Cautious optimism as dealmaker sentiment signals busier 2025 for M&A

After 2024 showed green shoots of progress in another otherwise modest year for global M&A volumes, the outlook for 2025 is more positive, as the macroeconomic headwinds of previous years are expected to improve. Talk of a turnaround is gathering pace, even if caution remains very much in order.

The start of 2025 brought M&A advisers many reasons to be cheerful, with an anticipated improvement in macroeconomic conditions fuelling expectations of a dealmaking rebound. The geopolitical uncertainty that was such a feature of M&A decision making last year – when more than half of the global population took part in elections – is expected to feature less prominently in the year ahead, although questions over the resolution of the conflicts in Gaza and Ukraine may hamper confidence, at least in the short term.

With plenty of assets sitting on the sidelines ripe for sale, pro-growth pressure being exerted on regulators, and a build-up of ‘dry powder’ ready for deployment, many began the year in a bullish mood and are expecting pent-up deal demand to manifest in more buoyant activity.

That optimism was tempered only slightly by the arrival of the new administration in the White House. As interest rates and inflation stabilise, President Trump’s promises of a new era characterised by his pro-business, deregulatory agenda were welcomed by many as heralding just the backdrop needed to revive transactions. However, the fact that he has also moved to introduce tariffs that could yet result in retaliatory trade wars and inflationary pressures necessitates a strong need for caution.

Looking back at 2024 M&A deal activity, we saw a notable shift in momentum in the second half of the year. Inflation receded and dealmakers acted in anticipation of interest rate reductions, meaning global M&A volumes rose 14% year on year to reach $3.6 trillion. North America was responsible for almost half of the total deals, versus 24% attributed to EMEA. However, M&A volume in EMEA did hit $841 billion in 2024, up 10% on the two-decade low recorded for 2023. 2024 also saw the resurgence of mega-deals (valued at over $10 billion), which boosted global deal values.

As a result, sentiment in the global M&A market is optimistic at the start of 2025. Sponsors will be busy: more than 400 auctions are currently active in the UK, Germany, Austria, Switzerland, Italy, France, and the Nordic region, according to Mergermarket’s auctions tracking platform.

With strengthening equity markets and continued pressure on dealmakers to deploy record cash and dry powder, we expect to see an increased supply of assets coming to market. That will comprise both non-core assets ripe for divestment by corporates and private equity portfolio companies; in this context, the fact that half of private equity portfolio companies are now more than five years old, with close to 30% being at least seven years old, is worth noting.

Over the past few years we have seen a steady adjustment towards longer holding periods for sponsors, including via the rise of continuation vehicles for ‘trophy’ assets. That has created a backlog of potential assets that will not only provide impetus for M&A markets but should also lead to some revival in IPO activity, with many private equity assets now too big to be sold to other sponsors.

In the UK, the Financial Conduct Authority’s overhaul of the listing framework that came into effect in July 2024 aims to make London a more attractive destination for IPOs by cutting red tape for public companies. A new listing category for premium listed companies, combining the previous premium and standard listing segments to create a single point of entry, is designed to simplify the listing landscape. The regulation of material transactions by these companies will become more disclosure orientated and the new rules introduce more flexibility for companies to structure arrangements with their controlling shareholders.

The strong dollar suggests European assets will continue to be a target for US outbound M&A this year. Over the past 14 years, the US economy has grown more strongly than economies in Europe, including the UK, with the cumulative GDP growth rate between 2010 and 2023 standing at 34% in the US versus 21% in the EU.

That may spur European companies to acquire US counterparties in search of growth, while US acquirers remain motivated to look to Europe for strategic expansion alongside structurally lower valuations. The Trump administration’s hawkish approach to trading relations with China and the EU could also push those economies closer together, as Europe continues to be a more conducive environment for Chinese outbound investment.

Latham & Watkins’ 11th edition of its annual European Private M&A Market Study (the 2024 M&A Market Study) analyses data from more than 310 European deals signed or closed between July 2022 and June 2024. That data provides insights into the trends and developments shaping the overall market.

For example, the use of earn-outs has continued to rise as a mechanism to bridge valuation gaps between parties, providing flexibility in, and facilitating, deal execution. Earn-out provisions were used in 23% of the deals in the 2024 M&A Market Study, an increase that was even more significant among private equity deals, featuring in 24% of deals with a private equity seller, compared with 8% in 2019. While earn-out usage varies between sectors and traditionally features most prominently in healthcare and life sciences deals, it is gaining wider traction. This sector is expected to remain strong in 2025, with $1.3 trillion in transaction firepower available, which could cause this upward trend in earn-out usage continue.

The prevalence of transactions featuring warranty and indemnity (W&I) insurance has plateaued at 48% of deals, according to the 2024 M&A Market Study. This is on par with the peak recorded in the previous year’s M&A Market Study, ending a consistent trend of growth in usage. Uptake tends to be strongest among private equity sellers, which typically favour W&I insurance (compared with corporate sellers).

Escrows remain uncommon – only 16% of deals in the 2024 M&A Market Study featured such an arrangement. Although we registered a slight increase compared with the proportion of deals in the previous year’s M&A Market Study featuring escrows, this is a notable decrease from earlier editions. Despite buyers’ concerns about sellers’ ability to meet post-completion obligations, this suggests that sellers continue to successfully resist requests for a portion of the purchase price to be placed in escrow. While escrows continue to be much more common in the US than in Europe (with closer to two-thirds of transactions including some form of escrow), the results of the American Bar Association’s 2023 Private Target M&A Deal Points Study also indicated a decline in escrow use in US M&A.

Looking forward, plenty of market trends seem set to power M&A in 2025. From an industries perspective, we expect the tech sector, and especially software and semiconductors, to be key areas of activity, driven by the ongoing AI boom and the resulting demand for chips and technologies.

Data centres are also very much in focus: outlooks suggest that global data centre energy demand could double over the next five years, with leading data centre players preparing to deploy approximately $1.8 trillion in capital by 2030 to meet the need.

As mentioned above, significant investment in life sciences and healthcare is expected to continue in 2025, with the expiry of upcoming drug patents expected to be a big catalyst fuelling activity. Large pharma and medical device players are also on the hunt for acquisitions to drive growth.

Finally, we expect more institutional interest in cryptocurrencies to emerge this year, with 2025 set to be significant for fintech more broadly as a result of crypto asset regulatory changes and the heightened focus on the use of data and AI in financial services.

Regulatory conditions and their potential to impact transactions continue to be a key challenge dealmakers must navigate. Foreign direct investment (FDI) approval regimes are a growing feature, corresponding with an escalation in the number of jurisdictions with their own regimes and the breadth of FDI rules in play.

We saw in the 2024 M&A Market Study that the proportion of transactions impacted by approval conditions grew to 38% in 2024, up from 15% as recently as 2021, with the biggest impact being felt in Italy, the UK, and Germany.

As concerns regarding antitrust, FDI, and the EU’s Foreign Subsidies Regulation remain prevalent, market participants may be unsurprised that ‘hell or high water’ clauses now appear in some form in just under half of deals, with split signing and completion, and a regulatory clearance condition. The growing trend for hell-or-high-water clauses to cover the target group only featured in around one in five deals in the 2024 M&A Market Study.

Deal conditionality beyond mandatory regulatory clearances remains uncommon in Europe, with material adverse change clauses featuring in just 10% of deals in the 2024 M&A Market Study. However, buyers are paying close attention to FDI regulations, merger controls, foreign subsidies, and state aid rules, all of which have the potential to lengthen the period between signing and closing, impacting deal timelines.

The new administration in the White House is expected to herald a new era of more favourable antitrust and regulatory treatment of dealmakers. The selection of Andrew Ferguson to lead the Federal Trade Commission (FTC) and of Gail Slater to lead the Antitrust Division at the Department of Justice suggests a more restrained approach to M&A antitrust enforcement, while a repeal of the 2023 Merger Guidelines and the FTC’s ban on non-compete agreements is also reasonably likely.

That said, antitrust enforcement in the tech sector will probably remain a top priority under Trump’s administration, which has previously taken a critical stance against large tech companies. US companies also continue to grapple with new restrictive measures such as the outbound investment screening regime dubbed “Reverse CFIUS”, which took effect on January 2 2025. These new rules give the Committee on Foreign Investment in the United States (CFIUS) the authority to review outbound foreign investments by US businesses for potential national security issues in countries of concern, as determined by the president.

January also saw the US Department of Commerce’s Bureau of Industry and Security issue rules regulating the export of US-origin AI chips and AI models to protect national security and foreign policy interests.

Given the ongoing challenges associated with slow growth in the UK and Europe, we have seen similar pro-investment pressure being exerted on regulators by executive bodies and governments. The European Commission’s new competition commissioner, Teresa Ribera Rodríguez, has signalled a shake-up of antitrust rules to foster growth in the EU and promote international competitiveness.

The new Labour government in the UK is making similar noises about a pro-growth agenda, including calls for the Competition and Markets Authority, the UK’s principal competition and consumer protection body, to support growth and international competitiveness when carrying out its regulatory functions.

Given the cautiously optimistic outlook for 2025 M&A, as macroeconomic and geopolitical challenges evolve and the demand and supply for dealmaking builds, we expect to see another year in which dealmakers utilise creative deal structures and terms to facilitate transactions.

One fact remains clear: early engagement with advisers and thoughtful preparation and diligence to get ahead of issues will be important keys to success when transacting in the year ahead. While the next 12 months look set to present plenty of opportunities, dealmakers will need expert and strategic legal counsel to navigate some of the challenges and uncertainties that remain.