UK M&A outlook 2025

Heading into the new year, uncertainty continues to define the UK M&A market. While there is significant optimism that dealmaking activity will continue to recover from the lows seen in 2022 and 2023 during the next 12 months, buyers and sellers of all sizes continue to face significant challenges and hurdles to completing deals.

While factors such as continuing cross-border activity, ongoing distressed M&A, strategic dealmaking and increasing private equity activity are broadly predicted to drive dealmaking this year, economic and political headwinds are still viewed as major obstacles.

Underlying economic improvements, some measure of political stability, the need for businesses to adjust rapidly to their changing industries and the vast sums of unused capital held by private equity firms mean that appetite for M&A activity is perhaps stronger than it has been since the post-pandemic boom of 2021.

However, the UK’s economic recovery was shallower than expected last year and, especially in the latter months of the year, economic and political uncertainty have again become more prominent.

As a result, dealmakers head into 2025 optimistic, yet uncertain. In this piece we analyse some of the key tailwinds and challenges that could come to define M&A in 2025, as well as some of the sectors that could play a prominent role in activity over the next year.

2024 – A tentative recovery
Firstly, however, it is important to analyse how M&A shaped up last year. While 2024 began with optimism of a strong economic recovery and an expectation that a new Labour government would deliver political stability, dealmakers were still wary of prevailing challenges – especially economic headwinds.

These concerns have been largely justified, with the UK seeing a tentative recovery. Inflation and interest rates have both fallen from historic levels, but remained high. The Bank of England cut interest rates from 5 per cent to 4.75 per cent in November – the second interest rate cut of the year – but were held in December, with the BoE warning that further cuts would be gradual.

The BoE also warned that inflation may rise further during 2025 in the wake of the Autumn Budget – which saw increases in employers’ National Insurance contributions and the National Living Wage. While still on a downward trajectory, slower rate decreases are indicative of the sluggishness of the 2024 recovery.

In M&A, 2024 was a year in which stability continued to return to the UK’s dealmaking market – as opposed to full blown dealmaking revival à la 2021. During 2024, transactions involving UK companies hit around £261 billion, according to figures from the London Stock Exchange Group (LSEG), up by a third compared to approximately £196.5 billion in 2023.

M&A involving a UK target totalled around £147 billion, up 51 per cent on the value recorded in 2023. This was driven by a doubling in domestic M&A and a 21 per cent increase in inbound deals. As a result, the UK was the third-most targeted country globally for M&A last year and the top country within Europe.

According to the data, M&A activity in the UK was bolstered by deals targeting financial services businesses such as banks, with LSEG saying that the financial industry was “the most targeted sector in the UK”.

Consolidation among British lenders was a particularly prominent trend in the sector, exemplified by Nationwide Building Society’s £2.9 billion acquisition of Virgin Money UK in a £2.9 billion deal, while there were a string of major deals across the wider financial services sector, including Aviva’s £3.7 billion acquisition of rival firm Direct Line.

The annual figure remains some distance off the roughly £527 billion in deal value recorded during the post-pandemic boom in 2021, but represents a significant improvement compared to 2023’s value, which was heavily reduced amid the fallout from the war in Ukraine and widespread economic turmoil.

One of the big issues heading into 2024 was whether private equity activity would recover and there are signs of greater activity. In a CMS poll, 51 per cent of European private equity buyers said they had been involved in between 3 and 4 deals last year and 32 per cent said they had been involved in 5 to 6 deals.

Improved PE sentiment was reflected in a recent Deutsche Numis poll of 200 senior UK-based private equity professionals, which found that 81 per cent viewed the UK as “more attractive” or “significantly more attractive” in comparison to other geographic areas.

At the other end of the spectrum, 2024 was another year in which much UK activity was driven by financial distress – with insolvencies rising to their highest levels since the financial crisis and more businesses at risk of insolvency due to their financial woes.

Finally, arguably the most important event of the year was the general election, which delivered a sizable Labour majority. Despite initial optimism and a reinvigorated sense of stability, concerns have begun to emerge following the budget and due to the sluggishness of the economic recovery. The election of Donald Trump, meanwhile, has heightened concerns over the transatlantic relationship.

As a result, heading into 2025, there are significant worries regarding how the political landscape will affect UK M&A and the economy at large.

Outlook on 2025
Despite such challenges, however, most buyers are looking ahead to 2025 with a determination to carry out M&A activity, potentially reflecting how reduced dealmaking in recent years has led to pent-up appetite.

In CMS’s 2025 report, 65 per cent of respondents said that they expect European M&A to increase this year, with 20 per cent saying that they expect a “significant” increase in activity. This is a stark contrast from the previous year’s survey, in which just 35 per cent forecast an increase and only 3 per cent a significant increase.

Key to these hopes is the issue of whether private equity activity will finally deliver the long awaited resurgence – something that would deliver major value and volume to M&A activity across the UK and Europe.

The early indications of private equity sentiment are highly positive. As well as highlighting the attractiveness of UK assets to private equity, the Deutsche Numis survey also revealed an eagerness to deploy capital ambitiously during 2025, with 84 per cent of respondents planning to execute between 5 and 10 deals.

However, uncertainty is still noticeable. Despite 65 per cent of CMS respondents expecting an increase in European M&A, close to a quarter (24 per cent) say that they think activity will slow down during 2025.

Given recent developments such as the fallout from the budget, the election of a more protectionist US government and the prospect of gradual interest rate decreases, such pessimism may have grown over the past few months.

There is also significant uncertainty among private equity firms. During 2024, PE exits were up nearly 50 per cent, but distributions to investors have remained weak. A challenging exit environment has meant that many private equity firms have relied on sales, rather than lucrative public listings.

Many have struggled to generate return capital for investors and, partly as a result, the value of global PE/venture capital fundraising fell in 2024, with institutional investors said to be more wary of investing in firms without a proven track record of returns.

However, uncertainty of European PE firms does not necessarily preclude a concerted increase in UK private equity activity, with UK assets viewed highly favourably in comparison to other regions, such as Europe.

Overall, dealmaking appetite seems to be strong. But naturally, what actually occurs this year will depend hugely on the various tailwinds and headwinds that either assist or hinder dealmakers.

As recent years have dramatically shown, these can be impossible to accurately predict. However, there are some longer-term trends developing that seem like a safe bet to play a significant role in how dealmaking shapes up during 2025.

Key tailwinds for 2025

The resurgence of private equity
Slow private equity activity has arguably been the key factor in the sluggish levels of dealmaking seen over recent years. Faced by challenges such as soaring interest rates, many private equity buyers chose to significantly reduce their activity over much of the past few years. Since a post-pandemic surge that spanned 2021 and the first quarter of 2022, there was a decline in PE activity that lasted until midway through 2024.

Despite a considerable pick-up in activity since then, private equity firms still head into 2025 with huge sums of unspent capital waiting to deploy that they are under growing pressure from investors to deploy in order to generate higher returns.

Furthermore, UK assets are of particular interest to private equity firms operating in Europe – with widespread opportunities for consolidation in fragmented industries, world-leading businesses across a number of key sectors and attractive valuations among the key factors tempting PE investors to do business in the UK.

Should a full-blown resurgence in private equity dealmaking occur during 2025, then it is likely that a considerable amount of this will be focused on the UK and will represent arguably the greatest tailwind for UK M&A over the coming year.

Cross-border M&A
Over recent years, the UK has established itself as one of the world’s leading hubs for cross-border M&A activity. World-leading industries, familiar regulations and, crucially, low company valuations, have meant that inbound M&A activity has been key to sustaining UK dealmaking over recent difficult years. As we examine in this month’s other insight, the UK remains one of the most attractive destinations in the world for inbound M&A activity – with the trend set to continue this year.

World-leading businesses
In spite of the colossal challenges UK companies have faced over the past few years, the UK remains a world-leader in a huge number of important, rapidly growing sectors.

CMS reported that the technology, media and telecoms (TMT) sector was the one that dealmakers would be targeting the most in 2025 – with respondents also noting that the UK and Ireland had the strongest TMT sector in Europe.

The same is true across a number of other vital sectors, from healthcare, financial services, consumer goods and renewable tech and energy, to medical technology, pharmaceuticals and manufacturing.

Going into 2025, the UK’s status as a world-leader across so many critical industries means that, despite significant economic and political headwinds, the country will continue to attract investment from both domestic and international buyers.

Sector spotlight - TMT
The technology, media and telecoms (TMT) sector is widely tipped to be among the most active for M&A activity across Europe this year. In CMS’s survey, for instance, 50 per cent named it as one of their top two sectors for the coming year.

The rapid acceleration in the development and adoption of tech such as AI is driving significant M&A activity and investment, with buyers keen to enhance their digital transformation and operational efficiency through acquisition.

In the UK telecoms sector, the nearing completion of Project Gigabit could drive further consolidation, with scarcer operational builds and contracts meaning that smaller operators may struggle to secure work and investment, making them targets for bigger players seeking to bolster their coverage figures.

Meanwhile, the media subsector could see growing dealmaking as SMEs target growth. A recent survey from Asset Finance Connect found that 92 per cent of small businesses in the UK media sector were planning to invest in growth initiatives in 2025 – the highest of any sector. Should private equity investors take an interest in high-growth-potential businesses in the sector, M&A could become a key part of these plans.

Economic and political stability boosts sentiment
While economic uncertainty has become more prominent over recent months and discontent with the new Labour government has begun to emerge, it is generally agreed that some measure of economic and political stability returned to the UK last year.

The general election and the gradual downward trend in interest rates mean that, while far from fully recovered, the UK is in a far more stable position than it has been over recent years.

This should help to improve dealmaking sentiment further during 2025, providing a more stable environment, while helping with the availability and cost required for dealmakers to conduct transactions.

With UK deal value having increased during H1 2024 and optimism among UK dealmakers at its highest levels since 2021, according to a recent CIL Management Consultants study, this improving M&A sentiment should provide a major boost to activity this year.

Sector spotlight - Energy
ESG considerations are now a key factor in M&A and, in 2025, the UK energy market is expected to play a significant role in sustainable dealmaking. The drive to net zero by 2050 is seeing increased investment in renewable energy, making clean energy firms prime acquisition targets. The recent change in government has further boosted investor confidence, with expectations of policy interventions that support decarbonisation.

Market consolidation is accelerating as companies seek scale to execute large energy projects, particularly in offshore wind and green hydrogen. Investment in energy infrastructure is also rising, with Scottish Power’s parent company Iberdrola committing £24 billion over the next five years to upgrade the UK’s green energy network.

Technological advancements, particularly the integration of AI in energy systems, are creating investment opportunities. While AI adoption in the UK energy sector has been slower compared to global trends, companies are now prioritising investments in digital transformation.

With increased investor confidence, government support and improved infrastructure, the UK energy market should become a hotspot for M&A this year, with the transition towards cleaner energy driving deal-making, strategic partnerships and investment.

Distressed activity
Finally, it is important to note that not all M&A tailwinds are positive and distressed dealmaking is set to continue playing a major role in UK activity. Insolvencies remained high throughout 2024 and the number of businesses on the brink of bankruptcy has also been increasing, with close to 633,000 businesses in significant distress, according to Begbies Traynor.

In addition, increases to employers’ NICs and the national living wage could push even more businesses into distress over the coming year, while there is also the risk that rising household bills could further affect consumer sentiment, impacting yet more companies.

However, improved M&A sentiment could provide some element of a silver lining to struggling owners, potentially improving their chances of securing a rescue deal.

Ultimately, many UK owners will also hope that 2025 is the year when improvements in the economy begin to be felt by businesses and that the alarming trend of increasing financial distress may finally end.

Major headwinds

Valuation gaps
The most prominent headwind facing dealmakers this year is valuation gaps. 34 per cent of CMS respondents selected it as among the top two major obstacles to dealmaking in Europe in 2025.

Despite greater M&A appetite, it is clear that there remains a significant divergence between buyers and sellers. Buyers may point to their pre-downturn performance as evidence that their business is a high value proposition, while sellers remain cautious amid inflationary pressures and economic uncertainty.

Valuation gaps could be further exacerbated by the incoming increase in business asset disposal relief, which could lead to sellers increasing their valuations further in order to offset the higher tax rate.

In order to bridge these gaps and ensure that valuation disputes don’t derail transactions, buyers and sellers may need to either compromise or adopt more creative deal structures in order to satisfy both parties – with this in mind, 2025 may again be a year in which earnouts play a key role in dealmaking.

Spotlight: The UK’s tightening regulatory environment
Significant reforms to UK competition law and digital regulation took effect on 1 January 2025, following the enactment of the Digital Markets, Competition and Consumers Act 2024 (DMCC).

The Competition and Markets Authority (CMA) can now review mergers where at least one party holds a 33 per cent share of supply in the UK and has a UK turnover of at least £350 million, provided the target has a UK nexus. This allows the CMA to scrutinise transactions without horizontal overlaps, including vertical or conglomerate mergers.

The expansion will also see the existing turnover threshold for merger reviews rise from £70 million to £100 million (mergers where both parties have UK turnovers below £10 million will be exempt from review).

New CMA powers include the authority to request information and documents from entities outside the UK if they are involved in a merger or competition investigation with a UK connection.

The CMA's Digital Markets Unit (DMU) will oversee a new regime targeting large digital firms designated with "strategic market status" (SMS). Such firms will be subject to conduct requirements aimed at promoting competition and preventing anti-competitive behavior in digital markets.

The new legislation could have significant impacts on UK M&A. Fundamentally, the new jurisdictional threshold enables the CMA to review a wider array of transactions, including those lacking direct competition overlaps, potentially leading to greater scrutiny, particularly in sectors where companies hold significant market shares.

Digital companies, especially those qualifying for SMS designation, will need to carefully assess the implications of the DMU's regulatory framework on their M&A strategies and the need to ensure compliance may influence deal structures and valuations.

The enhanced enforcement powers and penalties also underscore the importance of thorough due diligence and adherence to information requests during transactions. In order to avoid potentially costly sanctions, firms must ensure robust compliance measures are implemented.

The reforms signify a more proactive regulatory environment in the UK, emphasising the need for companies engaged in M&A to meticulously evaluate competition implications and ensure compliance.

Uncertainty not a thing of the past
Just when it looked as if the UK was beginning to turn a corner, the Autumn Budget reignited concerns over the state of the UK economy. Inflation remained stubbornly high during 2024, meaning that interest rates fell slower than many had hoped last year.

Economic uncertainty means that, while rates are still expected to go down, the trend of slower rate cuts could continue even beyond 2025. The Bank of England had initially hoped that inflation would fall to its 2 per cent target by 2026, but is now forecasting that this will happen in 2027.

Bank of England governor Andrew Bailey has stated that rates would “fall gradually” but could not be cut "too quickly or by too much”, reasoning that “there are a lot of risks out there in the world at large and also domestically”
From an M&A perspective, lingering uncertainty could serve to temper dealmaking sentiment and appetite for UK assets, while potentially impacting the cost and availability of M&A financing.

It could also lead to private equity investors returning to the market more cautiously than hoped – depriving owners of a valuable exit option or source of funding.

Due diligence lengthening deal times
A report conducted by Bayes Business School for SS&C Intralinks last year found that M&A due diligence is taking significantly longer than it was a decade ago. The survey found that, on average, due diligence took 64 per cent longer over the past decade compared to results from a similar study in 2013. Over that timeframe, average due diligence times had increased from 124 days to 203 days.

While COVID-19 and social distancing measures will have had an impact, dealmakers polled also cited a range of factors that had made due diligence a more time-consuming process. These included more stringent regulations, the soaring importance of ESG, growing digitisation and geopolitical concerns.

This year, ESG is likely to be more important than ever in M&A deals, both as a source of risk and opportunity, while geopolitical tensions continue to make their impact felt, cybersecurity issues become a bigger consideration and the regulatory environment tightens. Due diligence, therefore, could be even more cumbersome during 2025.

Final thoughts - No time to be overly cautious
In the face of persistent uncertainties, dealmakers could potentially be forgiven for again entering a new year with a sense of caution. However, with so many industries undergoing rapid transformation and organic growth still a distant prospect for many companies, M&A offers the perfect opportunity to secure growth and keep up with the rapid pace of change.

Simply put, the stakes are too high for businesses that could stand to benefit from a well-thought out M&A growth strategy to avoid targeting acquisitions due to ongoing headwinds.

While economic uncertainty remains a factor, the underlying conditions for dealmaking are stronger than at any point since 2021. Combining a well-thought out strategy with a bold approach to M&A, there is no reason that UK companies cannot use acquisitions to drive serious, sustainable growth and, simultaneously, build a more resilient business in the face of persistent challenges.

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