43% of dealmakers expect European M&A activity to drop in the next 12 months, though (35%) are forecasting an increase, with those working in private equity notably optimistic. This is according to the 11th edition of the European M&A Outlook by global law firm CMS in association with Mergermarket. This stands in stark contrast to last year’s predictions when 73% forecasted an increase in M&A activity.
The report offers a comprehensive assessment of dealmaking sentiment in Europe’s M&A market. It reflects the opinions of 330 corporates and private equity firms based in Europe, the Americas and Asia-Pacific about their expectations for the European M&A market in the year ahead.
The first half of 2023 saw a 47% decrease in total deal value in the first half of 2023 compared to the previous year (from EUR 596 billion to EUR 316 billion). Meanwhile, transaction volumes experienced a 12% drop from 2022 (falling from 8,635 to 7,608 deals).
Decreased risk appetite
A key contributor to this shift is the decreased risk appetite amongst acquirers. This has been further exacerbated by heightened financing costs, cautious lending practices and the aftermath of bank collapses both in the United States and Europe in early 2023. In response to persistent inflation, interest rates have undergone multiple increases across Europe, the US and the UK. Nearly half (48%) of dealmakers say that inflation and interest rate pressures will be the biggest obstacles to dealmaking over the next 12 months. However, a downward trend in inflation since the beginning of the year has alleviated concerns about a potential regional recession.
Louise Wallace, Global Head of the CMS Corporate/M&A Group, said: "In 2021 and even in 2022, deal volumes still broke records and aggregate value figures remained high, despite inflation levels not seen in decades as a result of Russia’s invasion of Ukraine. However, we are now seeing M&A activity across Europe starting to reflect the more challenging macroeconomic backdrop."
ESG will create new deal opportunities
Dealmakers continue to identify undervalued targets (36%) and turnaround opportunities (35%) as the primary catalysts driving M&A activity in Europe for the upcoming year. This trend is hardly unexpected, considering the decline in valuations of public companies over the past 18 months.
No less than 64% of dealmakers believe that ESG regulation in Europe will create dealmaking opportunities. 93% states that ESG considerations constitute a significant element of their organisation’s due diligence. 85% expect greater ESG scrutiny in M&A deals over the next three years.
More than a third of dealmakers predict the TMT sector (37%) and the energy sector (36%) will experience the most significant surge in dealmaking across Europe. 42% believe that the pharmaceuticals, medical and biotech (PMB) sectors will exhibit the slowest growth.
Pieter van Duijvenvoorde, Partner and Head of the Corporate/M&A Group at CMS in the Netherlands, said: "In particular with respect to the high value transactions, the market remains challenging. The decrease of the inflation figures may boost confidence in the transaction market and result in an increase of the number of transactions. We expect to see more transactions driven by ESG motives."
Read the full CMS European M&A Outlook 2024 here: Turning the Corner? CMS European M&A Outlook 2024
Methodology
In Q2 2023, Mergermarket surveyed senior executives from 240 corporates and 90 private equity firms based in Europe, the Americas and the Asia-Pacific (APAC) regions about their expectations for the European M&A market in the year ahead. Among the 330 executives interviewed, 70% are headquartered in Europe, while the remaining 30% are split equally between the Americas and the APAC regions. 85% of all respondents have been involved in an M&A transaction over the past two years and 81% plan to undertake an M&A transaction in the coming year. All responses are anonymous, and results are presented in aggregate.
