Berlin: We are seeing a very strong July for M&A activity

Key Concepts:

• M&A Activity
• Regulatory and Governance Environment
• Bid-Ask Gap
• Interest Rates/Cost of Capital
• Technology (specifically AI)
• Sector-Specific M&A (Oil & Gas, Life Sciences, Media & Entertainment)
• Economic Backdrop (Inflation, GDP)

M&A Activity in 2025

• Initial Slow Start, Strong July: The year began slowly for M&A, but July showed significant strength, creating optimism for a robust second half. From January to June, M&A activity was fluctuating with no clear direction.
• Increased Deal Preparation: EY is seeing elevated activity in clients preparing deals and strategies for their boards, indicating a large pipeline and backlog.

Regulatory and Governance Impact

• Deregulation as a Tailwind: Optimism exists that deregulation may fuel consolidation. The Trump administration potentially influenced this, possibly facilitating transactions that might have faced more hurdles under a different regulatory approach.
• Example of Railroad Deal: The railroad deal's approval suggests a more favorable regulatory environment compared to what might have occurred under a Lina Khan administration, with fewer compromises required.

Closing the Bid-Ask Gap

• Significance of Bid-Ask Spread: A shrinking bid-ask gap is a crucial driver. Previously around two points, it has decreased to about half a point, improving deal affordability and aligning buyer and seller expectations.
• Impact on Deal Affordability: The reduction in the bid-ask gap makes deals more affordable and attractive, contributing to increased M&A activity.

Interest Rates and Cost of Capital

• Importance of Lower Rates: Lower interest rates and the lower cost of capital are essential for sustaining M&A momentum. While current rates haven't stopped deals entirely, there's a desire for further rate reductions.
• Anticipated Rate Cuts: Optimism is fueled by the expectation of two more interest rate cuts this year.

Sector-Specific Outlook

• Technology (AI Focus): Technology, particularly AI, remains a dominant sector. There is a race to acquire sophisticated AI technology for business modernization. Acquisitions are the fastest route to obtaining advanced AI capabilities. Tech is less affected by potential tariffs, allowing for more deal-making flexibility.
• Oil & Gas: Following a strong performance last year, the oil and gas sector continues to show strength in M&A activity.
• Life Sciences: Life sciences companies have substantial cash reserves and need to bolster their R&D pipelines, driving M&A activity.
• Media & Entertainment: There has been a surprising surge in M&A deals within the media and entertainment sector this year.

Economic Assumptions

• Inflation: EY's base case assumes inflation will remain flat or decrease.
• GDP: EY is looking for GDP to continue increasing.

Synthesis/Conclusion

M&A activity in 2025 started slowly but is expected to gain momentum, driven by factors like a more favorable regulatory environment, closing bid-ask gaps, and anticipated interest rate cuts. Technology, especially AI, remains the leading sector for M&A, with significant activity also expected in oil & gas, life sciences, and media & entertainment. The economic outlook assumes stable or declining inflation and continued GDP growth, providing a supportive backdrop for deal-making.