The global M&A Outlook for 2025 looks promising: A snapshot of the economic future based on 2024

August 28, 2024
The global M&A Outlook for 2025 looks promising:  A snapshot of the economic future based on 2024

As 2024 hurtles toward the finish line, the markets are looking strong to finish and primed for a healthy 2025. With key divestitures and transformative transactions, the global outlook for the 2024 financial year has been moderately positive, with 2025 geared up to be a growth year. 

Industry experts have analyzed market performance across various sectors to put together an overview of the economy in 2025. Here’s what the data tell us:  

Industrials and Services Sector: A Broad Overview

According to experts, the industrials and services sector (I&S) is indicative of the overall view of the global economy and is steady in the short term. Promising signs of growth are expected in 2025. Long-term prosperity lies in the promise of federal investment in infrastructure and onshoring initiatives from corporations.

Another solid indication of growth in the I&S sector is the signs of industry consolidation. A number of small to medium companies have been deeply impacted by the macro and microeconomic conditions; from slow domestic markets to increased geopolitical tension. 

To remedy this, companies will be “scrutinizing their asset base” with a view to selling non-productive parts of the business. This consolidation strategy will allow businesses to free up capital to invest in areas that offer a better return on investment. 

When looking at deal volumes and values in I&S, there was a decrease by 21% and 19%, respectively, between the first half of 2023 and the first half of 2024. The global trend could be attributed to challenges in the macroeconomic and geopolitical environment, despite varying performance across the region. 

Key M&A themes for industrials and services in the second half of 2024

Given the continuing war in Ukraine and conflict in the Middle East, defense spending is expected to increase, driving dealmaking focused on innovation, the transition to agile platforms as well as replenishing dwindling stockpiles. Although cross-border activity is expected to remain muted due to geopolitical factors, countries prioritizing the establishment of secure strategic supply chains may look to make investments in other regions to shore up or even expand production. However, increases in government defense spending will need to be balanced with concerns about increased debt.

The commercial aerospace sector is expected to continue growing in the second half of 2024, which we expect to drive increased M&A activity. We also expect continued activity in the aircraft aftermarket segment, driven by the aging military and commercial fleets. This will result in greater demand for aftermarket services and capabilities. Aerospace companies have a robust order backlog and are seeing strong demand for their products. We expect companies will look to ramp up production later in 2024 and into 2025.

Both the aerospace and defense subsectors are likely to benefit from increased government and commercial spending thanks to increased post-pandemic travel and heightened geopolitical tensions, which will drive M&A activity. With debt markets lending again and interest rates stabilizing, the stage is set for a boost in M&A activity in the second half of 2024 and into 2025.

Automotive

Global automotive M&A volume and value were hampered in the first half of 2024 by high interest rates, political uncertainty and lower consumer demand, especially in the electric vehicle (EV) sector. Despite the challenging conditions, many dealmakers maintained discipline in capital distribution and are now actively seeking talent acquisitions and refocusing on their global footprint. 

Overall, automotive deal volumes are expected to remain stable over the next six to 12 months as the sector adapts to an electric future and companies maintain their existing ICE portfolios in markets with slower EV adoption rates. This includes continuing to invest in EVs and connected automated shared electric (CASE) assets, taking steps to strengthen the distressed supplier base, and expanding into global markets through M&A. Companies striving to implement sustainability and carbon emissions initiatives may also pursue acquisitions to comply with regulations and meet consumer demands.

Business Services

Deal activity in the first half of 2024 was predominantly led by private equity-backed investments and portfolio companies, as well as ongoing activity in professional, legal, and marketing services. Accounting, tax and advisory services, and IT services remain popular areas for investment and roll up consolidation, particularly in the US and Europe.

Although business services deal volume has been more subdued in the first half of 2024, we expect M&A activity to pick up in the near to medium term. This stronger level of activity will be driven by consolidation (by strategic players looking for scale and through roll-up platforms), influenced in part by the impact of digitalization and changing workforce dynamics.

Engineering and construction

We remain optimistic about engineering and construction (E&C) deal activity in the second half of 2024 and into 2025. Decreases in interest rates may spur investment, particularly in the residential construction space, which is already showing signs of recovery. As inflationary pressures begin to ease and with interest rates expected to decline, we believe the second half of the year may provide an opportunity for players within the equity and capital (E&C) sector to capitalize on lower valuations and create value through acquisitions.

The commercial construction industry continues to face a more difficult situation with stagnant projects, squeezed profit margins, impending refinancing deadlines and the potential risk of debt defaults. The trend of workers preferring remote or hybrid work results in decreased demand for office space. Newer office buildings are more successful at attracting tenants than older ones that require renovations. These uncertainties underscore the significance of making informed decisions when allocating capital for E&C companies.

E&C firms are adopting AI and digital technologies to enhance productivity, improve customer experience, and streamline operations. Firms leveraging AI for operational improvements, both incremental and transformative, are expected to lead the sector—and companies are looking for digital skills through acquisitions. AI is being used to enhance project management, optimize resource allocation, improve safety standards to increase competitive advantages and further support capital allocation.

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Industrial manufacturing

We expect deal activity in the industrial manufacturing sector to ramp up in the near to medium term, driven by increased investor optimism surrounding the sector and more stability in the macroeconomic environment. Hesitant investors may remain on the sidelines until after the outcome of the various elections in the second half of the year, especially given ongoing uncertainty around inflation, interest rates, and regulations. The introduction of the Pillar Two tax framework—the levying of a global minimum effective tax rate of 15%—is top of mind for investors as they explore acquisitions abroad. In addition to Pillar Two, R&D tax credits and other government-sponsored incentive programs are important factors in M&A decision-making.

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The rapid pace of technological change continues to propel M&A activity as companies seek to acquire new technologies to enhance their product offerings, improve internal operations, and enter new markets. Developments in AI, machine learning, predictive robotics, and smart factories continue to drive manufacturing efficiencies in the industrial manufacturing sector.

Despite subdued deal volume in late 2023 and early 2024 compared to the record highs of 2021, improved executive confidence, coupled with profitability growth, supports an uptick in deal activity. Expectations of easing monetary policies and a clearer picture of policy direction after the elections later this year will likely fuel an increase in deal activity in late 2024 and into 2025.

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M&A outlook for industrials and services in the second half of 2024

Business transformation and profitable growth are top of mind for companies as they seek to remain competitive in the market. This is expected to be achieved through strategic M&A focused on digital innovation (including AI) and consolidations, as well as through divestitures of non-core assets. Sustainability and emission-reduction initiatives may also drive acquisitions to comply with regulations and meet consumer demands. Speed and preparation will be key to success; we expect deal activity to surge once there is greater clarity around the macroeconomic environment and election outcomes are known in the second half of 2024.

Concluding thoughts 

2025 is set to be a promising year with predicted growth across several sectors. Despite global challenges in the form of geopolitical unrest and an economic downturn, the market looks like it’ll rebound. Several industries have opted to consolidate, selling poorly performing parts of the business. This strategy allows them to free up capital for reinvestment which ultimately makes room for merger and acquisition activity. Experts agree that 2025 will see the market rally, with an increase in deal volume.

 

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