Outlook for the German M&A market in 2025

After years of growth, fears of recession, falling consumer confidence, persistently high interest rates and continuing sanctions against Russia have abruptly slowed the long boom in mergers and acquisitions. In times of great uncertainty, it is not easy for buyers and sellers to agree on company valuations. In addition, corporations have become cautious and are discreetly holding back on risky, large-scale acquisitions. The general mood on corporate floors and in the private equity scene is currently very subdued. At the same time, the supply of attractive targets has deteriorated.

Despite this dismal environment, there are still numerous drivers for M&A activity. The need for critical mass and the growing importance of digital business models and AI applications are forcing many mid-market companies to pursue bold acquisition strategies or sell to a larger or financially stronger partner.

Private equity investors have plenty of dry powder and are therefore under enormous investment pressure to find suitable acquisition candidates for the money they have raised. And the current high share prices of major listed companies are also forcing boards to actively consider acquisitions. In many cases, current valuations can only be justified in the long term if companies grow not only organically but also through acquisitions.

Challenges in the core business are forcing German conglomerates to constantly review their portfolios. Increasing pressure from activist major shareholders is another reason why corporate portfolios are being “turned over” faster and faster. As a result, many companies can no longer afford to postpone portfolio adjustments.

In the coming years, ESG issues will continue to grow in importance, particularly for large corporations, private equity firms and financing banks. Environmental compliance, diversity and good governance will become increasingly important in acquisition and divestment decisions. Decarbonisation and the wider energy transition will drive companies to acquire skills, technologies and other assets. As such, M&A is becoming an important management tool to raise one’s ESG profile.

Given this broad range of motivations, M&A has become part of every CEO’s strategic toolkit. Executives recognise that inorganic growth strategies are often the best way to secure sustainable growth ambitions and achieve transformation goals.

Mergers and acquisitions will take place in almost all industries, with the share of non-cyclical industries continuing to grow at the expense of cyclical industries.

We see above-average M&A activity in the technology sector, particularly in software, digitalisation and medical technology (MedTech), as well as in healthcare and renewable energy. These sectors have already grown strongly in recent years and will continue to be in high demand due to increasing digitalisation and a growing focus on sustainability. In addition, these business models are characterised by their resilience and stability, making them particularly attractive to financial investors. We also expect a particular boom in M&A activity in the retail sector, which is coming under increasing pressure, and in the weakening automotive supply industry. These sectors in particular offer opportunities through distressed M&A, turnarounds or restructuring. On the other hand, we see a weakening trend in energy-intensive industries, in the machinery and plant sector, and in the chemical sector.

We expect the share of cross-border deals to remain high at around 70% in 2023. As in previous years, foreigners will acquire more companies in Germany than vice versa. The most important buyer and target country for German companies is clearly the US, followed by the UK and France. The currently relatively high purchase prices are likely to come under pressure as many companies’ earnings momentum declines. Finally, we expect most transactions to take place in the mid-cap segment, with the exception of large elephant marriages in the double-digit billion range, such as the recent acquisition of listed Covestro AG by the Gulf state-owned Abu Dhabi National Oil Company.

As a result of the deal jam, we expect deal activity for smaller and mid-sized transactions to be around 20% higher than in 2024. Our discussions with large corporates, financial investors, family shareholders and financing banks confirm this outlook. As a result, we expect a total of around 2,000 M&A transactions with German participation in 2025.

There will be opportunities for corporates and private equity to find strong companies at reasonable valuations. However, the market will remain fragile, as it has been for the past two years. Dealmakers will continue to live with higher uncertainty and navigate a mixed macroeconomic environment and business outlook. Buyers will need to be calculated and entrepreneurial if they want to make successful deals. They should be mindful of potential risks while looking for opportunities and preparing to close a deal when the time is right. Experience shows that economic downturns can be attractive times for deal hunting.