Market Eye: Our snapshot of the M&A backdrop

We remain buoyed by the optimism we felt in our last issue, as Q3 2024 brought a continuation of the increasing deal flow that started in Q4 2023. Impressively, global M&A activity has increased by 27.6% in deal value and 13.3% by deal count YoY. And while much of this growth has been driven by corporates, PE activity is beginning to play catch-up as borrowing costs decrease. Some headwinds persist, but we anticipate that the recovery in M&A activity will support a continuing build in momentum into Q1. PitchBook’s estimated deal count captures the clear upward trajectory of volume that many in the market have been experiencing.

Economics and backdrop 

• The US election is decided. UK Labour has delivered its first budget in 15 years. Inflationary pressures are easing and with them comes a gradual reduction in interest rates. The effects of policies adopted by newly elected governments throughout 2024 are beginning to be felt with their impact building into 2025 and beyond. As a result of all of this, boards are starting to regain their focus and to feed off an increased sense of certainty to make strategic investments.
• Risks continue to weigh on M&A recovery. Although central banks are aligned in reducing interest rates, rate cuts are still small and steady and by no means guaranteed. Geopolitical tensions continue to have effect on the macro-environment. In particular, increased regulatory scrutiny of deals by antitrust and foreign direct investment authorities increases the time, and cost, involved in doing a deal. This is a topic we cover in great detail in our latest M&A Report: M&A Report 2024 - Navigating a complex global regulatory environment to deliver successful transactions | Eversheds Sutherland.
• The volatility in M&A activity we have experienced since the pandemic may not yet be over. However, the global M&A market is durable and adaptable. It is hoped that, in what seems like a long time, the political and economic backdrop may provide boards with the stability, and the support, to enable them to secure value creation through M&A.

M&A landscape 

We are witnessing a steady pace of growth in deal volumes and value as companies find ways to adapt to the increased regulatory scrutiny and to make the most of opportunities in a changing macro environment. While there remains a gap in valuation expectations, present M&A multiples appear to have stabilised, particularly in the US. Trading multiples on public companies continue to increase, but the gap between public and private is expected to reduce as private company multiples push higher as borrowing costs decrease.

• Countries across the G7 are pursuing growth agendas and some governments, such as the UK, are implementing more interventionist policies to increase investment and really drive economic output which will lead to more deal activity as companies look to capitalise on the opportunities. Another Republican presidency will likely bring lower taxes and bigger deficits in the US. Both macro trends will support growth and equity market valuations, and the confidence in growth should be a positive for M&A activity, provided the threatened increase in US tariffs do not act as a counterweight. In the US, already cash-rich investors will have even more cash to spend on targets with a corporate tax cut on the horizon. On the other hand, we are yet to see the effect on UK boards’ strategic priorities of some of the bigger tax changes such as to employers’ national insurance contributions and CGT, and long-term Treasury yields are already increasing in both the UK and the US.
• As we discuss below, the M&A landscape is being further influenced by an increase in protectionism, de-globalization and higher tariffs. These are only expected to increase in the US during a Trump presidency, where we see the following themes gaining traction causing an impact to be felt across the globe:
  • Greater Certainty:  apart from interest rate increases, much of what has muted M&A activity for the last few years has been uncertainty. The results of the election remove much of that uncertainty, and anticipated pro-business policies and leadership are likely to draw assets to market while also bringing out more, and more aggressive, buyers.
  • Reduced Regulation: reduced regulation was a theme of the Trump campaign, and the prospect of less regulation in certain sectors, particularly banking, crypto, and traditional oil & gas, is already driving enthusiasm in those sectors.
  • Tariffs: tariffs on imported goods would strengthen the positions of US companies in some industries (for example, electric vehicles) while posing problems for others (for example, those that manufacture products overseas or depend on imported components).  Trump’s pro-manufacturing positions can be expected to lead to “reshoring” of manufacturing by US companies and an incentive for non-US businesses to build or acquire facilities in the US

As a result there may be a shift in M&A activity, focusing on local targets rather than geographic expansion and investing in vertical integration.

• Strengthening supply chain resiliency will remain a focus for M&A activity in light of this shift in global attitudes – in India, Donald Trump’s victory is generally viewed as a favourable boost to the already improving India-US economic and political relationship with any negative effect of increase in proposed tariffs burdens by US being estimated to be offset against general gains via favourable supply chain solutions oriented foreign investment.
• The rise of AI and the growing importance of sustainability are driving the M&A strategy of many boards. The impact of AI on M&A is fundamental in so many areas, from transactions driven by the requirement for businesses to enhance their own offering to AI being integral to due diligence and execution of a transactions. We only see this increasing in the short and long term.
• We have also witnessed the pursuit of joint ventures and alternative deal structures such as earn outs and take privates both to share the risks of higher valuations between the parties and to offset the reduced availability of debt financing. This is likely to continue until the macro position stabilises.
• We anticipate that the current market upturn will continue into the New Year. Now is the time for boards and M&A leads to review and, if necessary, re-evaluate their M&A strategies in light of the opportunities that are starting to come their way.

Private equity outlook 

• we witnessed a significant uptick in transaction volumes as the UK Budget date approached. Where transactions failed to complete ahead of that date, they are continuing onwards – the immediate change to the rate of CGT was not as high as some commentators had been predicting, and so transactions do not appear to have been adversely affected. We expect activity in the period until the end of the calendar year to be strong, and are aware of a number of competitive processes scheduled to launch in Q1 2025. Nonetheless, we anticipate the sector will continue to face headwinds, notably because of continuing inflationary pressures in many parts of the world. The decision by several central banks, including the Fed, the ECB and the Bank of England to cut interest rates recently provided comfort, but rates remain higher in comparison to much of the past 15 years. This continues to have an impact on valuations and, therefore, for assets other than the most hotly sought after, the exit market remains challenging.
• We are continuing to see the proliferation of co-investment strategies, with a steady increase in the number of investments over the last three years. The structure of these co-investments is diverse, as are the applicable fee arrangements, but the number of funds offering formal co-investment arrangements appears to be steadily rising. In terms of sector trends within the world of private equity, areas of focus for many investors remain healthcare and technology, with an increasing move towards energy and professional services.

Deal terms 

The impact of the M&A landscape is driving the following deal terms:

• Use of warranty and indemnity insurance remains very strong and there is plenty of capacity in the market. Premiums are at historically low rates across all sectors and we are seeing coverage being extended. With a greater number of conditional SPAs we are seeing a number of clients looking at enhancements such as new breach cover to deal with breaches of warranty arising in the gap between signing and closing.
• The market has shifted to being more of a buyer’s market. In slow auction processes and in bilateral arrangements we are seeing a rise in closing accounts as buyers hold more leverage. However, where institutional investors are on the sell-side locked box accounts are still the norm.
• Buyers are still mostly insisting on exclusivity before committing to significant phase 2 expenditure, but we are seeing advisors manage to push processes with pressure back on timetable, evidence that some ‘froth’ is returning.
• Conditionality is on the rise and ever increasing numbers of SPAs have a gap between signing and closing. Anti-trust requirements and foreign investment regulations all play a part, high level MACs are in vogue as parties deal with the consequences. The interim covenants need particular care and attention with advisers carefully tailoring the rights and obligations to avoid falling foul of regulatory challenge.
• A potential consequence of the rise in conditionality is a theme we are seeing of aggressive processes to signing with parties willing to push more work to finesse the detail into the gap period following signing and announcement. This approach is fraught with risk but parties are being assured that they can work collaboratively to deliver these deals on the basis that neither wants to deviate from the public announcement.
• Specific indemnities are more common, with buyers a lot bolder about including indemnities for risks that are not covered by warranty and indemnity insurance. Boards are demanding a greater level of due diligence and without true competitive tension are less willing to accept material pre-closing risk. We are seeing limitations clauses being tailored to suit each specific indemnities, including their own time periods.
• There have been a number of strategics devesting non-core businesses and we are seeing carve-outs are requiring more and more detailed TSAs and other longer term commercial arrangements (e.g. tolling) to get deals done. Clients should make sure these terms are addressed early and not left to the end of a process otherwise there is a risk of elongated timetables.

Offshoots of optimism are being seen in the consumer sector, with companies now starting to push through regulatory challenges and pivot to take advantage of certain key trends that are providing opportunities for growth.

In particular:

• Health, wellness & sustainability: there is a growing focus on health and wellness products, driving M&A interest in specialised nutrition businesses and consumer health, including the non-alcoholic beverages market, which continues to see an uptick in activity. In emerging markets such as China, India, and the Middle East, the percentage of consumers who intend to increase their spending on wellness products and services is two to three times higher than in advanced markets such as Canada and the United States. Notable deals include Carlsberg’s acquisition of Britvic, McCain Foods acquisition of Strong Roots and The Simply Good Foods Company’s acquisition of Only What you Need.
• Hospitality & leisure: the restaurant industry in particular has shown resilience, with sales projected to reach record levels despite economic challenges as we see a rise in the ‘splurge economy’ amongst the younger generations who are now more willing to spend money on casual dining and other experiences/travel. Larger restaurant chains are actively pursuing acquisitions to expand their market presence and diversify their portfolios. This includes both acquiring smaller, innovative brands and consolidating within their existing segments. In the next few months, we also anticipate a number of casual dining brands coming to market.
• Challenges for retail: the sector as a whole, but in particular retail, is continuing to face challenges. inflation may be easing but prices are not reducing and this continues to impact purchasing power and consumer spend. In the retail space, M&A is likely to be used to build resilience and efficiency. It will also lead to an increase in distressed M&A. The restructuring of The Body Shop highlights the impact of e-commerce growth and shifting consumer preferences. The overall result being consolidation of the market.
• Technological enhancements: M&A is being used to integrate new technologies and enhance consumer experiences. Walmart’s acquisition of VIZIO Holding Corp to diversify into new revenue streams is a good example of this trend in action. 

Specific sub-sector trends that are noteworthy:

Hospitality and leisure

This subsector is seeing increased deal activity as consumers prioritise spending on travel and experiences. For example American Express Global Business Travel Group’s acquisition of CWT Holdings.

Food and beverage

There is notable resilience in the snacking sector. Despite challenges, the snacking sector remains strong in M&A, with confectionary inciting a heightened interest amongst trade buyers who are currently more active than their PE counterparts.

We note that the bakery M&A landscape is also dynamic, with companies leveraging acquisitions to strengthen their market positions, innovate, and meet changing consumer demands.

Notably, in diligence there are concerns over food fraud and quality of product, where greater investments are being made to ensure compliance and vigilance.

Luxury

Notwithstanding certain new tariffs (particularly with regard to the drinks market in China) and the resulting uncertainty for dealmakers, we are now seeing businesses starting to buy up luxury brands in order to supplement their existing brands. For example, Diageo, which is now looking to expand into India, a growing economy with a rising middle class.

Retail

With the continuing squeeze on discretionary spend and soaring costs and prices, the retail sub-sector continues to struggle.

Since our last Market Eye update, the UK election has concluded, and we now have the first Labour Budget in 14 years. Energy, and particularly clean energy, was at the forefront of policy considerations and budget changes. The rallying call of ‘invest invest invest’ has led to increased confidence throughout the investment community, provided it is backed by the regulatory infrastructure to support it and the public finance backing to release the private capital.  One of the new Government’s first creations was GB Energy, a publicly-owned clean power company which Labour launched with a pledge to invest over £8bn by mid-2029, but which to the disappointment of industry, has received only £100m in funding for the first two years following the Autumn Budget. 

The recent Mansion House announcement by Rachel Reeves, the Chancellor of the Exchequer, to create ‘megafunds’ will allow investment into national and strategic corporates and projects permitting further large scale deployment within the infra and energy (particularly clean energy) space.

The recent US elections will also send ripples throughout the global energy and infrastructure market.  The Inflations Reduction Act (IRA) has been a huge catalyst for investment from and into the US market, and given the geographical locations of that investment, we do not anticipate seismic change to that policy.  The potential swing back to oil and gas, and future tariffs, may mean that investment from non-US investors in the clean energy space may need to be carefully considered but one remains hopeful that opportunities will continue when one considers the investment to date made in this sector over the last 5 years.

Energy transition and decarbonisation is critical for all of our clients and is driving energy related M&A activity. Corporates are continuing to think of how to decarbonise their businesses with no easy solution for many. A Labour government has traditionally preferred certain energy sources over others and we expect to see a continuing of support for onshore and offshore wind, and solar.  Battery storage will also be required, not least to stabilise the grid during the transition. There has been strong support so far for new technologies such as hydrogen, carbon capture usage and storage (CCUS), small modular reactors (SMRs) and long duration energy storage (LDES) such as hydro and larger batteries.

Against that are the headwinds of a heavily constrained network and a perceived dysfunction of the wider electricity market, leading to NESO’s connections reform (TMO4+) and DESNZ’s review of electricity market arrangements (REMA) respectively. Both of these are significant reforms “of a generation”. Both have the potential to create a host of winners and losers. And critically both create a hiatus period where certain projects are not sure if they will be winners or losers, knocking investor confidence and complicating deals and long term contracts (such as PPAs).

Globally M&A continues to be very busy. Funds are becoming more active and looking at buying more than single sites and single companies, instead opting for the strategy of acquiring a suitable pipelines of assets or platforms that will allow them to deploy capital on multiple assets or types of assets.  This is seen as the better strategy for future growth and hedging through diversification as the energy transition and market reforms progress at rapid pace. Fundraising has been more challenging in the last 6-12 months, however a number of funds are coming towards their end of life, with those funds looking to exit whilst other investors are needing to deploy their cash from earlier fundraising. An issue affecting the sector and which is still a drag on M&A activity is raising, and the cost of, debt.

In a number of jurisdictions there needs to be an effective legal framework and plan to put capital work. In most jurisdictions there have been grid connection issues and aging or congested grid infrastructure delaying projects. Removing these barriers is a priority in GB and elsewhere. Public grid operators and regulators are working on reforms to ensure that their respective queues are operated in a fairer, more efficient way that encourages viable projects that are strategically aligned with the wider energy strategy to come forward, and conversely those that aren’t to drop out.  We expect a movement to a ‘first ready, first served’ basis.

Energy infrastructure will always be a complex and highly regulated sector, but with the energy transition and net zero targets, much needed significant reforms are ongoing which creates both opportunities and risk.  The subsidies landscape is likely to remain reasonably settled in the UK and major European countries, especially for ‘conventional’ renewables like wind and solar. But new/improved subsidies or support schemes/policies are coming through, at varying pace, for other energy transition technologies such as new nuclear, long duration energy storage (LDES), hydrogen, carbon capture usage and storage (CCUS) and biofuels (including sustainable aviation fuel (SAF) and sustainable marine fuel), each of which are recognised as important parts of the energy transition where significant investment is needed, at a scale and pace.

Developers and owners of energy projects need to have eyes on the evolving regulatory landscape, and subsidies/support schemes, but also increasingly the demands of corporate buyers of power who are underwriting clean energy projects through long-term corporate power purchase agreements (PPAs). Many corporate buyers are now very energy savvy and consistently driving best practice e.g. in terms of ESG requirements they expect of their suppliers

Specific sub-sector trends that are noteworthy:

Clean

There has been significant growth in off-shore wind and regulatory changes have provided opportunities in this area. NESO’s recent advice to the Government on the latter’s flagship Clean Power 2030 plan sees offshore wind as the “bedrock” of the new energy system. The last round of contracts for difference (AR6) saw off-shore wind contracts take 9 contracts totalling 4.9GW, a stark contrast to AR5 where none were taken up as the prices were too low. This sends a strong signal about the government’s ambition, as well as its willingness to work in collaboration with the industry. Significantly more will be needed to meet Clean Power 2030, with NESO saying that offshore wind is the only technology available at sufficient scale to deliver clean power by 2030, and an additional 28-35GW of offshore wind will be required to reach the total of 43-50GW in 2030. The Government therefore needs future CFD rounds to smash records again for offshore wind to keep Clean Power 2030 plans alive. Increasingly, entrepreneurial developers (and their funders) are looking at re-powering end of life assets with new or advanced technology.  With some of the capital expenditure already embedded in the model, we see the opportunities across Europe being substantial.

We see a continuing uptick in solar development, especially hybridised models with battery energy storage systems (BESS).  This sector continues to outperform all forecasts and there remain ambitious growth plans of incumbents and new entrants.  We have seen solar and wind still as a preferred energy source for major corporates looking to invest in their own energy creation. Such investment has good ESG credentials and is therefore seen as attractive on a number of levels.

Battery projects have faced some tough times and we see depressed M&A activity relating to these assets as a number of participants have focused on the assets that they have and optimising those or shoring up revenues, and less aggressively looking at new assets.  Whilst the tides are (tentatively) turning on revenues and BESS developers look at revenue stabilisation measures such as floors or tolling arrangements, the overcrowding of BESS in the connection queue is an issue as National Grid looks to cull the queue. However, developers and funds still have pipelines to deploy and long term ambitions to fulfil including large-scale batteries, so there is still some activity. The current market has created a strong desire for revenue certainty, which can be achieved by those with the right knowledge and approach. Batteries are at last being recognised in the UK and some other markets as helping the grid constraint problems, which will hopefully lead to more positive outcomes and faster, less risky deployment.

Infrastructure

M&A transactions are becoming larger, there is trading of portfolio assets and a general trend of larger and larger projects will continue.  The opportunities here for large scale deployment of capital both at a generation and grid stability level should not be under-estimated. We expect greater focus on portfolio optimisation as shown by ongoing reinvestment of capital in key strategic priorities.

Change of political regimes mean some people are thinking about how to manage sale mandates. Recent and upcoming elections in certain geographies around the world in 2024 are leading to investors analysing whether potential new governments will have ‘infrastructure heavy’ spending requirements.  Our view is that in a world where energy security and decarbonisation is still required, and where there is a significant requirement for new energy projects and energy infrastructure, successful governments will need to create the environment for this private capital to be spent. Their challenge will be balancing this with the cost to consumers.

The general trend in this sector is that M&A activity is increasing, driven by a number of factors. A lot of Financial Services legacy institutions and established FinTechs are now looking to diversify and expand their own offering; they are waking up to the fact that the best way to do so quickly is inorganically by deploying their cash to buy smaller FinTechs that are themselves facing a challenging funding landscape as an alternative to investment. In addition, private equity buyers are increasingly looking to exit some of their assets as valuations firm up and inflationary pressures and interest rates ease.

Regulatory change is still a big driver in the sector and is causing the lifecycle of deals to become more protracted, particularly when it comes to scrutiny around change of control matters, albeit not unusually so compared to prior quarters. A number of new governments are seeking growth, in the face of increasing tax levels, which is driving de-regulation and/or speeding up reform of financial services regulation, or at least announcement that this is the intention of policymakers. Changes in the regulatory environment may drive further consolidation. The regulatory environment (including the Sustainability Disclosure Requirements and ESG) means that many participants need to be a large size to be able to deal with these regulatory requirements. We see this meaning it pays to be large and it will continue to drive consolidation and M&A volume.

Corporate investors have been active in the insure-tech space and money is being put to work at an earlier stage (for example, niche platforms are now becoming quite buoyant). Corporate VC investors are also demonstrating a certain resilience as Financial Services organisations continue to bring disruptive business models into their organisation or partner up with those that do so.

Specific sub-sector trends that are noteworthy:

Asset and fund management

There is a macro trend of consolidation and we see that as a continuing trend through the end of 2024 and into 2025. This is being driven by generally lower margins, people are finding it much harder to make money by putting it into passive funds and so capital is being re-allocated. The direction of travel globally is into the passives and there is continued pressure in the sector on margins and this continues to mean economies of scale make a big difference. This, coupled with an increasing shift towards consumer centric strategies and delivering value for clients through technology/AI, means M&A is expected to remain buoyant as we head into 2025.

There are additional drivers of M&A activity such as fee pressures, achieving scale-based synergies, tapping into new geographies and asset classes, achieving differentiation through digitization and technology (including generative AI), ever-changing and expanding regulatory regimes (such as focus on market discipline, outcomes for customers and ESG) that are all contributing to deal making in this sector.

While corporate buyers look to strategic consolidations, the addition of new capabilities/offerings and vertical integration, private equity and financial sponsors continue to back this sector through buy-and-build or buy-and-improve strategies (particularly on the wealth management side) with an aim to achieve effective exits.

Payments

The payments sector has remained fairly resilient for M&A activity and we see that as a continuing trend. The market and regulatory dynamics haven’t fundamentally changed over the last 12 months but many smaller firms struggle with the requirements of KYC and holding of client monies and find it difficult to ensure compliance. These are natural drivers of consolidation and the resulting M&A activity. Some of the privately owned businesses are dealing with succession in conjunction with this which again pushes the consolidation strategy.

We are seeing many strategic collaborations, new FinTechs in the debt space and collaborating with players in the payment space. In the UK, the new government intends to speed up the approval process for new FinTechs with an aim of moving from years to months and we look in interest to see if new technologies can be brought to market quicker.

Insurance

We see a lot of insurance activity and it is a real bright spot. There is and has been for many years a good market for broker work but companies are being more selective. On the broker side, many consolidators who have grown platforms in the UK are looking further afield to Europe.

In the life insurance market, activity has slowed down in the UK and Europe and the majority of activity has been focussed on the asset intensive pension de-risking market. With that in mind, we have seen life insurers more looking at M&A activity to help them support asset origination for bulk annuity transactions and to move into new products.

All the underlying, fundamental drivers for M&A in the Healthcare sector continue – hospital waiting lists continue to expand, healthcare systems remain understaffed, demand for private services continues to grow and technical innovation remains a necessity rather than a luxury. Alongside this, the manifestos of many now-incumbent political parties stressed investment in healthcare as a key priority. With globally settling or reducing inflation, increased liquidity in the debt markets and increasing private equity activity the scene is set for a strong six months of M&A activity.

In Life Sciences, M&A and licensing activity continue to form a strategic driver of growth and change and H1 2024 saw a steady stream of activity broadly consistent with 2023’s activity levels and valuations. Volumes remain comparable to the same period in 2023 and significant deals have been executed by the likes of Merck & Co, Johnson & Johnson, AstraZeneca, Edwards Life Sciences and others.

Technology remains a key driver across multiple sub-sectors: innovations in cardiology, robotic surgery, remote wearable devices and other areas of MedTech and HCIT continue to be reliable drivers of dealmaking activity in 2024. GenAI and machine learning drive advancement in drug discovery, as increasingly specialised and niche medicines require increasingly sophisticated routes to commercial realisation, driving pharma investment in increasingly specialised CROs and CDMOs. 

Additionally, whilst health and life sciences is often a focus sector for national security/foreign direct investment legislation around the World, recent statistics show that deals generally still receive approval even if called in for scrutiny and so such matters are having an impact more on deal timetables than actual deal delivery.

It remains to be seen how a year marked by global elections and increasing nationalist policy, will ultimately wash through the sector but given the wider global drivers and the continued nearshoring technology and supply chains underpinning activity, we anticipate a strong flow of deals will continue in at least the short term.

Specific sub-sector trends that are noteworthy:

Pharma

As noted above, the increasing complexity and niche application of medicines continues to drive investment in contract development and manufacturing organizations (CDMO) or contract manufacturing organizations (CMO) as large pharmaceuticals out-source commercialisation of their IP to specialist providers.

The inherent potential for AI to transform drug development and discovery will continue to drive and attract significant funding from big pharma businesses.

Bio-Tech

High levels of activity in Bio-Tech continue and we anticipate will continue for the foreseeable future as the continuous stream of technological advances (in part again fuelled by AI) and scientific breakthroughs shows no sign of slowdown. Bio-Tech valuations have come down from extreme highs, making assets more attractive for acquisition. These factors, combined with the general need on behalf of Bio-Tech businesses to raise funds and get ahead of the patent cliff, should continue to fuel deal activity in to 2025.

Healthcare services

Activity in healthcare services has generally rebounded to an extent from a softer Q4 in 2023, as investors return to market, customer spend increases and non-core divestitures drive activity. However, activity on the whole remains relatively steady. Valuations have stuttered in certain markets, perhaps driven by the early-year anticipation of more meaningful interest rate cuts than have materialised and otherwise by early-year investor caution. On the other hand and as noted in our previous update, many markets in this area are highly fragmented and are set for further consolidation so whilst 2024 may not be a knock-out year for healthcare services we can expect a steady stream of activity to continue.

Life sciences

There continue to be more strategic development agreements, licensing arrangements and joint ventures being considered by Life Sciences businesses as a way of pooling resource and sharing risk. However, H1 2024 was in part marked by some impressive deals (and valuations) in GLP-1s as well as a continued stream of life sciences spin-offs. Oncology, immunology, and rare diseases continue to be active markets in terms of deal-making in a trend that shows no sign of slowing down, and the IPO volume for 2024 is expected to surpass 2023. In short, we expect life sciences M&A to continue to give a strong showing.

Medical devices

Some commentators report that the medical devices and technology sub-sector has already seen as much deal activity in terms of value in 2024 as it did in the entirety of 2023. Certainly, it has been a strong year to date and is trending upwards - M&A activity globally increased by nearly 200% in Q2 2024 compared with the previous quarter’s total. Corporate carve-outs feature strongly, alongside existing players seeking growth in either new markets or new devices as well as a steady stream of commercial collaborations. 2024 will be marked as a strong year in medical device M&A.

The election campaign in the US has concluded which has been weighing down on deals as the uncertainty was an unhelpful backdrop for boards making strategic decisions on M&A. Both in the US and elsewhere round the globe, we have seen a more nationalistic approach with tariffs and domestic legislation designed to promote American manufacturing being prominent parts of the Republican campaign. This is also an approach that other countries have been considering as there is domestic political capital to be gained in being seen to re-patriate manufacturing capability. Industrial clients are particularly affected by tariffs and the geopolitical uncertainty between the US, China and the EU. We have seen a number of examples of clients exiting certain territories with a disposal often providing a cleaner exit solution than a wind down and dissolution. On the flip side, growth is firmly on the agenda for policymakers across the G7 and industrials companies are at the heart of this, enhancing technology capability and productivity drives by AI are all contributing to businesses looking to buy in and speed up their own development.

As we move into 2025, we anticipate that cash rich industrials companies will turn to growing by acquisition and we have witnessed an increased confidence in doing deals in the last quarter. There has been an easing of inflationary pressures which had been squeezing margins/earnings and this is freeing up boards to consider their strategic options. There is a diversity of strategy that reflects the different companies in this broad sector, from divesting non-core assets to looking at strategic acquisitions to drive growth. In all cases there is a focus on maximising capital returns and we are still seeing a number of clients evaluate non-core assets and prepare them for sale in the future with corporate reorganisations on the increase. It is a sector where M&A activity will be on the increase over the next six months.

Private capital activity has picked up and competition with corporate acquirers will increase, the latter having been in the driving seat in a number of auctions over the last six months. Debt markets are opening up which is allowing more options for acquirers and leveraged returns mean any participant in the industry can take bigger risks if aligned to their strategy. As with many other industries, the macro conditions mean that small and medium sized companies are being consolidated by the aggregators. 

Shareholder activism is something we have noted before and the negative macro conditions have meant companies have been given more leeway. There is now increasing pressure for returns on capital invested and M&A is on the agenda to deliver against this backdrop.

Specific sub-sector trends that are noteworthy:

Automotive

ESG initiatives remain a focus as the net zero pledges of governments around the world are heavily dependent on the carbon emissions driven by the industry. However, consumer demand for electric vehicles has dropped as a result of wavering political incentives. Despite this the industry is moving towards electrification and the capital expenditure of original equipment manufacturers is focussed on developing their offering to respond to the evolution of the industry. We see opportunities to speed up this process through acquisitions, which is an ongoing trend that drives M&A. Electrification, autonomous driving and connected vehicle technology (including development of more sophisticated apps), as themes, will continue to be the driving factors as participants need to develop the capability and skills required.

Difficult choices lie ahead for policymakers between allowing globalisation to drive down the prices of electric cars or to protect national heritage brands. For the historically dominant manufacturers, such as those in western Europe, M&A certainly offers an opportunity to acquire new technology and allow them to remain ahead of potentially cheaper imports.

We do see some issues in supply chains as business critical original equipment manufacturers struggle with macroeconomic conditions and volatility in output. Distressed M&A will therefore be on the rise, or at the least, novel funding solutions within supply chains will be needed to keep production lines running. 

In maintenance and repair, margins will be squeezed as electric cars require a different repair profile and there is benefit in size. A continuing trend into 2025 will be consolidation in this part of the automotive industry as aggregators look to increase their scale.

Aerospace, defence and security

A continuing theme for the future is an uncertain geopolitical landscape and potential new demands on NATO countries, particularly if incoming President Trump holds true to his promise to cut US funding into NATO. This will result in a continued pressure on defence spending to be a priority which should drive activity as companies look to increase capability and continue to stay at the cutting edge of technology. We see M&A activity as a natural consequence of these macro pressures, particularly when it comes to technology, as historically dominant players will benefit from acquiring smaller, nimbler enterprises that can be more creative. For the more traditional multi-year projects, R&D spend continues to be challenging for a number of companies due to lead times and the cost of capital and so they are looking to joint ventures/strategic collaborations. We see this as a continuing theme which companies employ as an alternative to product development.

Regulatory scrutiny will continue to impact the sub-sector and that will not change in the foreseeable future, however we do not see this as dampening M&A activity, merely adding additional complexity to deal processes that can eventually be overcome.

This tends to be an asset heavy sector so private equity investment is targeted. However, there are assets under private equity ownership and we have seen an uptick in divestitures which we predict will continue into 2025 as investors seek to realise returns after a depressed M&A period.

Building products

The M&A activity in this sub-sector is jurisdiction dependent, but a number of recently elected governments, such as in the UK, have building on the agenda as a way to attempt to inject growth into flat economies. Large scale infrastructure investment will increase activity for businesses. As with all industries, easing inflationary pressures and reducing interest rates may create opportunities over the next six months for organisations to capitalise on M&A opportunities. Digitalisation and the use of AI to enhance productivity are drivers of M&A in the sub-sector (like all) but the areas of improving safety standards and project management are particular issues that lend themselves to development through technology.

Regulatory reform in jurisdictions can jolt participants and impact on M&A processes. In the UK potential reform around planning regulations and a drive for housebuilding could spark activity in the sub-sector and is an area of policy focus for the government.

As the calendar year end draws ever closer, the TMT sector brings with it more optimism than in Q1/Q2, plus some increased activity specifically in the UK following the announcement of the budget, but activity is still relatively subdued, at least outside the US.

Now that the UK Budget has been announced and the US election results are in, we anticipate that boards will start to regain their focus and feed off an increased sense of certainty to make strategic investments and digital transformation initiatives.

Private equity firms are increasingly becoming more active, especially in rolling up software players or targeting telecom infrastructure for stable returns.

Notwithstanding the ongoing geopolitical issues in the Middle East and Russian war in Ukraine, the resurgence in activity is being aided by interest rate cuts and a heightened positivity around the UK and recent investment summits.

All in all, the demand for tech-enabled services is increasing. Large tech corporations are continuing to reduce their workforces and there is still a bit of a downturn in the early stage fundraising market caused by a suppression in entrepreneurial activity. However, the flywheel is starting to turn and there is now, and we expect will continue to be, an uptick of activity, particularly where smaller companies with relatively weak economic profit are concerned given the strategic opportunities they present.

Specific sub-sector trends that are noteworthy:

Software/cybersecurity

Software continues to be the largest driver of M&A within the technology sector. In 2023, software accounted for 80% of all technology M&A activity and notwithstanding the level of threat in this field which continues to spike and the reaction of regulators to mandate greater reporting requirements, companies still look to M&A to acquire attractive IP and talent in this sphere as seen in early October when US private equity firm, Thoma Bravo completed the take private of UK cyber security company Darktrace in a transaction valuing the company at £4.3bn. Increased M&A in the cybersecurity space reflects a strategic recognition that acquiring businesses that offer advanced cyber capabilities is essential to strengthening existing offerings in a rapidly growing market. It is also crucial to consumer confidence, with cyber-attacks becoming a weekly (if not daily) front page headline, serving as a reminder that robust cyber defence measures are critical to businesses. As with many sectors, we are also seeing cybersecurity firms leveraging AI machine learning for threat detection, in parallel to the increasingly sophisticated attacks.

Asset light model and many Saas models continue to be attractive to investors and generally speaking, clients are keen to ride the wave, including those in Europe, where there are many attractive targets for US strategic bidders.

AI

While Big Tech in particular is pouring vast resources into AI development, there is also a focus on achieving scale through tech acquisitions. Companies are increasingly acquiring AI startups to enhance their technological capabilities and stay competitive, reflecting a recognition that internal development and organic growth will in many cases not be sufficient in a world where development continues at a breakneck speed. This, coupled with the apparent favourability of deal terms across fundraises involving AI as recently chartered by Pitchbook (source below) is demonstrating that the gulf between AI and non-AI has never been greater.

This trend is only expected to continue as AI becomes more integral to business operations, with targets now even being known to place restrictive covenants on their investors so as to prevent those investors from pooling money into other competitive businesses.

Media

The media industry has seen significant consolidation as companies seek to expand their consumer base. Several US media companies have merged to increase their market share, with Disney and Netflix now also signing multi-billion dollar deals. Sport and streaming is the crown jewel in this field at the moment with streaming services looking for strategic partners to better model and analyse their operations. This will certainly add more value to the space within the next 12 months.