As we usher in 2025, the mergers and acquisitions (M&A) landscape appears to be poised for more favorable conditions. The convergence of favorable economic indicators, regulatory shifts, and strategic corporate initiatives suggests a more positive year ahead for dealmakers and investors. According to a recent survey by the AM&AA, overall lower middle market deal multiples are up by 0.5 in the last half of 2024.
Economic Tailwinds Fueling M&A Activity
The global economy is exhibiting robust signs of strength. Central banks across major economies had initiated interest rate cuts in 2024, enhancing access to capital and invigorating corporate investment strategies. This monetary easing has begun to lower the cost of financing acquisitions, thereby stimulating M&A activity.
Private Equity Funding continues to strengthen and there appears to be more capital available for non-majority transactions, including management buyouts. Also, strategic buyers have stepped up in pursuit of target companies to acquire in multiple industries, especially in the areas of sustainability and AI.
Sector-Specific M&A Prospects
- Technology: The technology sector continues to be a focal point for M&A, driven by advancements in artificial intelligence (AI) and digital transformation initiatives. Venture capitalists predict a resurgence in initial public offerings (IPOs) and M&A deals, particularly involving AI startups specializing in enterprise applications. This trend underscores the strategic imperative for companies to integrate AI capabilities to maintain competitive advantage.
- Healthcare: Despite a slight decline in deal value in 2024, the healthcare sector remains a significant contributor to global M&A activity. Larger life sciences companies are expected to pursue acquisitions to bolster their product pipelines, with lower interest rates facilitating these strategic investments.
- B2B Services: Multiples in 2024 have remained consistent for companies in the $25-100 million enterprise value range. While there is economic uncertainty and competition, the positive drivers are likely to support healthy multiples for well-performing companies, particularly those with recurring revenue models and strong growth prospects.
- Construction: Multiples in 2024 have declined slightly but are improving. This is driven by infrastructure spending, energy transition, and technology adoption. It is crucial to stay informed about economic conditions and industry trends, as these can significantly impact M&A activity and valuations.
- Manufacturing: Multiples have improved overall in 2024. This is driven by reshoring, automation, and infrastructure spending. Positive drivers are likely to support healthy multiples for well-performing companies, particularly those in high-growth sectors.
Global Perspectives
- North America: The region is anticipated to lead in M&A activity, buoyed by strong economic fundamentals and a supportive regulatory framework. The technology and healthcare sectors are expected to be particularly active, driven by innovation and the need for strategic growth.
- Europe: European markets are showing positive M&A sentiment, with declining inflation and interest rates contributing to improved dealmaking conditions. The technology, media, and telecommunications sectors are projected to experience robust activity, reflecting the ongoing digital transformation across industries.
- Asia-Pacific: While the region exhibits a more cautious outlook, opportunities exist, particularly in sectors such as technology and energy. Strategic investments aimed at capitalizing on emerging market growth and technological advancements are expected to drive M&A activity.
Challenges and Considerations
Although there are large amounts of money available for acquisitions, buyers have become more particular in the past couple of years in looking for where to invest their money. There is universal talk of “quality companies” as the targets for acquisitions while more limited interest in “the rest”. The attributes of quality companies include growth, profitability, size and multiple other factors which represent the amount of perceived risk of the business’ ability to meet the buyer’s objectives after closing. These factors greatly influence the valuation multiples being offered and also whether the business can even be sold at all.
Prior preparation by the business owner before taking the company to market is critical to a successful outcome.
The timing of taking a company through the sales process is also important. Overall, there is optimism in the market about improving conditions throughout 2025.
Despite the optimistic outlook, several challenges persist. Navigating evolving regulatory frameworks, particularly concerning antitrust considerations, requires meticulous planning and due diligence. Additionally, geopolitical tensions and potential policy shifts necessitate a vigilant approach to cross-border transactions.
Furthermore, the integration of acquired entities, especially those involving advanced technologies like AI, demands careful attention to data privacy and cybersecurity concerns. Ensuring compliance with varying international standards adds complexity to the M&A process.
Conclusion
The M&A landscape in 2025 is characterized by a confluence of favorable economic conditions, strategic corporate initiatives, and a supportive regulatory environment. Sectors such as technology, healthcare, and energy are poised for significant activity, with private equity firms playing a pivotal role in driving deals. While challenges remain, the overarching sentiment is one of optimism, heralding a dynamic year ahead for mergers and acquisitions.
Maximizing the New Year
The Maximum Possibilities team just returned from the AM&AA Winter Conference, an annual event for M&A professionals, private equity investors, senior and mezzanine lenders, CPAs, attorneys, business valuators, and more. We had a fantastic time and are excited to share with our partner clients what they can expect and how best to prepare for 2025.
Contact us today so we can discuss your business goals this year.