Surge in global M&A anticipated in 2025 but heavy lifting may still be required

The global M&A market did not take off in 2024 as the industry had hoped for. Dealmakers waited for an improvement in conditions in inflation, interest rates and debt financing, and to see the effect of those macroeconomics on target performance over a substantial financial period. As a result, deal activity did not the gain the anticipated momentum.

Deals took longer to sign. Timescales were lengthened without the typical competitive tension of an auction process, combined with more emphasis on the right financing and robust valuations and diligence. Deals also took longer to close. On occasion, transactions were announced before secured financing and often faced significant regulatory clearance periods and a heightened risk of regulatory intervention.

Nevertheless, on balance 2024 was a better year than 2023 for global M&A, driven by the larger deals rather than activity across the board.

'Gaining Altitude', Herbert Smith Freehills' latest global M&A report, explains why there is optimism that activity will continue to build in 2025, but cautions that heavy lifting is likely to continue for some time.

Gavin Davies, Head of Global M&A at Herbert Smith Freehills, says: "There remains significant pent-up demand for M&A. Although private equity and the broader private capital ecosystem have adjusted to longer hold periods, dealmakers are under pressure to return invested capital and deploy new dry power."

"We have seen that strategics continue to show strong appetite to accelerate transformational change through M&A as they face multiple structural transitions in energy, ESG, digital and artificial intelligence. They also need to drive above-trend growth in their businesses to distinguish themselves from their peers."

In the report, lawyers from across Herbert Smith Freehills' global offices examine key legal challenges and issues in the current M&A environment:

• how to articulate the art of (financing) the deal
• the "give and take" with regulatory risks 
• a deeper dive into due diligence considerations
• a return to old terms during tough conditions
• the change in investment routes to match shifting geopolitical winds.

The global landscape has shifted with geopolitics becoming more complex to navigate. Rebecca Maslen-Stannage, M&A partner and Chair of Herbert Smith Freehills, notes that: "Despite geopolitical tensions and uncertainty, businesses continue to show resilience in pursuing deals, adopting innovative deal structures to adapt to the new normal. In some cases, M&A can even provide a solution to some of the challenges they face."

Capricious market conditions and less-structured sale processes have increased the focus on due diligence. Caroline Rae, M&A partner, notes: "We are seeing that the time taken for due diligence exercises has become noticeably longer and that there is a greater focus on ESG considerations. It seems that these more rigorous, holistic due diligence processes and emerging areas of enquiry are here to stay."

The report also looks at the continued elevated pace of shareholder activism; 2024 witnessed the highest global proportion of activity initiated by first-time activists since 2020. Laura Ackroyd, M&A partner, comments, "A challenging M&A environment has encouraged shareholders to turn their attention towards strategy and operations-related demands. Nevertheless, M&A continues to be a prominent part of the global activist toolbox with shareholders playing an increasingly pivotal role in influencing and shaping deals."

Looking ahead to 2025, Gavin Davies comments: "Although it is tough to make predictions, what we are certain of is that agility, creativity and resilience will be valued qualities in deal teams and advisers for the dynamic and eventful conditions we expect for 2025."

Gaining Altitude is available here.