Although M&A activity in Europe has slightly cooled this year, there are a number of promising deals in the pipeline. However, the unpredictable market conditions, along with the growing regulatory scrutiny of M&A transactions, is complicating the deal-making process.
To ensure that M&A is as frictionless as possible for buyers and sellers alike, companies need to think carefully about the type of escrow solutions which they use, as JTC Group explains.
European M&A – time for a resurrection
A combination of volatile markets and geopolitical tensions have put the brakes on European M&A over the last 12 months, with deal volumes down by 26% in H1 2024. [1] While deal values may have jumped by 9% this year, they are still stuck below their pre-Covid levels, and are certainly nowhere near their 2020-2022 highs. (See chart) [2]
Despite this, there are several reasons to be optimistic about the M&A outlook in Europe.
Firstly, the macro fundamentals underpinning European M&A are strong.
Even though inflation is still higher than what rate-setters would like, the European Central Bank (ECB) has not ruled out cutting interest rates again at its next policy meeting, [3] a move that could spark a revival in the European M&A market, as companies look to take advantage of the lower rates by making more debt-fuelled acquisitions.
This comes as companies appear to be more focused on achieving scalability and diversification though M&A, rather than via organic growth. In particular, M&A transactions involving high growth sectors, i.e. artificial intelligence (AI), technology, life sciences and healthcare, are expected to trend upwards over the next 12 -18 months. [4] Similarly, companies with a strong sustainability tilt will likely be attractive acquisition targets as businesses try to meet the mounting Environment, Social, Governance (ESG) demands from both regulators and shareholders.
European M&A will also be given a helpful boost by private equity.
Right now, the global private equity industry is sitting on $2.68 trillion of dry powder (i.e. uncommitted cash), [5] which it needs to urgently deploy if managers are to deliver returns to investors. This pressure to make good on Limited Partner (LP) distributions will force managers to pursue acquisitions.
At the same time, a number of private equity funds are nearing the end of their lifecycles, and managers want to raise cash for new funds, which again could lead to more asset sales. This flurry of anticipated private equity deals will only have a positive impact on M&A volumes.
M&A – Challenges to watch out for
M&A in Europe may be on the cusp of a long-awaited comeback, but the transaction process is becoming increasingly complex and saddled with risk.
While the headline macro conditions are becoming more favourable for M&A, companies are still facing a lot of difficult headwinds. Ongoing regional conflicts (e.g. Wars in Ukraine and the Middle East), for example, are not only slowing down the global economic recovery, but they are also introducing a greater element of risk when carrying out transactions.
Elsewhere, regulators are taking a more interventionist stance towards M&A.
According to Bain & Co, at least $361 billion in announced deals were challenged by regulators between 2022 and 2023, and of the $255 billion which ultimately closed, nearly all required fixes of some kind. [6] European regulators are certainly flexing their muscles here, having either blocked a number of transactions completely or demanded major changes to the terms and conditions before blessing the deals.
High profile examples here include Adobe’s decision to abandon its takeover of rival Figma after UK and EU regulators voiced their opposition, citing innovation and competition concerns.[7] Meanwhile, the UK’s Competition and Markets Authority (CMA) forced Microsoft to make a number of concessions before signing off on its $75 billion acquisition of gaming company Activision Blizzard back in 2023. [8]
Again, this regulatory pushback is making the M&A process more protracted.
Additionally, a tsunami of ESG rules have been rolled out too, and their impact is being felt in the M&A world. The EU has been particularly active, introducing the Corporate Sustainability Reporting Directive (CSRD), the Carbon Border Adjustment Mechanism (CBAM), and the Corporate Sustainability Due Diligence Directive (CSDDD) , while ESG disclosure provisions are also now live in the UK and US.[9]
All of these regulations are forcing businesses to think more carefully about ESG during M&A.
Escrow as an enabler
With M&A activity projected to recover in Europe and interest rates stabilising after their all-time lows, demand for escrow solutions offered by leading providers, such as JTC Group, is only going to rise.
Escrow agents offer enormous value-add during the whole M&A process.
Amid today’s gyrating and often choppy markets, escrow agents provide a degree of financial security to the companies involved in a transaction by safeguarding their assets. Escrow agents mitigate transaction-related risk by securing payments between all relevant parties, while also simultaneously managing any post-transaction liabilities related to warranties and indemnities.
In transactions where there may be a lack of trust between a buyer and a seller for whatever reason, escrow agents – owing to their neutrality and independence – can facilitate negotiations and help participants avoid misunderstandings, thereby reducing the likelihood of costly litigation.
With deals becoming more expensive and complicated, escrow agents provide invaluable support by assuming the administrative burden of the transaction, post-closing conditions and the contingent liabilities.
In today’s highly fluid regulatory environment, escrow agents with a strong global footprint can also help companies navigate some of the idiosyncrasies involved when operating across multiple jurisdictions, i.e. managing different rules, fragmented ESG requirements, etc.
Alongside its escrow capabilities, JTC Group provides an extensive array of services in parallel, including management and maintenance of Special Purpose Vehicles during acquisitions, remediations and restructurings, enabling companies to obtain a one-stop-shop solution during transactions.
Elsewhere, JTC Group’s Risk and Compliance Advisory Services not only carries out internal and external business risk assessments, but also customer due diligence and know-your customer checks helping clients comply with various European (and global) regulations during M&A.
Leveraging a high calibre, engaged and knowledgeable escrow agent is all but essential nowadays when carrying out M&A, especially when operating in today’s turbulent markets. An escrow agent can ultimately be the difference between getting a deal over the finish line, or not completing altogether.
Find out about our escrow services here.
[1] PwC – June 25, 2024 – Global M&A Industry Trends
[2] PwC – June 25, 2024 – Global M&A Industry Trends
[3] Financial Times – August 22, 2024 – ECB minutes highlight openness to September rate cut
[4] Katten – February 1, 2024 – UK and European M&A: Predictions for 2024
[5] S&P Global – July 12, 2024 – Private equity dry powder growth accelerated in H1 2024
[6] Bain & Co – January 30, 2024 – Regulation and M&A: How scrutiny raises the bar for acquirers
[7] White & Case – June 24, 2024 – High profile deals in European regulators’ firing lines
[8] White & Case – June 24, 2024 – High profile deals in European regulators’ firing lines
[9] Katten – February 1, 2024 – UK and European M&A: Predictions for 2024
