6 key M&A predictions for 2025 — net zero, international investment and tax changes explained

After a prolonged period of volatility, the Bank of England’s decisions throughout 2024 have provided greater clarity for both businesses and investors. This has helped to reduce uncertainty in the M&A market — enabling firms to make more informed decisions about financing and investment.

Our corporate and Deal Advisory teams have both had an extremely busy year on the M&A front, as we’ve been recognised by Experian’s MarketIQ league table as the UK’s 11th most active team for merger and acquisition activity with a total of 38 transactions completing during H1.

The change in Government and Autumn Budget announcements have provided a sense of stability and direction — and although some changes may not have been well received by business owners, the political shift has been instrumental in fostering a more conductive environment for M&A activity, with a raft of transactions rushing to completion before the budget was announced.

Sellers have faced a difficult few years — grappling with the impacts of the COVID-19 pandemic, Brexit ramifications, inflation and changing interest rates. As we moved through 2024, many sellers started to recalibrate their expectations, recognising the need to adapt to market conditions.

Some economists are predicting that stability will now drive activity in the market. Here, Nicola Lomas and Grace Hiles explore some of the key trends we’ve seen in 2024 and look ahead to predict what 2025 may look like in the world of M&A.

Private equity driving M&A in health, tech and financial services

Private equity (PE) has played a crucial role in shaping the M&A environment, with PE firms seeking to capitalise on emerging opportunities and navigate the challenges posed by economic fluctuations. This strategic focus has led to PE firms targeting sectors that demonstrate resilience through turbulent times — leading to heightened interest in healthcare, technology and renewable energy.

The technology sector retained strong interest in 2024, with companies actively seeking acquisitions to enhance their digital capabilities, particularly in areas like AI, cybersecurity and fintech. There has also been extensive investment from companies and management teams in generative AI.

The healthcare surge is driven by a focus on biotech and pharmaceutical companies that offer promising R&D pipelines. This trend is propelled by an aging population and heightened emphasis on health post-pandemic, with developing areas like digital health and telemedicine gaining further traction.

Another sector that has seen a record volume of activity is financial services. Driven by both consolidators and PE, UK financial services recorded the largest half-year increase in the number of M&A transactions in the last decade, with total deal values reaching £6.9bn in the first half of 2024. 

Defence and retail sectors struggle to keep pace

This trend hasn’t been seen across all sectors. In aerospace and defence, M&A activity was slow through the first half of 2024 due to interest rates, supply chain and production issues and competition for talent. However, given the continuing war in Ukraine and conflict in the Middle East, defence spending is expected to increase, which could drive deal-making. 

The retail sector has faced a significant decline in M&A activity, exacerbated by the challenges with high operational costs and shift towards online shopping. A similar story is seen throughout the leisure and hospitality sector, with uncertainty in travel throughout the pandemic leading to decreased interest from PE firms. 

Yet with inflation back below target and real wages expected to increase over the next year, it’s anticipated that these sectors will recover and we’ll see increased demand. Some economists are hopeful that with debt markets lending again and interest rates stabilising, the stage is set for a boost in M&A activity into 2025.

Valuations and due diligence posed significant challenges

One of the most significant challenges faced in 2024 was the divergence in price expectations between buyers and sellers. While valuation gaps can be common following market corrections or economic shocks, this sticking point appears to be taking longer to navigate than it has in the past. 

After significant market disruptions, adjustments in pricing typically occur as both parties recalibrate their expectations. Factors contributing to this complexity included lingering economic uncertainty. Despite these challenges, company valuations have remained relatively high — something that’s especially notable considering the increase to financing costs driven by interest rate and inflation concerns.

As the UK economy started to recover throughout 2024, there were more instances of competitive bidding for attractive targets, which resulted in higher multiples in technology and healthcare where PE firms see significant potential for growth. This has driven up competition, making it more challenging for strategic buyers to secure favourable deals. The gap in price expectations between buyers and sellers highlights the need for effective negotiation strategies and thorough market analysis to bridge the divide and facilitate successful transactions.

Many transactions are staying in the due diligence phase for longer, marking a stark contrast from previous years. For example, in 2021 — dubbed ‘the year of M&A’ — the race was on to complete due diligence as swiftly as possible. However, in recent years there has been a shift toward longer preparation times, with the average due diligence processing time rising from 124 to 203 days. There’s now a need for buyers and investors to understand the underlying performance of businesses and confirm that results are genuine and maintainable without displaying any COVID-19, Brexit or supply chain impacts — whether positive or negative.

However, slower due diligence is more likely to report a successful outcome. By allowing more time for in-depth assessments, due diligence becomes less of a box-ticking exercise and enables those involved to have a better understanding of the individual nuances of the transaction itself. If the due diligence process is completed as intended, it should simply confirm what has already been disclosed by a selling company. This can ensure that the deal proceeds smoothly, with buyers securing the data and insight they need while at the same time avoiding unnecessary complexity and delays.

Increased investment from private equity

During recent years, we’ve seen private equity houses and venture capital funds turn to consolidate their existing portfolios and ‘keep their powder dry’ on any new investments. Yet recently we’ve seen investment activity increase substantially, with PE houses becoming active in supporting strong management teams in sectors such as technology, media and telecommunications, energy, healthcare and pharma due to pressures to deploy capital and realise value. 

Private equity is now so active that it has become a dominant source of deals — demonstrating its substantial liquidity, pivotal to the UK’s economic recovery.

There are many benefits that come with selling to or accepting investment into your business from a private equity house, including the ability to obtain finance from multiple sources (i.e., equity and debt), the opportunity for the business owner to realise some equity value by taking funds out (thereby de-risking) and the ability to incentivise a new tier of management to create options for growth, coupled with succession and final exit.

The key for a business owner is to find the right PE firm to accept investment from. Money and pricing shouldn’t be the only factors considered — management teams need to look at cultural alignment and who they could work with going forward. This approach is what helps businesses to flourish under PE investment, benefiting all involved in future growth.

Cross-border transactions and international buyers

Cross-border transactions continue to be particularly buoyant, with British companies being the most active acquirers in Europe, accounting for 29% of all deals. However, overall figures are somewhat lower than in previous years, with the provisional value of inward mergers and acquisitions of UK companies by foreign companies falling to £5bn — £1bn less than in Q2 2023.

Following the initial turbulence of Brexit, international buyers have started viewing the UK market as an attractive opportunity, with companies adapting to the new regulations and international firms seeing potential in acquiring UK businesses that offer unique market access. Stabilising interest rates and inflation show signs of control, improving international investor confidence in the UK economy and creating a more appealing destination for foreign investment, as companies seek to capitalise on growth opportunities in a recovering market. 

Figures indicate that the volume of cross-border M&A deals involving UK targets has risen by around 15% when compared to previous years, which may be partially driven by favourable exchange rates. This shows a robust appetite from international investors, with US firms leading the way in terms of deal value. 

The General Election was a significant milestone and its early date worked to the UK’s advantage by removing uncertainty from the equation at a time when other countries are facing political challenges. The new Government’s plans depend on strong economic growth — in other words, a business-friendly environment. This makes the UK a more attractive place to invest and as such we may see a rise in cross-border transactions as we move into 2025.

Sustainability and net zero

As we approach 2025, it’s evident that sustainability and the transition to net zero have become central themes in the M&A market. Companies across various sectors are increasingly focused on ESG criteria, driven by a combination of regulatory pressures, changing consumer expectations and the recognition that sustainable practices can lead to long term financial performance.

In 2024, the volume of deals in the renewable energy sector increased by approximately 20%, reflecting heightened interest from both PE and corporate buyers and indicating a broader shift towards integrating sustainability into core business strategies. 

Investors seem to be prioritising companies that demonstrate strong ESG credentials — prompting firms to enhance sustainability initiatives to attract investment and remain competitive. Companies showcasing their commitment to sustainability are often rewarded with higher valuations and increased interest from buyers.

The Government has committed to achieving net zero by 2050 — creating a regulatory environment that encourages businesses to adopt sustainable practices. 

For larger companies and PLCs, the introduction of further legislative requirements and legal obligations on directors to justify their decisions will no doubt be a key driver in this corporate activity. We’re seeing corporates and shareholders focus more on long-term environmental and social economic sustainability and there’s no doubt that many executive teams are under pressure to deliver short-term successes and value to shareholders and other investors which makes sustainable corporate governance a challenge.

The ongoing global emphasis on sustainability is likely to drive international buyers to seek UK firms that align with their ESG goals — particularly those in the renewable energy and technology sectors.

Six key predictions for 2025 — what’s in store for M&A?

Market sentiment suggests that strategic motivations and market conditions will continue to drive the M&A market even in the face of recent and upcoming tax changes. If so, we’re likely to see activity accelerate into 2025, with the right deals at the right price moving quickly to beat tax rises. 

Savvy investors will want to thoroughly evaluate a business at the financial due diligence stage to ensure that changes to taxes like employer NI continue to show a viable deal — while sellers will want to take advantages of lower CGT allowances while they’re still available.

Here are six key predictions for UK M&A activity in 2025.

1. Profitability challenges to impact business valuations

The Autumn Budget announced initiatives for growth and activated plans to balance the books across a variety personal and business taxes. Yet some businesses have found that this introduced challenges to their bottom line, which could affect valuations.

2. International activity set to continue

If the UK economy continues on its path to recovery — with controlled inflation and stable interest rates — international buyers are likely to maintain their interest in UK investments. Also, as the regulatory landscape becomes clearer post-Brexit, international firms may find it easier to navigate the UK market, encouraging cross-border transactions. 

3. Interest rates to increase M&A appetite

Interest rates may have a bearing on the appetite for investment and the affordability of transactions leveraged by variable rate bank funding. With base rates having dropped twice now (and widely predicted to be on a downward trajectory), it’s likely that this will increase the appetite for investment. 

4. Net zero target to drive investment and acquisitions

As the UK continues to implement regulations aimed at achieving net zero targets, companies are expected to seek M&As to bolster their compliance efforts and enhance sustainability profits. As consumers become more environmentally conscious, businesses that prioritise sustainability in their products and operations are expected to attract more investment and acquisition interest from the market through 2025. 

5. CGT changes to have minimal impact

Looking ahead to April 2025, anticipated changes to CGT (Capital Gains Tax) are expected to have limited effect on the M&A market. Although there were initial concerns regarding a potential alignment of CGT to income tax rates, this didn’t materialise in the budget, with the landscape remaining relatively stable. 

6. BADR to spark a rush of activity before April

The planned 4% increase in BADR (business asset disposal relief) is predicted to lead to a rush of activity in the run up to April 2025, as many eligible SME shareholders will prioritise disposal completions before the change comes into effect. Following this, we’re likely to see a slight uptick in price expectations among sellers, though we believe that this is unlikely to significantly hinder deal activity. 

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As one of the North’s most active deal advisers across all sizes of transaction, our corporate team understands the nuances and complexities of deals. We can help you to build and implement your strategy, grow your business, achieve your objectives, negotiate terms and fulfil your legal and financial obligations.

Our Deal Advisory team of specialist accountants uses expertise, experience, tenacity and instinct to tactically guide businesses and management teams through a range of complex, multi-million-pound corporate transactions, including management buy-outs and buy-ins (MBOs and MBIs), acquisitions, disposals and working capital fundraising.

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