CMS launched last week its 10th edition of annual European M&A Outlook — published each year in association with Mergermarket and offering a comprehensive assessment of dealmaking sentiment across Europe’s M&A market, the report is based on interviews with hundreds of corporates and private equity firms based in Europe, the Americas and Asia-Pacific about their expectations for the European M&A market in the year ahead. Headline news download and a short video with highlights of the study can be found here.

After an unusually buoyant 2021, the European M&A market has normalized thus far in 2022. Activity levels are trending down, though they remain above pre-pandemic levels. A year ago, economic growth was booming, spurred by rebounding consumer demand and the return to business activity made possible by an easing of the COVID-19 pandemic.

However, inflation proved to be more deeply entrenched than the European Central Bank (ECB), the Bank of England, and other policymakers had initially anticipated. Moving into 2022 this raised the prospect of a hawkish turn in monetary policy to rein in prices. Then Russia invaded Ukraine, fueling already elevated energy price pressures. Succumbing to inflation and the drag it is creating on demand, growth is expected to halve this year, and the eurozone’s GDP forecast to expand by 2.6% in 2022 from 5.2% in 2021.

The deal market has held up impressively well in this environment so far and respondents are bullish on their own activity over the coming 12 months. Overstretched valuations in segments of the stock market last year came back down in the first half of the year and while the cost of financing is now increasing as credit conditions tighten, buyers are well positioned to capitalize on deals they have high conviction on.

Some key findings of the report include the following:

M&A expectations run high: 73% of deal makers expect the level of European M&A activity to increase over the next 12 months, compared to just 53% last year. Almost all respondents (88%) are currently considering M&A.

Undervalued targets and distressed sales to drive activity: The biggest buy-side driver of M&A is expected to be the availability of undervalued deal targets. On the sell-side, distressed situations are expected to be the biggest driver, cited by 26% of respondents.

Valuation gaps: seller/buyer valuation gaps are seen as the biggest obstacles to M&A.

Cost of financing to increase: As many as 87% of all respondents expect financing to be tighter compared with 2021 – this includes 45% who expect it to be much more difficult.

ESG rises up the M&A agenda: Some 90% of respondents expect ESG scrutiny in their dealmaking to increase over the next three years, compared to 72% in 2021’s survey.

TMT reigns supreme: Technology, Media and Telecommunications (TMT) is the sector predicted to see the greatest growth in dealmaking.

Read the full report here.