European M&A in 2025: Navigating a strategic pause

European mergers and acquisitions entered 2025 with cautious optimism. After a modest rebound in 2024, dealmakers hoped that improving financing conditions, steady sector performance, and a gradual resumption of deferred transactions would spark a broader momentum.

That optimism, however, was short-lived. By the end of the first quarter, deal volumes across Europe had dropped more than 25% compared with the previous two quarters, and aggregate deal values mirrored this decline [S&P Global]. In April, the US announced new tariffs on European imports, pushing global deal signings to their lowest monthly level in two decades - worse even than the declines seen during the pandemic or the financial crisis of 2008 [Reuters]. Europe felt the impact immediately, with cross-border sentiment weakening and deals being put on hold.

“What began as a tentative recovery shifted to a broader pause, as macroeconomic and geopolitical factors regained prominence.”

“The announcement of new U.S. tariffs froze cross-border dealmaking, forcing European investors into a wait-and-see stance.”

On April 2, the US unveiled tariffs of up to 20% on a wide range of European goods. While the tariffs’ implementation was delayed for 90 days, the announcement alone rattled confidence and sent shockwaves through ongoing and prospective cross-Atlantic deals [Conf].

Investors have paused new launches and revisited pipeline assumptions. The broader U.S. stance toward China and other regions has added to the uncertainty. Beyond these immediate disruptions, the outcome of negotiations could reshape competitive dynamics, affecting industries unevenly and changing how deals are structured across Europe [Conf].

Europe also faces deeper structural challenges. Fragmented capital markets [ECB], regulatory hurdles in digital sectors [Project Liberty], and strict competition rules [BusinessEurope] continue to weigh on consolidation. Reforms in these areas could bolster investor confidence and support a more sustained recovery.

Even so, analysts anticipate a rebound once trade negotiations bring clarity. How quickly it unfolds - and which sectors benefit most - will depend on the level of certainty investors can rely on. Long-term reforms, such as completing the Capital Markets Union, simplifying digital regulations, and advancing cross-border fiscal coordination, will be critical to securing Europe’s role in global M&A.

“Despite central bank cuts, long-term financing remains relatively expensive - limiting execution capacity for large, debt-driven transactions.”

Even as central banks loosened monetary policy, long-term financing - the lifeblood of large deals—remains costly. Inflation expectations and high sovereign debt keep rates elevated, limiting the capacity for debt-driven transactions [ECB].

Companies and private equity sponsors are also approaching refinancing cycles for debt issued during the ultra-low-rate years of 2020–2021. The resulting repricing pressures are constraining acquisitions and prompting caution from lenders [Goldman Sachs][S&P Global].

There are early signs of improvement. Moderating inflation and fiscal deficits could ease long-term rates in the coming quarters [European Commission] [ECB]. In the meantime, dealmakers are adapting, using tools such as earn-outs, hybrid capital structures, deferred payments, and minority stakes to bridge valuation gaps [Moody’s][Bain & Company]. These mechanisms allow deals to move forward, even in a tight financing environment.

“Private equity sits on record capital, but a lack of pricing visibility and regulatory clarity is keeping deployment highly selective.”

Private equity entered 2025 with record reserves of “dry powder,” yet deployment has been highly selective. Uncertainty over valuations, regulations, and debt markets is keeping investors cautious [Ashurst].

• Sellers often cling to pre-2023 pricing

• Buyers assume more conservative valuations

• IPO activity is muted, and secondaries face LP scrutiny

The shift has led private equity to focus on bolt-ons, sector consolidation, and public-to-private deals in mature markets [S&P Global]. The capital is ready; the market simply needs clarity for confident deployment.

“While headline volumes are down, disciplined investors are quietly repositioning - targeting resilient sectors and preparing for a shift in momentum.”

Even in a subdued market, activity continues quietly below the surface. Investors are revisiting theses, pressure-testing assumptions, and seeking resilient assets with predictable cash flows [Conf].

Key areas attracting interest:

• Infrastructure: Backed by public investment and energy transition projects, with revenue often linked to inflation.

• Healthcare: Demographics and digital adoption, including AI solutions, support continued activity.

• Technology: Targets with proprietary data and applied AI capabilities are in focus [Vestbee].

• ESG: Sustainability has become a prerequisite, not a bonus, influencing valuation and due diligence [Dealsuite].

• Financial services: Mid-cap divestments in banking, insurance, and asset management could provide supply for second-half deals [Ashurst].

Europe’s strong legal and institutional frameworks, combined with stable macroeconomic conditions, may enhance its appeal as a safe harbor for global capital. A second-half rebound could occur faster than current sentiment suggests, provided financing conditions improve and geopolitical risks ease [ECB].

“Those who act during the pause - refining theses, preparing due diligence, and planning execution - will lead when activity resumes.”

The current slowdown is not structural. Capital is available, consolidation logic persists, and investor interest remains. What has shifted is timing - and those who prepare now will have an advantage.

For buyers:

• Refine sector strategies

• Prioritize pipeline targets

• Conduct early-stage due diligence on resilience, working capital, and inflation pass-through

For sellers:

• Launch vendor financial due diligence

• Prepare operational carve-outs

• Define standalone cost structures and TSA frameworks across finance, IT, HR, and legal

Flexible deal structures - earn-outs, deferred payments, hybrid capital, minority stakes - combined with AI-enabled tools for screening and risk modeling, can help bridge valuation gaps and accelerate execution. In a volatile market, preparation today can provide a decisive edge tomorrow.

European M&A in 2025 is in a strategic pause. Geopolitical uncertainty, financing challenges, and structural factors have slowed activity. Yet this pause is not idle - it is an opportunity. Investors and sellers who use this time to sharpen strategies, prepare processes, and identify resilient opportunities will emerge ready to lead when market momentum returns.

Our team is ready to help you navigate uncertainty, refine your strategy, and position your business to move decisively when the market shifts. Connect with us to gain timely insights and a clear perspective on what’s next.

This article was written in collaboration with Alberto Chocano – Deal Advisory Director and Raul Alvarez – Deal Advisory Assistant Manager, at KPMG Luxembourg.