Cooling inflation gives hope for European M&A recovery in 2024

• Mid-market continues to offer an abundance of opportunities.
• Foreign buyers remain hopeful about European assets.
• Deals will be driven by technology and ESG in 2024. 

Volatility in the European M&A market will remain for the rest of 2023 and early in 2024, but there are green shoots of recovery on the horizon, according to corporate finance experts at Baker Tilly International in the latest Global dealmakers 2023: Europe M&A market update.

Inflation in key European markets has shown signs of cooling, giving some hope that interest rates may be peaking. This will provide dealmakers with much-needed clarity when pricing risk and structuring deals. Valuations are also correcting from 2021 market peaks, encouraging buyers to pursue deals for good assets at attractive prices.

Francesca Lagerberg, CEO, Baker Tilly International, commented: “Macroeconomic and geopolitical challenges have taken a toll on the European M&A market in the last 18 months, however, there are still potential deals to be had for the opportunistic dealmaker.

“For risk-tolerant buyers, current conditions provide a rare chance to make bold, market-shaping deals that may not be available when competition for assets intensifies during the next upturn.”

Dealmaking across Europe has not been easy over the first half of 2023 as the same headwinds that dampened M&A in 2022 – high inflation, rising interest rates and the Ukraine war – continue to weigh on market sentiments. As a result, deal value in 1H23 fell to a five-year low of US$280bn, a 52% decline from US$594bn in 1H22. Deal volume has likewise slipped, down 17% from 1H22.

Mid-market remains hotbed of activity

With abundant consolidation prospects, quality companies and pockets of value, the European mid-market promises to remain a hotbed of M&A activity.

While mega-deals may dominate headlines, the vibrant European mid-market (deals valued between US$15m – US$500m) offers compelling M&A opportunities away from the spotlight. Even as mid-cap deals declined through 1H23, current activity remains on par with pre-pandemic totals as dealmaking in this segment of the market returns to more sustainable levels.

Both strategic corporate buyers and private equity (PE) are hoping to fuel growth and capitalize on value creation drivers.

For PE firms, financing difficulties and recession fears have clouded larger leveraged buyouts, and general practitioners are mitigating risks by pursuing more conservative capital structures and smaller deals. Strategics face similar pressures, curbing appetite for large transformational deals.

European assets a magnet for foreign investors

European assets, technology and intellectual property – particularly in the mid-market – continue to present compelling value for overseas buyers.

Economic and geopolitical turbulence have made 2023 a particularly challenging year for offshore dealmakers as many become more cautious on investments in Europe. Regardless, many international buyers see the region’s large consumer market, skilled workforce, robust and vibrant mid-market and advanced infrastructure as opportunities they cannot overlook.

William Chapman, Partner, Baker Tilly US: “Even in the face of worldwide uncertainty, European assets remain a magnet for foreign investors. Amid economic fluctuations, the region’s vast consumer market, skilled workforce, and robust mid-market continue to entice overseas buyers. North America takes the lead in inbound mid-market M&A, pursuing European value whilst Asia Pacific investors, mindful of near-term risks, still consider Europe a promising destination for investments once conditions stabilize.”

Tech and ESG to drive transactions in 2024

Through the rest of 2023 and into 2024, several structural and strategic drivers will be at play in the European M&A market.

Digital transformation is a cornerstone of long-term dealmaker strategies, as firms use tech to catapult operations into the digital age. Tech deals have been and will continue to be a key driver of M&A in Europe – and indicators already show abundant deal opportunities in this industry for dealmakers ready to act. However, more discerning buyers are less willing to invest large sums in technology assets that have yet to convert strong revenue growth into sustainable profitability.

Xavier Mercadé, CEO, Baker Tilly Spain, commented: “In the evolving European TMT sector, we’re witnessing a shift in deal dynamics. The landscape has transformed from soaring heights to careful evaluation, prioritizing performance over potential. Tech giants are in pursuit of AI-driven prospects, while PE firms target strategic acquisitions. While reaching new heights might take time, the number of deals is anticipated to remain robust.”

According to Mergermarket’s Intelligence European Heat Chart, the technology sector had 550 companies for sale in the first half of 2023. In addition, industrials and chemicals, and consumer also offer large volumes of M&A opportunities with close to 400 companies for sale in each sector, as do pharma, medical and biotech, with around 300 companies for sale in the first half of 2023.

In terms of key markets, the UK and Ireland had the largest pipeline of potential deals with over 550 companies for sale, followed by Central and Eastern Europe with just under 550 and the DACH region with over 400.

Dealmakers are also turning to M&A to accelerate decarbonisation and make progress towards net-zero carbon emissions targets. M&A will be one of the key funnels for capital to flow into renewables and energy transition projects at the required levels.

Wider environmental, social and governance (ESG) concerns are also spreading into sectors other than energy as investors and consumers become more socially and environmentally conscious.

Harsh Maheshwari, Head of Corporate Finance, Baker Tilly International, says: “Looking ahead to the rest of 2023 and into 2024, we are likely to see factors like divestitures, technology, ESG, and private equity driving activity. As inflation moderates and valuations stabilise, it relieves the strain on central banks to persistently raise interest rates and positions lenders and investors more favourably to formulate deals as rates stabilise and create opportunities for growth and strategic repositioning.”