Dealmaking expectations are mixed amidst economic uncertainty, but private equity remains notably bullish.
43 per cent of dealmakers expect the level of European M&A activity to drop in the next 12 months, though a sizable minority (35 per cent) are forecasting an increase, with those working in private equity notably more optimistic, according to global law firm CMS’ 2024 European M&A Outlook published in association with financial data firm Mergermarket.
This stands in stark contrast to last year’s predictions when 73 per cent forecasted an increase in M&A activity.
The landscape of European M&A activity in 2023 has been marked by a confluence of factors, including higher inflation, rising interest rates and an uncertain economic outlook. These challenges resulted in a 47 per cent decrease in deal value in the first half of 2023 compared to the previous year (falling from 596 billion euros to 316 billion euros), although transaction volumes experienced only moderate declines resulting in a 12 per cent drop from 2022 (falling from 8,635 to 7,608 deals). Overall, the M&A environment for this year is characterised by a prevalence of smaller transactions – a departure from the trend observed in 2021 and 2022.
M&A expectations have moderated and diverged
Against an increasingly challenging macroeconomic background, just 35 per cent of dealmakers expect the level of European M&A activity over the next year to rise, down from 73 per cent this time last year, whilst 43 per cent are anticipating a fall. A divergence has emerged, with private equity dealmakers notably more optimistic than their corporate counterparts. Just 24 per cent of private equity respondents expect European M&A to fall, compared to 49 per cent of corporates surveyed.
Decreased risk appetite
The report states that a key contributor to this shift is the decreased risk appetite amongst acquirers, which has been further exacerbated by heightened financing costs and cautious lending practices. The aftermath of bank collapses both in the United States and Europe in early 2023 has introduced an additional layer of apprehension amongst market players. In response to persistent inflation, interest rates have undergone multiple increases across Europe, the US and the UK. Most notably, 48 per cent of dealmakers say that inflation and interest rate pressures will be the biggest obstacles to dealmaking over the next 12 months. However, a downward trend in inflation since the beginning of the year has alleviated concerns about a potential regional recession.
Louise Wallace, Global Head of the CMS Corporate/M&A Group, said: “After heady post-pandemic activity, European M&A has started to feel the effects of a changed macroeconomic environment. In 2021 and even in 2022, as Russia’s full-scale invasion of Ukraine last year pushed inflation to levels not seen in decades, deal volumes still broke records and aggregate value figures remained higher than before the pandemic. However, we are now seeing M&A activity across Europe starting to reflect the more challenging macroeconomic backdrop.”
Nevertheless, the European Commission’s recent upgrade of the European Union’s GDP projections, forecasting one per cent growth for 2023 and 1.7 per cent for 2024, provides a glimmer of optimism in an otherwise uncertain economic climate. Whilst projections for M&A activity over the next year remain mixed, with private equity firms showing more optimism than corporate counterparts, a significant proportion of industry professionals anticipate active participation in the M&A market. This suggests a healthy volume of activity in the near term. Notably, as valuations stabilise throughout 2023, the stage appears set for increased agreement between buyers and sellers in the medium term.
ESG scrutiny will create new deal opportunities
64 per cent of dealmakers believe that ESG and climate change-related regulation in Europe will create dealmaking opportunities, with 93 per cent stating that ESG considerations constitute a significant element of their organisation’s due diligence. Indeed, 85 per cent expect greater ESG scrutiny in M&A deals over the next three years.
Deal drivers
Similar to findings from last year’s survey, dealmakers continue to identify undervalued targets (36 per cent) and turnaround opportunities (35 per cent) as the primary catalysts driving M&A activity in Europe for the upcoming year. This trend is hardly unexpected, considering the decline in valuations of public companies over the past 18 months.
Thriving sectors
More than a third of dealmakers predict the TMT sector (37 per cent) and the energy sector (36 per cent) will experience the most significant surge in dealmaking across Europe. In contrast, 42 per cent believe that the pharmaceuticals, medical and biotech (PMB) sectors will exhibit the slowest growth. Whilst 68 per cent of dealmakers favoured the TMT sector as one of their top two choices in the previous year, the recent decline might partially stem from the notable revaluation of technology stocks over the past 12 to 18 months. However, the enduring prominence of the TMT sector underscores investors’ unwavering confidence in future expansion and companies’ need to acquire technology as various industries continue to emphasise digital transformation. An illustrative instance of this trend emerged in the first half of 2023, with Deutsche Börse’s four billion euros acquisition of Danish data provider SimCorp – a venture that highlights the exchange group’s pursuit of reinforcing its data analytics prowess for the newly established investment management solutions arm.
Regional differences
Expectations for M&A activity across various European regions have undergone significant shifts compared to the previous year. Looking ahead to the next 12 months, dealmakers project a noteworthy surge in dealmaking within the UK and Ireland, which now holds the foremost position on the list by a considerable margin, with nearly half (47 per cent) of respondents placing it in their top two preferences. In contrast, the UK and Ireland occupied the sixth spot last year, amassing merely 19 per cent of the top-two votes. Iberia and Benelux jointly claim the second spot, with 29 per cent of decision-makers ranking them amongst the top two regions for projected M&A growth in the upcoming year. Conversely, the regions of Central and Eastern Europe (CEE) (38 per cent) and Italy (30 per cent) represent the areas where the largest subsets of dealmakers expect the slowest growth in M&A activity.
As the European M&A landscape continues to evolve, industry stakeholders remain vigilant in navigating these shifting dynamics, aiming to seize opportunities whilst effectively managing challenges. The path forward necessitates a delicate balance between economic conditions, regulatory developments and evolving market sentiments.
Dr Malte Bruhns, Global Head of the CMS Corporate/M&A Group, added: “Higher inflation costs and a more uncertain economic outlook have made buyers more prudent about the price that they are prepared to pay for businesses, whilst sellers have yet to adjust their expectations. That being said, there are plenty of reasons to be optimistic about the prospects for European M&A over the medium and long term, including a continued appetite for TMT deals, strong inbound investment and the growth of private capital in Europe, which will keep deals moving along.”
You can read the full CMS European M&A Outlook 2024 here.
This content has been produced in collaboration with a partner organisation through our Global Visibility Programme. Our programme helps companies boost their digital presence and strengthen the thought leadership of their experts. Find out more here.
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