitical Uncertainty:
Trade tensions, political instability, and regulatory changes can create significant uncertainty and disrupt deal flow.
National security concerns are leading to increased scrutiny of cross-border M&A transactions.
Elections in many countries create uncertainty in regulatory environments.
Valuation Gaps:
Discrepancies between buyer and seller valuations can make it difficult to close deals, particularly in a volatile market. Sellers may hold out for high valuations based on past market peaks, while buyers could be more cautious due to economic uncertainty.
Rising interest rates can also impact valuations and make it more challenging to finance deals.
Economic Volatility:
Inflation, interest rate hikes, and economic slowdowns can create significant challenges for M&A transactions. Companies must be prepared to navigate these challenges and adapt their strategies accordingly.
A sudden spike in inflation leading to increased interest rates could create a slowdown in deal activity. Additionally, the possibility of a recession or economic downturn will create a headwind in deal-making.
Develop a Profitable M&A Strategy for Your Business
These M&A shifts, expected for 2025, can open new opportunities for you to grow, sell, or acquire new business structures. Our professional M&A team at Windes can guide you throughout the process, from due diligence procedures to EBITDA analysis pre- and post-acquisition.
Take advantage of the positive outlook and explore your M&A options with Windes. Contact us today to speak with our team about your goals to get started.