Transactions
The value of everything
15 Jan 2025
Insight
Global
3m read
This time last year we asked whether the M&A market was ready for take-off in 2024. We now have the answer: not really. To continue with familiar metaphors, the fog didn’t lift as much as we hoped, tailwinds didn’t overcome headwinds, the flights we did take were bumpy and we stayed firmly buckled in our seats. In other metaphors, green shoots didn’t blossom into spring etc, etc...
On balance, 2024 was a better year than 2023 for global M&A. The market is climbing out of the lows stemming from the Russian invasion of Ukraine and the resulting energy security issues, along with inflation, the cost of living crisis and interest rate rises. In terms of global M&A statistics, at the end of 2024 volumes were down 13% from 2023, but more significantly values were up 9%. Generally, it has been the larger deals that pulled the market up, rather than activity across the board.
Activity was driven by ongoing transformational ambitions of corporates and continued portfolio realignment in line with a trend to de-conglomeration. Regional hotspots helped, such as takeover bids for UK public companies, with both strategics and private equity, many overseas, taking advantage of a structural discount in the UK market. The best assets produced competitive auctions in private M&A, but there was no sign of the steady build-up of successful sale processes that had been hoped for, nor any significant reduction in the backlog of private equity-owned businesses that are beyond their ideal hold period. Global M&A struggled to build momentum in 2024, while participants waited for an improvement in conditions in inflation, interest rates and debt financing, and to see the effect of those macroeconomics on target performance over a meaningful financial period.
Against that backdrop, boards and investment committees tested strategic rationales and valuations, looked for value generation beyond attractive debt financing terms and demanded thorough due diligence exercises. That M&A environment, with more bilateral processes and longer lead times, tipped the balance back in favour of strategic deal-doing by corporates and away from finance-driven acquisitions.
While sale processes were generally still launched as auctions, many turned out differently in 2024. It remained a buyers' market for all but the most prized assets. Sellers experienced not enough (and sometimes no) buyers turning up in a transactable price range, as well as bidders offering for only parts of the sale assets, or for minority positions in them. In response, some auctions quickly became de facto bilateral processes. Sellers repackaged sale assets tailored to buyers' preferences, considered buyers' offers of more structured deals, and contemplated partial sales to achieve at least some monetisation and to establish valuations.
Generally, it has been the larger deals that pulled the market up, rather than activity across the board."
Gavin Davies
Head of Global M&A
Sellers have also been working hard to attract buyers and get them over the line in other ways, not only adapting the sale process (even up to cost coverage in some cases), but also helping with funding, including retained minority stakes and other vendor financing. Against this backdrop, listed companies disposing of divisions have sometimes preferred pursuing spin-offs, with no counterparty risk, rather than sale processes.
Deals also took longer to sign, without the competitive tension of an auction to drive timings, and with more work on finding the right financing as well as robust valuations and diligence. Potential buyers also gave more thought to the realities of navigating a complex and dynamic global regulatory environment.
We have seen a marked trend towards heavily negotiated sale documents and the re-emergence of buyer friendly terms that didn't feature in periods when activity was dominated by competitive auctions. More time was spent in 2024 in negotiation on bridging valuation gaps (eg, tailored forms of hybrid lockbox/completion accounts, detailed earn-out terms, and the introduction of convertible instruments). Other areas of focus include risk sharing, via tools like MACs or bespoke insurance solutions for identified issues, and more creative value and deal protection, including anti-embarrassment protection.
Deals are also taking longer to close, sometimes with transactions being announced ahead of secured financing, often with significant regulatory clearance periods and heightened risk of regulatory intervention. In a buyer's market, we have seen more acceptance by sellers of sharing some regulatory risk. Given the longer periods to close, more time is also now spent contemplating issues that could arise during that period, and protecting the deal contractually, whether through warranty bring down, termination rights, MACs and even "springing" conditions where new regulations come into effect in the long wait period.
Pent-up demand, and deals to be unlocked
There remains, nonetheless, significant pent-up demand for M&A. Private equity and the broader private capital ecosystem have adjusted to longer hold periods through the use of continuation vehicles, NAV financing and structures such as the private IPO, but the need to return invested capital remains an imperative, as does the deployment of new dry powder. Strategics continue to show strong appetite to accelerate transformational change through M&A as they face multiple structural transitions in energy, ESG, digital and artificial intelligence, as well as the need to drive above-trend growth in their businesses to distinguish their equity stories from their peers. Although inflation, interest rates and access to debt on the right terms, as well as closely watched volatility indices, have all stabilised and improved, sellers and buyers still need to reach alignment on valuations to unlock such activity.
Elections in some of the most significant economies around the world and continuing geopolitical shocks haven’t helped, but don’t appear to be a fundamental block to M&A activity. In the age of deglobalisation and post-banking crisis populism, a degree of turbulence has been priced into strategic deal-doing; for years, the M&A market has shown resilience through periods of uncertainty, beginning with Covid. Politics will continue to generate headwinds, including current French and German political uncertainties, and tailwinds, including the apparently pro-business, anti-regulation and catalytic effect of the Trump presidency and Republican control of both the House and the Senate, assessed in balance with concern around trade tariffs.
Heavy lifting, for a while yet
What will 2025 look like for the M&A market? It's tempting to fall back on the well-known mantra: "It's tough to make predictions, especially about the future." We believe there is a good chance activity will build, but to get deals done we should expect the heavy lifting to continue for some time. What we are certain of is that agility, creativity and resilience will be valued qualities in deal teams and advisers for the dynamic and eventful conditions we expect for 2025.
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