Investors need to look beyond the US tariff soap opera to predict the economics that will underpin M&A opportunities, says Jackie Bowie.
From a macro perspective, the announcement of US tariffs signalled a seismic shift in the global economic landscape. The immediate reaction was felt across equities, bonds and currencies. At a micro level, companies have grappled with the implications of increased costs and disrupted supply chains. And as the Middle East situation spirals, more challenges should reasonably be expected.
The impact on macroeconomic forecasts has been profound, with US GDP forecasts cut from around 2% for 2025 to below 1%, accompanied by increased risk of a US recession. The ripple effects have not only curtailed domestic expansion, but strained international economic relations, amplifying the challenges facing businesses.
The impact on European GDP is difficult to forecast, complicated by the pause in the trade negotiations. However, European GDP had been revised upwards due to improved German fiscal outlook and the increase in EU defence spending. Market participants are more positive on the EU overall; it seems a more resilient and influential entity in the face of geopolitical challenges, as reflected in recent Euro strength.
As the dust settled on tariffs, the US pushed ahead with the ‘Big Beautiful Bill’ and long-dated US bond yields went up as the fiscal position came under further scrutiny. While the market is pricing in two further Fed interest rate cuts of 25 bps each for 2025, debt financing costs remain relatively high.
Elevated bond yields may result in firms prioritising self-funding or equity financing over debt, shifting the dynamics of deal structures. Companies with strong balance sheets and cash reserves might find themselves in advantageous positions to capitalise on acquisition opportunities without relying heavily on borrowed funds.
Valuations bases change as buyers and sellers account for increased debt cost. The result is more rigorous due diligence processes and negotiations, as parties seek to ensure deal financials continue to meet their targets.
At a micro level, many businesses anticipated the US announcement and were already re-evaluating strategic plans. As trade tensions escalated, particularly between China and the US, more protectionist stances across the world further complicate cross-border M&A considerations. Industries reliant on international trade have been most impacted. Companies have begun prioritising resilience and risk mitigation over expansion or acquisition activity.
The impact on M&A for the next 12 months is difficult to evaluate. Tariffs are expected to reduce global economic growth, which could drive acquisition activity. Companies unable to generate organic growth may seek alternative routes to a competitive edge. Historically economic downturns have stimulated M&A activity.
During the global financial crisis of 2008-2009, M&A activity increased markedly. Economic contraction led to lower valuations, creating opportunities. Similarly, the dot.com bust of the early 2000s prompted a wave of consolidation within the technology sector.
Sector specifics
The healthcare sector continues to be a focal point for M&A, with expectations for significant deal volumes in 2025. Advances in biotechnology, pharmaceuticals and healthcare services attract substantial interest from investors. The pursuit of technological integration will drive consolidation efforts within the sector.
Technological advances remain a cornerstone of M&A and private equity buy-outs. As businesses seek to leverage innovation, companies will pursue acquisitions to integrate complementary technologies, expand their product portfolios and capitalise on emerging trends.
The renewable energy sector expected to attract significant investment in 2025. M&A and private equity buy-outs will focus on expanding renewable energy portfolios, enhancing technological capabilities and achieving economies of scale.
The expectations for deal volumes in M&A and private equity buy-outs for 2025 are shaped by a confluence of macroeconomic, sector-specific, geopolitical and financial factors. While challenges persist, strategic opportunities abound in sectors such as technology and renewable energy. Companies that prioritise market diversification, technological synergies and economic resilience will be well positioned to navigate the complex M&A landscape.
In a pre-tariffs world, dealmakers were encouraged by the Trump administration’s pro-business flavour and deregulatory agenda, as well as previously easing concerns about inflation. Those trends were expected to fuel an even stronger M&A comeback in 2025, after last year’s moderate recovery from a slow 2023. When (or if) the white noise stops, there will be better visibility.
Jackie Bowie, managing partner and head of EMEA, Chatham Financial, a member of the Corporate Finance Faculty.