Spotting Undervalued Targets in Europe's Shifting M&A Landscape

The first half of 2025 brought a mixed picture to Europe's M&A market: deal volumes and values dipped, yet select sectors thrived amid strategic shifts and valuation discounts. For investors, the decline in multiples and sector-specific dynamics present a puzzle—but also an opportunity. The question is clear: Which undervalued firms are ripe for acquisition, and what sectors hold the most promise?

The Market Context: A Slump with Silver Linings

European M&A activity in H1 2025 saw deal volumes drop 6% year-on-year, with values falling 7%, driven by fewer megadeals—especially in the UK. Yet beneath the headline numbers, a nuanced story emerges. While total deals shrank, Q1 transaction values rose 3.6% compared to the same period in 2024, thanks to a handful of large transactions like the $13.7 billion merger of Italy's Banca Monte dei Paschi and Mediobanca.

The decline in median valuation multiples—from 14.3x in late 2024 to 10.8x by mid-2025—

—has created fertile ground for buyers seeking bargains. This contraction, driven by economic uncertainty and high financing costs, has left some firms undervalued relative to their strategic potential.

Sectors to Watch: Defense, AI, and Climate Resilience Lead the Charge

Not all industries are suffering. Sectors like aerospace and defense, chemicals, and asset management are thriving, buoyed by geopolitical tensions, green energy transitions, and rising demand for wealth management services. For example:

1. Defense & Aerospace: With European defense budgets rising, companies like Airbus (AIR.PA) and Thales (HO.PA) are in play. These firms are critical to national security and offer stable cash flows, making them attractive to both strategic buyers and private equity firms seeking long-term growth.

2. Utilities & Clean Energy: The $26.6 billion acquisition of Calpine by Constellation Energy underscores the appeal of climate-resilient assets. Firms with expertise in renewable energy infrastructure or grid modernization, such as Engie (ENGI.PA) or Ørsted (ORSTED.CO), could be prime targets as governments push decarbonization.

3. Asset Management: The rise of robo-advisors and passive investing has fueled demand for scale in wealth management. Amundi (AML.PA), Europe's largest asset manager, could be a consolidator here, while smaller players with niche expertise may attract buyout firms.

The Undervalued: Pharma and Retail—Bargains with Caveats

The flip side of this sector divergence lies in industries like pharmaceuticals, retail, and automotive, where deal volumes and values have plummeted. While these sectors face headwinds—regulatory uncertainty, drug pricing caps, and shifting consumer habits—some firms may be undervalued enough to warrant a closer look.

Take pharmaceuticals: Companies like Sanofi (SAN.PA) or Novartis (NOVN.SW) could offer value if regulatory clouds lift. However, investors must weigh the risks of prolonged headwinds against the potential for a turnaround. Similarly, retailers like Next (NXT.L) or Metro (MEG.DE) may trade at discounts due to e-commerce disruption, but their real estate assets or logistics networks could attract buyers in a sector consolidation.

Investment Strategy: Focus on Themes, Not Just Numbers

To capitalize on this environment, investors should prioritize firms aligned with megatrends: AI-driven efficiency, climate resilience, and security. Look for companies in undervalued sectors that have:
- Strong balance sheets: Avoid debt-heavy firms; favor those with liquidity to weather uncertainty.
- Strategic assets: Intellectual property, licenses, or infrastructure critical to long-term growth.
- Buyer interest: Monitor private equity's backlog of portfolio companies—strategic buyers may snap up these assets in 2025 or 2026.

Risks Remain: Debt and Geopolitics

The OECD's warning that government debt could hit $59 trillion in 2025—85% of global GDP—adds to the uncertainty. High financing costs and trade tariffs could further deter megadeals. Investors must balance optimism about undervalued targets with caution about macroeconomic headwinds.

Conclusion: Patience and Precision Pay Off

Europe's M&A market is a mosaic of decline and opportunity. For investors, the key is to avoid chasing broad market trends and instead focus on sectors and firms where strategic value outweighs current market pessimism. Defense, utilities, and asset management are clear winners, while pharmaceuticals and retail offer risky but potentially rewarding bets. As buyers navigate this landscape, the mantra should be: Buy the dip, but only in the right sectors—and at the right price.