Europe – Grounds for optimism

Activity

'Old Europe' has followed the same pattern as other global regions in 2023. Interest rate uncertainty, limited – and expensive – access to third-party debt financing, mismatched price expectations and high levels of inflation in the EU and euro area (which peaked in October 2022 at 10.6%), on top of other overriding geopolitical issues (conflicts in Ukraine and Israel-Gaza) have all had a negative impact on M&A activity in Europe in terms of volume and value during 2023.

Statistics show a decline in M&A transactions for 2023 to their lowest volume in three years and value declined both year-on-year and quarter-on-quarter, until the last quarter. Although the first half (and, more accurately, the first quarter) of 2023 indicated a positive trend in terms of volume of deals (to around 2021 levels, where high levels of liquidity prevailed in the market), the number of deals fell throughout the second half of the year. Value did not prove to be resilient through to the year end – particularly as there were only a few megadeals – but the upper mid-market supported M&A activity in terms of volume.

However, 2023 market data, based on these macroeconomic factors, does not mean that we cannot approach 2024 with some optimism, subject of course to a certain degree of caution as is required in any forecast, particularly considering the current challenging environment.

Sectors

In terms of sectors, technology, media and telecoms (TMT) has in the last couple of years been – and will likely continue to be in 2024 – a key driver for M&A activity in Europe. Digital infrastructure (fibre grids, tower networks or data centres) has proven to be a key asset that commands appetite from investors and, particularly, financial sponsors. Good examples of the relevance of the TMT sector in the European market in terms of value are KKR’s US$23.6 billion acquisition of Telecom Italia’s FiberCop fixed network and Blackstone’s US$14.4 billion purchase of Adevinta from eBay, both in November 2023, in addition to smaller deals reported to the market in the past year.

With TMT expected to continue leading M&A activity in 2024, market data forecast that industrials and chemicals will be the next most significant sector for M&A activity in 2024, especially in the DACH (Germany, Austria and Switzerland) subregion and Italy. The energy transition and the consumer sector (following the expected decrease of inflation rates) might bring a few M&A deals in the European market this year.

Legal trends

One of the more significant new factors impacting the M&A market in Europe from a legal standpoint is the new EU Foreign Subsidy Regulation (FSR) which entered into force in 2023. Alongside the familiar foreign direct investment (FDI) and merger control rules, players in the market will now have to consider the FSR regime when doing cross-border deals in Europe. It is worth noting that this regime does not prevent deals from occurring, but it will have an impact on, and will need to be factored into, the deal timetable. Please see the section "Merger control, FDI and FSR – The triple impact" in our 2024 global M&A report for further information on the FSR new rules.

Outlook for 2024

Forecasts on macroeconomic metrics for the short and medium terms seem to be changing positively. The efforts made by the European Central Bank to reduce inflation are starting to garner results. According to the European Commission, headline inflation in the euro area is set to decrease from 5.4% in 2023 to 2.7% in 2024, and 2.1% in 2025. GDP growth is forecast to be slightly lower, at 0.8% in 2024 and 1.5% in 2025, but still shows a positive trend and eliminates, or at the very least reduces, the risk of recession in Europe.

These positive macroeconomic forecasts should aid an optimistic (albeit cautiously optimistic) prediction for M&A activity for 2024. Although access to third-party and bank financing remains costly, strong corporate balance sheets should provide room for maintaining and increasing M&A activity and, more generally, sustain investment in Europe.

Financial sponsors, even with a high level of caution and limited access to debt funding at high credit costs, should remain active in the market considering both their existing dry-powder and the need to divest their portfolio companies (which might be carried out through secondary buyouts or continuation funds). See our piece "Private equity – At a turning point" for discussion of the outlook for PE in 2024.