The Interplay of M&A Momentum and Political Risk in European Equities

The European equity landscape in 2025 is defined by a paradox: while macroeconomic headwinds and governance volatility persist, strategic M&A activity has accelerated in sectors like banking and defense. This momentum reflects a calculated response to political risks, with companies leveraging consolidation and technological repositioning to navigate uncertainty.

M&A Momentum: A Response to Geopolitical and Regulatory Shifts

From 2023 to 2025, M&A deal value in the EMEA region surged 10% year-over-year in 2024, reaching $840 billion, driven by a 36% rise in sponsor-backed transactions [1]. This growth, however, is not uniform. Sectors with strong ties to national security and economic stability—such as banking and defense—have outperformed, even as broader markets grapple with elevated interest rates and regulatory overhauls. For instance, European defense M&A saw a 35% annual surge, fueled by the war in Ukraine and initiatives like the €800 billion ReArm Europe Plan [1].

Political risks, including U.S.-linked defense policies under the Trump administration (e.g., the DOGE initiative) and EU sustainability reforms, have reshaped deal dynamics. Companies are prioritizing cross-border acquisitions to hedge against geopolitical instability, with 56% of global chief risk officers expanding political risk assessments in 2025 [2].

Banking: Consolidation as a Strategic Imperative

European banks have emerged as a case study in resilience. Monte dei Paschi di Siena’s proposed $13.9 billion takeover of Mediobanca in 2025 exemplifies the sector’s push for scale and digital transformation [1]. This megadeal, one of the largest in the region, underscores banks’ efforts to strengthen capital ratios and diversify revenue streams amid regulatory pressures.

The sector’s M&A activity is also influenced by policy uncertainty. Research shows that policy uncertainty (PU) has positively impacted acquirer market value in banking, as firms pursue synergy-driven deals to mitigate regulatory ambiguity [4]. For example, SouthState’s acquisition of Independent Bank Group and UMB’s takeover of Heartland Financial in 2025 highlight a trend toward geographic expansion and operational efficiency [1].

Defense: Sovereignty, Technology, and Geopolitical Realignment

The defense sector’s M&A boom is driven by a dual imperative: securing sovereign capabilities and advancing technological edge. Rheinmetall’s $950 million acquisition of Loc Performance Products and its partnership with U.S. firm Anduril to develop drone systems illustrate this trend [1]. Similarly, Safran’s $243 million purchase of AI developer Preligens reflects a strategic pivot toward dual-use technologies [1].

Political risks, however, complicate this landscape. The DOGE initiative’s scrutiny of federal contracts has created short-term volatility, as seen in CACI International’s struggles with shifting contract terms [1]. Yet, long-term optimism persists: defense spending hit $2.4 trillion in 2023, with AI-related deals rising 35% year-over-year in 2025 [3].

Strategic Positioning: Balancing Risk and Opportunity

Companies in resilient sectors are adopting hybrid strategies. European banks are expanding political risk assessments and scenario planning, with 56% of chief risk officers prioritizing this in 2025 [2]. Meanwhile, defense firms are leveraging government-industry alignment, such as the U.S. government’s proposed equity stakes in contractors like Lockheed Martin [2].

Regulatory shifts further shape these strategies. The EU’s sustainability reforms and the Basel III Endgame re-proposal are pushing banks to refine governance frameworks and consolidate to meet capital requirements [4]. In defense, valuation multiples hit 20.7x in H1 2025, reflecting investor confidence in government-backed growth [1].

Conclusion: Navigating the New Normal

The interplay of M&A momentum and political risk in European equities highlights a broader trend: strategic positioning in resilient sectors is no longer optional but essential. As governance volatility persists, companies that align with geopolitical priorities—whether through technological innovation, regulatory agility, or cross-border consolidation—will dominate the next phase of M&A activity. Investors must remain agile, balancing the opportunities of government-industry alignment with the risks of overreliance on politically sensitive markets.

**Source:[1] M&A Annual Report: Is the wave finally arriving? [https://www.mckinsey.com/capabilities/m-and-a/our-insights/top-m-and-a-trends][2] Five ways banking CROs are increasing agility [https://www.ey.com/en_us/insights/banking-capital-markets/ey-iif-global-bank-risk-management-survey][3] Playing Offense and Defense With AI Investments in M&A [https://www.fticonsulting.com/insights/articles/playing-offense-defense-ai-investments-ma][4] The impact of policy uncertainty on shareholder wealth [https://www.sciencedirect.com/science/article/abs/pii/S1572308924001463]