Three sectors with the most M&A potential

May 2025  |  SPECIAL REPORT: MERGERS & ACQUISITIONS

Financier Worldwide Magazine

May 2025 Issue

As President Trump’s second term gets underway, business executives have a strong conviction that after a tepid last few years, conditions are in place for M&A activity to pick up pace due to a combination factors, including expected deregulation, down trending financing costs and pent-up demand from financial as well as strategic investors.

For example, a February 2025 KPMG survey of 300 C-suite executives suggests that 85 percent aim to sign more deals looking forward than six months ago, with 80 percent of corporates expecting a positive impact of elections on deal activity, primarily driven by changes in tax policy and the regulatory environment.

President Trump has already indicated that he will reduce regulations by issuing a memorandum directing all federal agencies to place a freeze on new or pending federal rules until further review. He further directed agencies to identify at least 10 existing rules to repeal whenever introducing a new regulation, with energy, financial services and cryptocurrency companies likely to benefit.

With a lighter regulatory burden comes lower compliance risks, and lesser deal uncertainty that can lead to a more permissive environment for M&A. Additionally, the Federal Reserve lowered interest rates twice in 2024 and is expected to potentially cut rates further into 2025 as inflation falls closer to its target range.

The big question is which sectors will benefit the most from the economic factors impacting the markets. While the consensus among industry experts is that President Trump will be good for deal activity, the Federal Reserve’s monetary stance could shift. Investors sent the 10-year treasury yield from 3.6 to near 4.5 percent in the immediate aftermath of the election, possibly betting on future tightening. In the first few months of 2025, tariff actions have raised the potential of increasing trade barriers which can dent business confidence and lead to delayed M&A activity.

Nevertheless, some sectors, driven by an improving macro and regulatory environment, should have an easier time in 2025 than they had in 2024. This article examines the sectors that are likely to see increased M&A activity in 2025.

Technology

Artificial intelligence (AI) investments have been all the rage, with the likes of Microsoft and Meta looking to outcompete in the AI arms race. This year, however, may see the benefits of AI become increasingly apparent for real corporate use cases, as demonstrated by Salesforce’s AI Agentforce.

With more data centre computing capacity being deployed, software companies will not only grow faster but also become more profitable and therefore keen to pursue M&A opportunities. Strong interest in AI start-ups is already being reflected in significant US venture funding, with a 30 percent year on year increase in 2024 – nearly half of all venture capital funding, according to Pitchbook.

Crunchbase notes that funding for AI-related companies reached over $100bn – up more than 80 percent year over year from $55.6bn in 2023. As more of these start-ups gain traction, larger technology companies will look to acquire them to accelerate speed to market and gain talent.

A good recent example is ServiceNow’s acquisition of Moveworks, a reported $100m AI start-up. ServiceNow is racing to deploy AI agents – programmes that have the ability to take simple directions and perform multi-step tasks. ServiceNow’s chief financial officer’s statement to Barron’s mentions that while the company could have built similar technology on its own, the deal will help ServiceNow make progress faster and provide 500 employees with expertise in the technology.

Also, the long-term trends toward cloud hosting and digitalisation are firmly in place, which could drive deals in the cloud space. M&A in cyber security, data analytics and enterprise software is quite likely as well. Particularly in cyber security, the rapidly decreasing cost of AI deployment, as demonstrated by China’s DeepSeek, could also lead to use of AI for cyber attacks.

These ever-escalating risks are prompting cloud infrastructure providers to add to their own capabilities rather than relying on third-party solutions. Alphabet’s acquisition of Wiz for $32bn points to that trend. Pure-play cyber security players such as Palo Alto Networks, Crowdstrike and Zscaler also continue to look for small to medium-sized acquisitions of venture-backed start-ups and will likely drive M&A activity.

Logistics and warehousing

2025 could be the year that things pick up in the logistics sector. 2023 and early 2024 saw a slowdown in freight transport, as volumes normalised from the post-pandemic boom. The sector has been going through what has been called ‘freight recession’ over the last 24 months.

However, freight activity is widely expected to pick up again with the stabilisation of freight rates alongside the removal of freight capacity from the market over the last two years through the bankruptcy of large players such as Yellow Corporation, Kal Freight and many others. Rail shipments are on the rise following their dip in 2023 and oil tanker demand continues to outpace supply.

Moreover, while the long-term supply-chain impact of increased tariffs on imports remains to be seen, in the near-term it will likely increase demand for domestic warehousing and logistics services. Energy sector deregulation, which has been the core focus of the new US administration, will lead to increasing oil & gas production and exports, thus providing additional tailwinds to the sector.

Reduced compliance costs, combined with lower fuel costs should drive operational efficiency and increase profitability. The ramp up in activity at freight and logistics companies should pique the interest of buyers, which may have been discouraged by the subdued market conditions in 2023 and 2024.

The wildcard may continue to be the potential risk of tariffs that will require reconfiguration of supply chains, creating uncertainty for investors. In the wake of tariff uncertainty, supply chain ‘visibility’ start-ups are also seeing heightened demand from their customers and will attract venture and strategic investments.

For example, according to a Wall Street Journal report, Resilinc, a logistics management software company, is developing a tool that will inform its semiconductor and automotive customers how tariffs are affecting their supply chains, and what changes they should make.

Energy

Another sector that could see increased M&A this year is energy. President Trump has pledged to lessen the regulatory burden on energy companies, encouraging them to produce oil and natural gas to make America energy independent. Part of this promotion of energy will likely be less regulatory scrutiny.

Currently, heavy regulations make it difficult to open refineries and pipelines in many parts of the US. With these burdens lessened, companies will feel empowered to pursue M&A in the energy sector.

Within its first few weeks, the Trump administration declared a national energy emergency and directed various departments involved to expedite leasing and completion of all energy infrastructure projects. In addition, Mr Trump announced the ‘Unleashing American Energy Directive’, which is aimed at increasing domestic energy production. Finally, the federal government also intends to focus on developing Alaska’s extraordinary resource potential.

Further loosening of regulations on exports of liquified natural gas (LNG) and other energy resources is expected to boost the sector and encourage major players to use M&A to gain additional scale and market. Energy demand is expected to accelerate, driven by long-term trends including reshoring of manufacturing, increasing data centre investments and LNG exports attracting continued investments.

In February 2025, Diamondback Energy announced its acquisition of private equity (PE)-backed Double Eagle for a combination of stock and $3bn in cash to accelerate development of the southern Midland Basin acreage. Earlier, in January 2025, Constellation Energy agreed to acquire natural gas and geothermal power provider Calpine Corp for a $26.6bn valuation to increase its power generation capacity.

Corporate divestitures

Another broad theme that is expected to run across sectors is the focus on realigning portfolios within large corporates and divesting non-core businesses to earn better valuations in the public markets, both for the parent as well as divested assets. Divesting profitable units of larger companies can unlock considerable value for investors.

Activist investors are increasingly pushing conglomerates to unwind valuable subsidiaries, unlocking value in the process. Presently, PE firms are sitting on record amounts of dry powder and could use their funds to take these corporate subsidiaries private.

According to MergerMarket, there were 14 spinoffs worth $99bn completed in 2024, in addition to $132bn completed in 2023. This trend is expected to continue, with announcements such as Honeywell’s Advanced Materials business separation, Comcast’s spin-off of its cable business and Fortive’s spin-off of its Precision Technologies business.

As a result, there is considerable potential for corporate divestitures and take-private deals in 2025. Already we have seen a few major announcements, such as Thermo Fisher’s $4.1bn acquisition of Solventum’s Filtration business and BP’s intent to sell its Castrol business for an expected $10bn.

Many sectors could see increased M&A in 2025 as a result of the new US administration’s policies and the Federal Reserve’s monetary policy adjustments. In addition to tech, logistics, energy and investment banking are clear winners in a lower-rate, less-regulated environment. How exactly this all shakes out remains to be seen. But one thing is certain: dealmakers are cautiously optimistic as 2025 progresses.

 

Rajesh Sharma is the director of corporate development at Itochu International.

© Financier Worldwide

BY

Rajesh Sharma

Itochu International

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