Executive Summary
- The M&A outlook is more positive this year but still somewhat uncertain: While lower capital costs and easing regulatory scrutiny could drive deal activity, concerns over inflation, tariffs, and global economic uncertainty continue to weigh on the market.
- Tariffs remain a key risk: The Trump administration’s trade policies, including new and escalating tariffs, could increase costs, disrupt supply chains, and impact dealmaking. The long-term effects remain unclear as policies continue to evolve.
- The regulatory environment is shifting but still present: Despite a move away from the Biden-era enforcement strategy, traditional M&A scrutiny, particularly in tech and foreign investment, is expected to persist.
- Middle market M&A is poised for growth: Sponsors deploying capital and corporate divestitures are expected to drive more activity in the mid-cap space, though macroeconomic uncertainty may disproportionately impact valuations and deal volume.
- Global growth concerns: The world economy faces a weaker growth outlook in 2025, particularly in Europe and China, while the US remains more resilient in the short term.
Last year, deal volume and sizes increased globally, though the recovery was more modest than many had anticipated. This year, the lower cost of capital, easing regulatory scrutiny, and increased deal flow from financial sponsors selling companies are all expected to drive more transactions.
Still however, uncertainty in the US and potential risks from Trump’s economic policies, including the inflationary pressures of tariffs, combined with a weaker global outlook, remain major concerns.
Less than a month into Trump’s second term, enthusiasm among some chief executives and dealmakers cooled, according to The Wall Street Journal, which reported in early February that initial optimism surrounding his economic policies had given way to a more cautious and uncertain outlook, largely due to his tariff policies.
Fewer than 900 M&A deals were announced in the US in January, according to data from LSEG. That marks a decline from more than 1,200 transactions in January of the previous year and over 1,500 two years ago.
Shortly after the WSJ report, JPMorgan Chase’s Chief Operating Officer Jennifer Piepszak said the bank's investment banking fees had grown by a mid-teens percentage in the first quarter, attributing the increase to improving economic sentiment among clients.
“We think we should see a real resurgence” in initial public offerings, Piepszak said. Though she noted that mergers and acquisitions could take longer to accelerate.
“What we hear from clients is optimism, but a bit of a wait-and-see approach around committing to significant investments,” she said.
Lower interest rates and inflation may not translate into low interest rates and inflation.
Speaking to Congress at the start of February 2025, Fed Chair Powell said the economy was in a strong position but emphasized the need for further progress on inflation.
“We’re in a pretty good place with this economy. We want to make more progress on inflation. And we think our policy rate is in a good place, and we don’t see any reason to be in a hurry to reduce it further,” Powell told members of the Senate Banking Committee.
Looking at 2025 through the lens of interest rates and capital costs, M&A activity may improve relative to last year, but if inflation persists, the pace could fall short of expectations with higher for longer rates.
At the same time, while corporate tax cuts would have a positive impact on dealmaking, the administration’s proposed cuts of $4.5 trillion could add more inflationary pressure to the economy.
Meanwhile, it’s hard to estimate the effects of tariffs on inflation and corporate strategy because we don’t yet know how many and what kinds of new tariffs the administration will impose or how long those tariffs will remain in place. While some, like the 25% tariffs on Mexico and Canada seem to have been short-lived and were temporarily paused, others like the 25% tariffs on steel and aluminum as well as those on Chinese goods may last longer.
Consumer sentiment declined by nearly 5 points across all political affiliations in early February, while expectations of higher inflation surged amid tariff concerns, according to the University of Michigan’s Consumer Sentiment Index.
“It is too soon for any possible fallout from President Trump's trade policy to show up in official economic indicators. But the sentiment data is the strongest warning yet that consumers have jitters,” said Axios’ Courtenay Brown.
Through their direct impact on both business operations and their indirect impact on the costs of capital with inflationary pressures, tariffs – a core tenant of the Trump administration’s economic policies – will likely remain one of, if not, the key policy issue for executives and advisors in 2025.
Lower levels of M&A scrutiny may not translate into low levels of M&A scrutiny.
Although Trump’s return to office signals a shift from Biden-era regulatory policies, a complete rollback is unlikely according to a February report from the Washington-based law firm Wilmer Hale.
That’s because Trump’s first administration saw significant antitrust enforcement, including challenges to the AT&T-Time Warner and Visa-Plaid deals. As the second Trump administration begins, many questions still remain about the future of antitrust enforcement. While a shift away from the Biden administration’s aggressive approach is expected, traditional scrutiny of horizontal and vertical mergers is likely to continue, the report argued.
While large technology companies may remain under greater scrutiny, many businesses in other industries can anticipate a return to negotiated remedies and early termination for reportable mergers.
Under the Biden administration in 2024, foreign investment oversight expanded significantly. The White House tightened enforcement of foreign investment rules under the Committee on Foreign Investment in the US and introduced new regulations on US investments in Chinese quantum, microelectronics, and artificial intelligence companies. The Trump administration is unlikely to roll back these measures and may instead increase scrutiny of inbound and outbound investment, particularly concerning China.
It is still worth noting, however, that many advisors expect cross-border M&A to remain strong, driven by significant global valuation gaps and a more resilient US growth outlook compared to Europe.
Mid-cap M&A is set to surge as sponsors deploy capital.
According to a report from JPMorgan, sponsor activity is expected to be a major driver of mid-cap M&A in 2025 as firms look to deploy significant amounts of accumulated dry powder. The focus is shifting toward strategic value creation rather than traditional buy-and-sell models.
A push for corporate clarity is expected to benefit mid-cap buyers, particularly as larger companies divest assets. This will create acquisition opportunities for both sponsors and strategic buyers, offering significant growth potential.
However, the report noted, macroeconomic factors in the US, including tax considerations, may ease pressure on founder-owned companies to sell, potentially affecting the supply of available assets.
At the same time, the economic and political uncertainty coming from Washington and around the world could disproportionately affect middle market businesses.
Global growth outlook dims for 2025, while the US shows signs of resilience.
At the start of 2024, confidence was high that inflation was under control and major economies would avoid recession. Those expectations largely held true. The US saw strong growth, but other advanced economies lagged behind. By year’s end, inflation proved more persistent than expected, and currency depreciation in many economies, particularly in emerging markets, raised concerns about potential disruptions.
Looking ahead, even while most economies are expected to stay in positive territory, the global economy faces an uncertain outlook, with a majority of chief economists expecting weaker growth in 2025, according to the World Economic Forum. While the US appears poised for a short-term boost – 44% of economists predict strong growth in 2025, up from 15% in August 2024 – the outlook remains less optimistic for Europe and China.
