M&A activity in Europe this year has been entangled in higher inflation, rising interest rates and an uncertain economic outlook. Deal values have fallen markedly, yet volumes are down only marginally. In contrast to 2021 and 2022, today’s environment is one where smaller transactions predominate.

While this may be due partly to the lower risk appetite among acquirers generally, increased financing costs and more caution among lenders are also contributing to this decline in bigger-ticket dealmaking, in particular following a spate of bank collapses in early 2023. Interest rates have risen several times this year across Europe, the US and UK, as inflation has proved more stubborn than expected. Yet, while inflation is still well above the European Central Bank’s (ECB) 2% target, it has trended downwards since the start of 2023 and the threat of recession in the region appears to be receding. The European Commission recently upgraded the European Union’s (EU) GDP projections to 1% for 2023 and 1.7% for 2024.

Projections for M&A activity over the coming year are mixed, with private equity firms notably more bullish than their corporate counterparts. Yet the vast majority of respondents to our survey anticipate being involved in the M&A market over the coming period, suggesting a healthy volume of activity in the near term. And, as valuations appear to have stabilised over the course of 2023, the stage looks set for a meeting of minds between buyers and sellers over the medium term – at which point M&A may well start truly turning a corner.

Key findings from our research include:

• M&A expectations have moderated and diverged: Though the bulk of respondents (43%) expect the level of European M&A activity to drop in the next 12 months a very sizeable minority (35%) are forecasting an increase. A divergence has emerged, with private equity dealmakers notably more optimistic than their corporate counterparts.
• Macro backdrop weighs on dealmakers: When asked to identify the greatest challenges to financing acquisitions over the next 12 months, respondents were quick to cite inflationary pressures (40% of their top two choices) and underlying economic weakness (38%).
• ESG scrutiny will create new deal opportunities: Although the vast majority of respondents (85%) expect M&A activity to come under more scrutiny relating to environmental, social & governance (ESG) regulations over the next three years, almost two-thirds (64%) also believe ESG regulation will ultimately provide a boost to dealmaking in Europe.

The report is also available via cms.law