Dealmakers expect European M&A market to cool down

21 September 2023 3 min. read
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The European M&A market will cool down further in the coming months, according to a new study by CMS and Mergermarket.

After a strong 2021 and even stronger 2022, the European deals market seems to be losing steam. While opportunities will continue to arise on both the buy and sell side of the landscape, including mega deals in hot and emerging sectors, across the board the trend is forecasted to be downwards.

“The first half of 2023 was more subdued as M&A activity started to reflect a more challenging macroeconomic backdrop,” said Louise Wallace, partner at CMS. At €316 billion, deal value in the six-month period was down 47% on the same period the year previous. Deal volume was down 12%.

Dealmakers expect European M&A market to cool down

With recent macro-economic developments in mind, dealmakers are somewhat less optimistic about the prospects for European M&A over the next 12 months than they were at this point last year. While more than a third (35%) say they expect the level of M&A to rise in the coming year, a larger share of respondents (43%) predict a drop in activity, including 11% who say it will decrease significantly.

An important reason for the decline in sentiment is the reduced risk appetite among buyers. Other causes include higher financing costs (due to high interest rates), the more cautious attitude of lenders towards financing, and the growing number of bankruptcies.

For its research, CMS (a global law firm) and Mergermarket (an M&A-focused industry analyst) surveyed over 330 dealmakers from corporates and private equity firms.

Dealmakers expect European M&A market to cool down

Strategics versus Financials

Notably, financial buyers are markedly more optimistic than strategic buyers. Among private equity dealmakers, just 24% expect the level of European M&A to drop, with 46% anticipating a higher level of activity. Meanwhile, among corporate dealmakers, 49% expect the level of M&A to drop.

The divergence in sentiment follows from a number of factors. First, private equity are serial investors and more acquainted to cherry-picking the right deals – targets that can outperform even in challenging times. They also are more likely to capitalise on a lower valuation environment – average deal multiples are considerably lower than a year ago.

In addition, private equity funds are sitting on a huge pile of money ready to be invested, also known as ‘dry powder’. Despite a fall in fundraising in 2022, global dry powder among private capital firms rose from around $3.2 trillion in 2021 to $3.7 trillion in 2022. “Private equity firms continue to have considerable firepower to acquire businesses”, said Wallace.

Dealmakers expect European M&A market to cool down

M&A drivers

Companies that aim to close deals in the coming year view undervalued valuations (36%) and turnaround opportunities (35%) as the top drivers for M&A activity. Nearly two thirds of dealmakers (64%) expect ESG regulations in Europe to create new transaction opportunities.

From a sector perspective, more than a third of dealmakers foresee the biggest increase in new deals in the telecom, media and technology industries (37%) and the energy industry (36%). 42% of respondents expect the lowest increase in the pharmaceutical, medical and biotechnology sectors.