If the latest predictions by Wall Street analysts hold true, the deal market should keep midsize firms’ transactional practices busy as 2025 progresses.
According to several reports issued during the last few weeks by top investment banks and other key financial industry players, merger and acquisition activity is expected to show strong growth this year—driven by lower interest rates, decreased regulatory activity, and a glut of undeployed investment capital, among other factors.
“The rebound in mergers and acquisitions that did not fully materialize in 2024 appears to be on track for 2025,” Morgan Stanley said in a Jan. 14 report. Similarly, Goldman Sachs, in a recent review of deal activity, said “the M&A market is steadily gaining strength as sponsor activity rebounds, regulatory and monetary dynamics normalize, and corporates continue demonstrating their intention to simplify portfolios.”
Optimism and Uncertainty
The new administration in Washington is likely to favor more “relaxed antitrust and merger guidelines, facilitating deals,” Morgan Stanley said. The bank noted that “financial sponsors may consider finally selling the companies or stakes in companies that they acquired in previous years, returning money to investors from funds nearing the end of their lives in order to raise new funds.”
While optimistic, analysts see reasons for caution, as well. J.P. Morgan notes that geopolitical events “threaten market stability and investor confidence.” Uncertainty remains about corporate growth outside the major technology companies. And potential tax cuts and tariffs in the United States “could alter investment dynamics” for corporations, J.P. Morgan said.
Valuation is also an issue. The Fortune 1000 has near record levels of cash on hand, but much of it is held by the largest companies. This could limit deal volume in certain sectors. On the other hand, higher interest rates have prompted some companies to sit on cash. With rates declining, those companies may decide to return to the M&A market, the banks said.
Where Activity May Be Strongest
Among the industry sectors where dealmaking may be the strongest are technology, media and telecommunications – largely because of the continuing growth of artificial intelligence. Infrastructure, financial services and consumer and retail may also see more transactions.
Midsize law firms with private equity clients may also see an uptick in work. Private equity firms are sitting on more than $2.9 trillion in dry powder. With interest rates falling and if inflation continues to wane, PE firms will be more likely to be in an investing mood. “Efforts to achieve organic value creation within portfolio companies should help to bolster valuations and returns,” KPMG recently noted. “The M&A tide is turning towards strategic expansions and leveraged buyouts, with private equity activity surging on the back of low premiums on risky debt.”
According to a January review by Boston Consulting Group (BCG), private equity deal activity increased 11 percent in 2024. “Still, financial sponsors remain under pressure to invest their large reserves of dry powder,” BCG said. “Early- and later-stage funding for startups showed signs of recovery, particularly in the final quarter of the year. However, activity levels remain well below the highs of 2021, even as enthusiasm for AI-focused startups continues.”
Activism and Overall Growth
Shareholder activism may see a boost as well. As Morgan Stanley noted, activism rose in 2024, spurred on by “top-tier activists targeting large- and mega-cap companies, as activists continued to aggressively pursue board representation.”
With a stronger outlook for M&A, buyers may be in the market for new investments and activist investors may “push for changes at undervalued companies, notably through corporate separations,” Morgan Stanley said. “Post-pandemic, there’s been a significant gap between companies with strong and poor operating performance. Companies at the lower end of the curve will be targets.”
In the end, EY said that in its “optimistic macroeconomic scenario, where GDP growth and corporate profits are stronger, inflation cooler and interest rates lower,” the total number of M&A deals would increase 11 percent in 2025. In a more pessimistic scenario, with weaker economic indicators, deal volume would grow 5 percent. In either case, midsize firms should prepare for a more active year for their transactional lawyers.
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