2025 M&A Outlook and Predictions

The words “cautious optimism” were broadly used at this time last year when M&A dealmakers were asked to provide an outlook for the M&A market in 2024. Following a COVID-era peak in 2021, 2022 and 2023 were both years in which an economy with high-inflation and increasing interest rates saw M&A deal counts and deal values fall dramatically (approximately a 25% decline in the number of deals and a 35% decline in aggregate deal value from 2021 to 2023). However, 2024 reversed that trend with a year-over-year increase of approximately 10% in deal count and 16% in deal value, helped in part by improving economic conditions such as lower inflation and lower interest rates. 2024 also represented an above average year when compared to recent pre-COVID times (i.e. 2014 through 2019). Now, in 2025 the question at the top of everyone’s mind is, can this positive momentum continue into 2025. The response from most M&A dealmakers is familiar . . . they are “cautiously optimistic” that it can.

 

 

What Forces Will Drive M&A in 2025?

The M&A landscape of 2025 is marked by a series of tailwinds and headwinds. While most see a strengthening environment for M&A dealmaking activities in 2025, there is also growing uncertainty as to whether these tailwinds will continue to improve or take a step back in 2025.

 

The Economy and Growth Expectations: US GDP growth for 2024 was 2.8%, which was roughly the same as 2023, but better than 2022 and all but one year (2.9% in 2018) when compared to recent pre-COVID times. Right now projections for 2025 GDP growth range from 1.5% to 3%. Slow growth scenarios are based on assumptions that US tariffs will push inflation and interest rates higher, extension of the Trump 2017 tax cuts will increase the federal budget deficit, and increased deportations will reduce labor productivity. High growth scenarios are based on significant federal and state government deregulation, increased investment by multinational companies in the US, continued efficiency gains from AI and easing of international hostilities. With GDP growth being one of the best indicators of a strong M&A environment, if the US economy can remain strong it will lay the groundwork for a robust M&A market in 2025.

 

Interest Rates & Inflation: The Federal Reserve cut interest rates three times in 2024 (in September, November, and December) bringing the federal funds rate to a target range of 4.25% to 4.50%. We also saw average inflation rates drop from 4.1% in 2023 to 2.9% in 2024. Further, interest rate futures predict the Fed will lower rates twice this year, reaching 3.75%-4.00% by end-2025. However, we saw that inflation could remain a problem as the Consumer Price Index rose 0.5% in January (higher than expected) and the annual rate ticked up to 3%. Add to that that many economists have argued that certain policies of the Trump administration (such as tariffs and deportations) will lead to further increases in inflation. If both interest rates and inflation can continue their downward trends (or, at a minimum, M&A dealmakers’ expectations remain positive that both interest rates and inflation will continue on their downward trends) they could act as catalysts for M&A dealmaking in 2025, as they did in 2024.  

 

Government Initiatives: The election of Donald Trump as President has generally been seen as a positive for future M&A activity based on the general expectation that many industries will be subject to much less regulation than during the prior administration. Additionally, with Trump promising to extend the tax cuts that were passed in his first term, as well as possibly further reduce the corporate-tax rate again during his second term, these policies would result in corporations having more capital at their disposal, potentially prompting them to engage in more acquisitions with their tax savings. However, those hoping for decreased regulatory burdens were dealt an early blow recently when the FTC Chairman announced that the FTC and DOJ would continue to use the 2023 Antitrust Merger Guidelines developed under the Biden administration. Also, as mentioned above, many question whether President Trump’s policies will actually increase costs for businesses and be a drag on the overall economy.

 

Excess Private Equity Dry Powder and Deal Backlog: Private equity sponsors continue to sit on near-record levels of uninvested capital, some of which may need to be deployed in 2025. With pressure to invest capital and generate returns, PE firms will be compelled to pursue strategic acquisitions, potentially driving up valuations in competitive sectors. This could lead to a surge in middle-market deals, as firms seek opportunities beyond the overvalued mega-deals of previous cycles. Additionally, the need to differentiate will push PE firms towards more complex transactions, like carve-outs and take-privates, and an increase in bolt-on acquisitions for existing portfolio companies, seeking to create value through operational synergies and market expansion.

 

Valuation Gaps: Valuation gaps remain a significant impasse between M&A buyers and sellers across industries. The valuation gap seems to have narrowed in 2024 due to the stabilization of interest rates and the consensus that the Federal Reserve will look to cut rather than hike interest rates in 2025. Still, material gaps in value expectations between buyers and sellers remain commonplace.

 

Aging Owners: Approximately 60% of small business owners in the US are baby boomers (meaning roughly 2.34 million businesses have owners who are nearing retirement). Many baby boomer entrepreneurs reaching retirement age will seek to monetize their businesses, creating a surge in available companies for acquisition. This demographic trend of aging business owners could be a significant driver of middle-market M&A activity in 2025, and will also place added importance on succession planning and exit strategies, as sellers will be increasingly focused on finding buyers who can ensure the continued legacy and success of their businesses.

 

 

2025 Outlook and Predictions

Despite potential uncertainty created by many of the macro-factors discussed above, we believe that the following key themes could drive M&A activity in 2025.

 

M&A in the Technology Sector: In 2025, tech M&A will be fueled by AI, cybersecurity, and cloud consolidation. Expect fierce competition for startups and talent, with regulatory hurdles impacting large deals. Digital transformation demands will keep the sector active.

 

M&A in the Healthcare Industry: Healthcare M&A in 2025 will see continued consolidation, driven by digital health, personalized medicine, and value-based care. Pharma and biotech deals will focus on novel therapies, while hospitals seek efficiency. Regulatory changes will impact valuations, making strategic acquisitions key.

 

M&A in Financial Services: In 2025, financial M&A will center on digital transformation and scale. Fintech acquisitions, regional bank consolidation, and asset management expansion will be the most active areas of M&A. Regulatory pressures on cybersecurity and data privacy, coupled with economic volatility, will further the additional need for deal activity.

M&A in Energy and Infrastructure: Energy and infrastructure M&A in 2025 will be driven by renewable energy growth and infrastructure modernization. Expect deals in solar, wind, and battery storage, alongside grid upgrades. Oil and gas consolidation will persist, with regulatory and geopolitical factors shaping deal flow.

 

M&A in Food and Agriculture: Government policies focused on boosting domestic food production and deregulating to prioritize affordability and productivity, rather than emissions control, will create favorable conditions for the food and agriculture industry. Expect increased activity in areas like plant-based alternatives, precision agriculture, and supply chain technology. Further, consolidation within the traditional agriculture sector will continue, driven by the need to scale and adapt to changing market dynamics.

 

Private Equity M&A Activity: Private equity firms remain active participants in the M&A landscape in 2025. With projected improving financing conditions and record levels of dry powder, private equity firms are set to target investments across multiple sectors and geographies in 2025.

 

Use of Alternative Financing Mechanisms to Bridge Valuation Gaps: Bridge or seller financing and earn-outs have emerged as mechanisms to bridge valuation gaps. They enable parties to share risks and align incentives. Moreover, creative deal structures, such as contingent consideration and equity rollovers, have offered flexibility and address valuation disparities, facilitating deal completion in a challenging M&A environment in 2024. The use of such mechanisms is expected to continue to rise to bridge valuation gaps in 2025.

 

 

Leveraging Legal Expertise to Navigate M&A Transactions in 2025

In the complex and ever-changing landscape of M&A, businesses rely on the expertise and guidance of legal professionals. M&A attorneys navigate regulatory complexities, mitigate risks, and achieve successful outcomes. M&A lawyers play a crucial role in assisting M&A by providing strategic counsel, transactional support, and regulatory insights to navigate challenges and seize opportunities.

 

Structuring and Negotiation: M&A lawyers assist clients in structuring M&A transactions, negotiating deal terms, and drafting transaction documents to protect their interests and achieve favorable outcomes by advising on M&A deal structures, valuation methodologies, and allocation of risks and liabilities.

 

Regulatory Compliance and Antitrust Clearance: M&A attorneys navigate regulatory complexities and obtain antitrust clearance for M&A transactions. They help ensure compliance with competition laws and regulatory requirements. M&A attorneys advise clients on antitrust risks, prepare merger filings, and engage with regulatory authorities to secure regulatory approval for transactions, mitigating regulatory risks and facilitating timely deal closure.

 

Due Diligence and Risk Assessment: M&A lawyers conduct comprehensive due diligence and risk assessments to identify potential legal, regulatory, and compliance risks in M&A transactions. By examining contractual obligations, regulatory compliance, litigation exposure, and intellectual property rights, M&A attorneys help clients assess the legal implications of proposed transactions and develop risk mitigation strategies.

 

As businesses evaluate the complexities of the 2025 M&A landscape, Nyemaster’s M&A attorneys can assist clients in navigate navigating the challenges of the current M&A environment and help businesses capitalize on emerging opportunities, mitigate regulatory risks, and achieve their strategic M&A objectives.