2024 was a better year for mergers and acquisitions (M&A) in the UK and Europe than 2023, although overall growth in the market was slow. Deal numbers, by both absolute volume and aggregate deal value, remained far below the heights of 2021.
As 2024 progressed, the macro environment was characterised by a decline in volatility. Across Europe and the UK, inflation figures fell to close to (and in some cases below) Central Bank targets, various key elections worldwide came and went without, for the most part, causing significant unrest or uncertainty and economies showed signs of a soft-landing from the inflationary shocks of the immediate post-pandemic years.
Beyond the headline figures, H1 2024 saw a marked increase in UK deal values against a decrease in deal volume against the same period in 2023. Figures for Q3 2024 continued this trend, with volumes falling against the Q2 2024 figures but values rising. We would expect that pre-UK Budget deals driven by concern about impending changes to the UK Capital Gains Tax (CGT) and Inheritance Tax (IHT) regimes will have pushed volumes of smaller deals significantly higher through the month of October, which is likely to skew the Q4 and year-end figures. There was concern prior to the October Budget that CGT rates would increase dramatically to align with income tax rates, but only small rises to GGT were made (i.e. from 10 percent to 18 percent and 20 percent to 24 percent). However, significant changes to IHT were announced, in particular with respect to Business Property Relief (BPR). Currently, on death, BPR provides 100 percent IHT relief in respect of qualifying business assets. This will change from 6 April 2026, when 100 percent BPR will be limited to the first £1 million of value, with only 50 percent of any value in excess of £1 million escaping the 40 percent IHT charge. Whilst this reduction in BPR may dissuade some investors from engaging with UK assets, certain types of businesses are excluded from BPR, so this change can be expected to have limited impact on investors whose investment profiles do not align with BPR- qualifying businesses.
This backdrop and the hope that 2025 may offer greater political and economic certainty should lead to cautious optimism for 2025.
In this article, we set out our predictions for the M&A market in 2025 in the UK and Europe.
1. Increase in deal volumes
We expect an increase in M&A deals in the UK and Europe more generally in 2025, as various forces are likely to drive deal flow and push up valuations.
First, on the private equity side, given the past two years of muted activity it is likely that pressure from Limited Partners (LPs) for returns of capital will cause an uptick in dealmaking by sponsors. On the sell-side, the recent focus from LPs and some General Partners on Distributed to Paid-In Capital as a measure of performance (despite potential problems with the metric discussed by our Investment Management colleagues in this article) illustrates the importance to sponsors and investors alike of achieving attractive exits in 2025. On the buy-side, commentators have been focused for some time on the level of dry-powder held by buy-out funds and continued fundraising throughout 2024, meaning that sponsors are under increasing pressure to deploy committed capital. Second, for strategics, a lack of activity in 2024 means that corporate buyers are likely to be sat on cash reserves available for strategic acquisitions.
Finally, for all market participants, falling interest rates during 2025 should increase the availability and attractiveness of leverage, boosting acquisition activity by both financial and strategic investors. This decline in debt cost should impact the multiples buyers are willing to pay, helping to bridge the wide bid-ask spreads that have affected activity throughout 2023 and 2024.
2. Increased competition among lenders
Falling interest rates in the UK and Eurozone will bring the cost of finance down and should accordingly increase both demand from acquirers for acquisition finance facilities and available leverage ratios. This increased demand may test the ability of traditional lenders to compete with the private credit funds whose capital reserves have boomed in recent years and who can sometimes find it easier from a regulatory perspective to make highly leveraged loans.
A busier M&A market presents a strong opportunity for nonbank lenders to deploy existing capital reserves, attempt to cement their position as lenders of choice for high-leverage mid-market buyout activity and expand into larger-cap deals. Savvy borrowers may be able to use this increased competition in the lender space to reduce borrowing costs further or to negotiate more buyer-friendly non-financial terms.
Finally, it is also worth noting that lower rates will reduce returns for credit funds, which is likely, in turn, to depress fundraising activity and fees for managers. What is good for borrowers is ultimately rarely good for lenders.
3. Changes to the nature of regulatory scrutiny
The UK government's focus on growth and the publication of its Industrial Strategy has been met with a change of emphasis from the Competition and Markets Authority (CMA) in favour of clearing deals in all but the most exceptional of circumstances. Accordingly, we anticipate an increase in the number of conditional approvals and in the level of creativity shown in the application of behavioural remedies on merging parties. The Vodafone/Three merger is one example of this new approach.
Transaction parties will need to factor this new approach into their deal documents, with risk-sharing provisions and efforts covenants likely to be of significant importance. Given the CMA's promise to quicken the pace of its review, drop-dead dates may (potentially) become less important, although this remains to be seen.
The hoped-for decrease in the risk of deals being blocked should absolutely help drive transaction activity in the UK, especially in sectors like technology, health care and pharmaceuticals where competition concerns are often more prevalent.
4. National Security remains a factor
We anticipate that scrutiny of transactions on national security grounds will continue to be a key issue for transaction parties, as geopolitical complexities lead to continued uncertainty in this area.
In the UK, the government has been clear in its commitment to national security and in attempting to separate national security matters from its proposed reduction in regulation across the board. On that basis, we expect that the National Security and Investment Act (NSI Act) will remain a focus on transactions either falling within the 17 mandatory sectors or involving buyers from certain key jurisdictions (notably China). We have considered the approach taken by the UK government to NSI Act matters in detail here.
Given recent political changes, it is harder to predict what the next 12 months will look like across the globe. For example, in the United States, we consider that it is likely that the incoming administration's hawkishness will filter through to greater scrutiny of foreign investment and more blocked international deals, even if domestic dealmaking booms. The ongoing impasse and upcoming litigation over the $15 billion acquisition of US Steel by Nippon Steel is evidence of bipartisan opposition to foreign investment that impacts critical supply chains and which could have national security implications in the United States.
On the other hand, recent disagreement among EU member states as to the breadth and focus of the EU foreign direct investments regime suggests that the bloc may be unable to agree a unified approach, leaving the door open to investment in certain member states that would otherwise have been closed.
5. More US inbound investment in the UK and Europe
We expect the US economy to continue to outperform European and key Asian economies, driving deals in the United States and, crucially, US buyers to look for deals in the UK and Europe. The strength of the US economy and its performance relative to the rest of the world is likely to see the US dollar strengthen further, expanding the valuation gap between US and European equities and bolstering the purchasing power of US buyers.
We have seen a number of US inbound acquisitions in 2024 and an increase in acquisitions of UK assets on US-style deal terms. Our expectation is that this trend will continue as US buyers seek to take advantage of the compounding opportunities created by large spreads in their favour in both valuations (in the UK and across Europe) and dollar exchange rates.
The UK Budget announcements regarding increases to both employer National Insurance Contributions and the National Living Wage, and the significant extension of employee rights all indicate that employment costs are likely to rise for UK businesses in 2025. Whether these measures will deter some international investors from investing in companies in the UK or depress valuations of UK companies when viewed against comparable businesses in other jurisdictions remains to be seen.
6. Cautious optimism
Despite healthier macroeconomic conditions and a sense that across the UK and the United States things are likely to get better, we see continued cause for caution arising from geopolitics and its impact on certain key economies.
The war in Ukraine is likely to enter a new phase in 2025 with the start of the Trump administration. In other areas of the world, it remains unclear how various current conflicts will evolve, although there is some hope for progress. For example, notwithstanding recent positive developments, overall, the situation in the Middle East remains fluid and volatile, notably due to the continued conflict in Palestine and the change of regime in Syria.
In addition, extended political uncertainty in key European jurisdictions could negatively impact the economic performance of the bloc. Notably, the political situation in France is impacting its economy and depressing French equities. In German Federal Elections in 2025, current indications suggest it is likely that the right-wing Alternative for Germany party will emerge as the second largest party, an outcome that would concern many in Brussels.
Conclusion
Even with these potential challenges, in our view, the outlook for M&A in 2025 is healthier in many respects than in 2024, and we expect to see a busy year for the market generally.
