Insight nuggets

How lower interest rates and political clarity are reviving M&A activity, is there an emerging acquisition wave?

Declining interest rates are a critical catalyst for M&A, as they reduce the cost of acquisition financing. In addition, robust equity markets in 2024 have strengthened the financial positions of both buyers and sellers, encouraging more transactions. By narrowing the valuation gap between buyers and sellers, these conditions are setting the stage for increased deal activity.

Sector-specific growth: technology and oil and gas are standout sectors poised to lead M&A growth, reflecting industry-specific tailwinds.

Key drivers for an M&A recovery are gaining momentum. Political uncertainty tied to historic global elections in 2024 is beginning to dissipate. Emerging clarity, particularly in the United States, is expected to boost buyer confidence and, in turn, catalyze greater dealmaking activity.

Two sectors where this is especially true are technology and oil and gas. Worries that antitrust concerns would block deals arose when President Joe Biden’s administration had made limiting corporation control a priority. The theory was tested by a string of successful large transactions. Cross-border deals remain vulnerable to potential obstacles driven by rising protectionism, as in the recent case of Japan’s Nippon Steel's proposal to acquire U.S. Steel, blocked by Trump.

The most significant factor driving M&A recovery is the easing of monetary policy. After a record-breaking surge in deal activity in 2021, M&A volumes declined sharply in 2022 as central banks raised interest rates to combat inflation. However, with the onset of a rate-cutting cycle in 2024, expected to continue into 2025, the environment for dealmaking is improving. Although current rates remain elevated compared to pre-hiking levels, lower borrowing costs will facilitate a return to historical transaction norms. In addition, robust equity markets in 2024 have strengthened the financial positions of both buyers and sellers, encouraging more transactions. By narrowing the valuation gap between buyers and sellers, these conditions are setting the stage for increased deal activity.

Price reductions across markets: retailers, luxury brands, and wine producers adjust to evolving consumer expectations

General prices of goods have risen steadily in recent years, driven by a combination of factors such as escalating input costs, particularly energy prices, and supply chain disruptions. Quarterly inflation hit a record-high 10% in the Eurozone in 2022. While raising the prices of products and services has often been a straightforward response, price reductions are historically less frequent and harder to implement. However, recent trends suggest a shift.

"The decision to raise prices, merely because it was convenient, was a mistake." Andrea Guerra, CEO of Prada, suggest to focus on product rather than price.

In recent months, price reductions have emerged as a strategic focus across diverse market segments, from essential goods to luxury items and premium wine. Retail giants Target and Walmart have both taken steps to remain competitive by lowering prices. In May, Target announced reductions on 5,000 items. Similarly, Walmart reported to analysts that it had cut prices on a broad array of grocery products. In the furniture market, IKEA has invested over €2bn to reduce the prices of its popular offerings. “For a couple of years, we moved in a direction that was not aligned with our core values. Last year, we achieved an average price reduction of 10%” explained IKEA’s CEO.

Price reductions are not confined to mass-market goods. The luxury sector is also revising its pricing strategies to adapt to shifting consumer expectations. Mid-tier luxury brands like Burberry and Saint Laurent are taking similar measures. Burberry has introduced price cuts ranging from 5% to 22% on all new handbag designs. Saint Laurent has also reduced prices for its Loulou handbags in the U.S. by 10% in January. Even premium wine producers are responding to pricing pressures. Bordeaux's 2023 vintage saw prices decline by an average of 22% compared to the 2022 vintage. Some producers have implemented even steeper cuts, slashing prices by 41%.

These adjustments highlight a broader trend: industries at all levels are reevaluating pricing strategies to align with evolving market dynamics and consumer expectations.

Innovation imperative: How businesses can learn from consumer behavior and R&D strategies to redefining market leadership

"Google had this seemingly insurmountable position in search, but the advent of AI has fundamentally shifted the landscape," notes Melissa Schilling. "AI is to search what e-commerce was to Walmart." Her observation serves as a reminder that even the most dominant players are vulnerable to disruption through innovation and new product launches.

Many companies fall short in allocating sufficient resources to adjacent and transformational innovation. It is time to realign R&D spending

David Yoffie, a professor at Harvard Business School, observed: "We know from behavioral economics that people tend to get into certain routines, and in the absence of a spectacularly better product, people tend to stick with that." While this insight highlights consumer inertia, it should not encourage complacency. According to the Financial Times, major industries—including automotive, telecommunications, and consumer goods—predict that a third of their sales, totaling $30tn over the next five years, will stem from new products.

This underscores the critical importance of fostering an entrepreneurial culture within R&D functions, even in large organizations. Teams with this mindset are more likely to generate transformational, rather than incremental, innovations. Such groundbreaking developments are precisely what can disrupt consumer routines and drive changes in purchasing behavior.

A 2012 Harvard Business Review paper found that companies allocating 70% of their innovation efforts to core initiatives, 20% to adjacent ones, and 10% to transformational projects consistently outperformed their competitors. Setting clear targets is also essential to the R&D process, whether the goals focus on reducing material costs, cutting engineering expenses, accelerating time-to-market, or achieving a combination of all. These objectives provide a foundation for establishing key performance indicators (KPIs) to evaluate the effectiveness of innovation strategies. This structured approach to innovation helps businesses stay ahead in competitive markets.

Major European cities are driving enterprise growth, with the digital sector leading as a key driver for future development

Europe is actively seeking corporate growth leaders as concerns grow over the continent’s slow economic recovery. The IT, construction, and logistics sectors have been the primary drivers of revenue CAGR in EU over the past decade, accounting for one-third of the region's growth champions.

Europe faces economic challenges, with growing GDP gaps and lagging business growth, while companies in developed EU show remarkable resilience.

Competitiveness has become a central focus among Europe's political leaders. French President Macron recently warned that the EU has only two to three years to close the gap, cautioning that "the EU could die". The economic outlook is equally troubling. IMF highlighted the growing disparity between EU and US GDP, noting that, at the turn of the millennium, GDP per worker adjusted for purchasing power was comparable across the US, Germany, France, Italy, and Spain. However, today it is roughly 20% lower in the European nations. The IMF also emphasized that Europe is falling behind in terms of new businesses. Its share of firms aged five years or less is roughly half that of the US.

The Financial Times has released a ranking of Europe’s Long-Term Growth Champions, highlighting 300 companies that have maintained strong sales growth despite economic challenges. These companies, with the highest CAGR over the past decade, span a period marked by the financial crisis and the Ukraine invasion. The median revenue of these companies increased from €2m in 2013 to €29m in 2023, demonstrating remarkable growth even in challenging times. The best represented sector was IT, with 14.7% of ranked companies, followed by Construction & Engineering (7.3%), and Logistics & Transportation (6.7%). Despite representing just 19% and 11% of Europe's GDP, Germany and Italy are home to 30% and 22% of its fastest-growing companies, proving that they outperform expectations despite often receiving less favorable coverage.

See the full FT 300 ranking

Euronext pressured to bridge the gap with U.S. capital markets, calling for greater integration and streamlined bureaucracy

While Europe's equity markets are reaching record levels, they are grappling with underlying challenges. Trading activity is dwindling, IPOs are becoming rarer, and several of the region's largest companies are opting for the U.S. market instead. A recent example is Swedish fintech company Klarna, which announced on November 13th that it began filing for a U.S. stock exchange listing.

Europe’s fragmented markets hinder investment and fundraising, contrasting with the U.S.'s unified system. Euronext's unified prospectus offers hope

European policymakers are taking action to revive their struggling markets by offering incentives aimed at boosting investment in domestic companies and encouraging local listings. However, these efforts face significant political, financial, and cultural challenges that have proven difficult to overcome over the years. Meanwhile, the U.S. market continues to expand rapidly.

Europe’s market structure is far more fragmented than that of the U.S., which benefits from a simpler system with fewer listing venues and a single clearinghouse for trade finalization. In contrast, many European countries operate their own exchanges, often viewed as a point of national pride, which divides liquidity across multiple markets. This fragmentation makes it more challenging to attract investment. Although European stock markets have seen record highs this year, fundraising remains relatively weak.

New listings and secondary share sales in the EU have consistently lagged behind those in the U.S. While the number of IPOs in Europe is gradually catching up to its transatlantic counterpart, the total value disparity remains significant, ranging from a 1x difference in 2023 to a 6x gap in 2020. Euronext is responding by introducing a unified prospectus for companies across its seven exchanges, aiming to improve investor access and stimulate Europe’s fundraising market.

Luxury market €20bn slowdown: U.S. and experiential segments drive hope for recovery in 2025

After experiencing robust growth in the previous decade, the luxury sector is now facing a slowdown. The global luxury market is projected to close 2024 with a value of approximately €1.48tn, a slight 2% decline from €1.5tn in 2023, as reported by Altagamma.

Pursuit of higher margins, coupled with efforts to offset declining order volumes, has driven price increases, leading to the exclusion of 50m consumers from the luxury market.

The S&P Global Luxury Index reflects an even more cautious outlook, with a year-to-date decline of 6% and a 14% drop from its peak in March. The gap between ultra-high-end luxury and aspirational consumption is widening, with a loss of 50 million consumers over two years, primarily among younger demographics, partly due to rising prices. Among product categories, watches, leather goods, and footwear have seen the sharpest decline, while beauty products, eyewear, and especially jewelry have shown growth. Experiential luxury is also bucking the trend, with an estimated 5% increase.

“We expect a moderate recovery in 2025, driven by experiences such as hospitality, fine dining, and wellness, along with strong markets like Europe and the U.S., and the solid performance of jewelry and cosmetics,” said Matteo Lunelli, President of Altagamma. The U.S. market is anticipated to lead the growth, with a forecasted increase of 3.5% (despite lingering uncertainties tied to trade policies under the Trump administration), followed by 2% growth in Europe and Japan. Modest growth is expected for leather goods and footwear, which remain impacted by price hikes, while cosmetics continue to stand out as a top performer.

Outdated strategies make even profitable companies vulnerable to activist investors, especially when they fall behind market benchmarks

$151bn conglomerate Honeywell under scrutiny

Activist investor Elliott Investment Management has amassed a $5 billion stake, or 3%, in Honeywell International and is calling on the company to break itself apart, seeking to dismantle one of the few remaining industrial conglomerates.

Strategic and operational improvements are becoming a primary focus in activist campaigns, representing 23% of initiatives in 2024

While many industrial giants are breaking up to focus on specialized sectors, CEO Vimal Kapur has been expanding Honeywell’s reach. In just 17 months, Kapur has allocated nearly $10 billion to acquisitions.
Honeywell, known for products ranging from home thermostats to aircraft landing gear, has long defended its diversified structure, even as the model has become less popular. Recently, the company has indicated it may streamline parts of its portfolio.

In 2017, Honeywell successfully resisted a campaign by activists to break up the company. However, Honeywell’s stock has recently lagged behind the broader market, leaving the conglomerate potentially exposed to renewed activist pressure. Activist investor Elliott suggests a corporate breakup could yield share price gains of 51% to 75% over the next two years.

Last year, the company reported $5.7 billion in earnings and $37 billion in revenue, both below its 2019 figures. This underperformance has been mirrored in its stock, which, prior to Elliott’s stake announcement, had risen only 12% this year compared to a 26% gain for the S&P 500.

A surge in specialization within the pharmaceutical industry has fueled rapid growth and value in outsourcing market

The $1.5 trillion global pharmaceutical sector has seen major companies increasingly outsource the production of pharmaceutical products and the development of manufacturing processes to contract development and manufacturing organizations (CDMOs), as reported by the Financial Times.

Outsourcing has gained significant traction in the pharmaceutical sector as a strategic approach to managing complex drug pipelines

While industries like electric vehicles, technology, and digital contents are increasingly embracing horizontal integration, one of the world’s largest sectors is trending in the opposite direction. As the pharmaceutical landscape grows more complex—with a diverse, R&D-intensive drug pipeline and emerging production modalities—CDMOs play a critical role in reducing development and manufacturing costs, timelines, and capital requirements. These organizations provide specialized manufacturing and quality control expertise that cannot be quickly developed, especially by startups and academic institutions, which often lack the equipment, expertise, and capital needed to bring new drugs to market.

In addition to meeting regulatory requirements, a crucial priority for leading CDMOs is maintaining production capabilities across multiple regions. As new pharmaceutical modalities and drug types emerge, pharmaceutical companies are increasingly seeking flexible production solutions to accommodate diverse and evolving manufacturing needs.

Currently, the top 10 CDMO companies worldwide secure an estimated 70% of all contracts for outsourced manufacturing of biopharmaceutical drug substances, predicted to grow at 13% within 2020 – 2028.

Read the full article at the Financial Times: link

Tariffs of up to 100% exacerbate trade tensions and further fragment global supply chains

Geopolitical tensions are projected to further disrupt global supply chains, with electric vehicles (EVs) exemplifying the challenges posed by escalating competition among the U.S., China, and the EU, particularly into 2025.

Tariff wars raise costs and disrupt supply chains, pushing companies to adapt rapidly to maintain competitiveness amid geopolitical tensions

The U.S. is excluding vehicles dependent on Chinese critical minerals from tax credits offered under the 2022 Inflation Reduction Act (IRA). This restriction already applies to all “foreign entities of concern,” including China, Russia, Iran, and North Korea. In mid-2024, the U.S. raised import tariffs on Chinese EVs from 50% to 100% and on EV batteries to 25%, with Canada soon implementing similar measures. Concurrently, China is requiring its automakers to source 25% of semiconductors from domestic suppliers. The EU imposed provisional duties up to 45% on Chinese EV imports following an anti-subsidy probe, pending a final vote in November. In response, China is anticipated to target agricultural tariffs and restrict EV-critical mineral exports.

Automakers globally will encounter volatile input costs and be pressured to diversify supply chains, mitigating tariff impacts through alternative production and trade agreements. While tariffs will be a significant factor, other influences on EV market growth across different geographies include baseline effects, the EU's strong political commitment and market competition.

Generating a $1bn equity uplift on announcement, activist investor Jana Partners aims to turn $6bn food producer’s performance around with just 5% of shares

Activist investor Jana Partners has acquired a 5% stake in Lamb Weston, a leading producer of frozen potato products, with plans to drive significant changes within the company

Activist investors wield significant influence even in large corporations by leveraging strategic investments and boardroom pressure.

Jana aims to improve operational efficiency, enhance capital allocation strategies, and explore a potential sale. This development was disclosed in a recent securities filing, which led to a 10% increase in Lamb Weston’s share price, already pricing in significant value generative measures. Based in Eagle, Idaho, Lamb Weston has a market capitalization of approximately $10 billion and is the largest producer of French fries in North America and the second largest globally, serving major clients like McDonald’s and Yum Brands (KFC parent company).

The investment comes after Lamb Weston’s disappointing quarterly earnings report in July, which triggered a sharp 25% drop in its stock price. Lamb Weston’s stock had declined by over 34% this year, largely due to weakening demand driven by higher restaurant prices. Jana, known for pushing companies toward strategic deals, has a history of activism in the food industry, and it may nominate industry veterans to Lamb Weston’s board to help steer the company’s future direction.

India emerges as a promising market with opportunities driven by both rural spending and a rising number of high-income consumers

Retail sales growth in Asia is anticipated to outpace that of other regions, though China is unlikely to be the main contributor. India's growth will average approximately 5% year-on-year, presenting opportunities across the spectrum of the market, from luxury goods to consumer essentials.

900 million Indian consumers are projected to increase spending on cosmetics, packaged goods and household products

China's real growth rate is forecasted to reach nearly 4% Y.o.y in 2025. This figure represents a significant decline compared to the historical average of 7% recorded between 2015-2019. In September, Chinese political leaders and the central bank announced a series of stimulus measures aimed at revitalizing the country's sluggish economic growth. These measures include interest rate cuts and support for the stock market. However, Western consumer groups, particularly those in the luxury, beauty, and beverage sectors, remain skeptical that the initiatives will be sufficient to significantly enhance growth in the coming months.

In contrast, India is poised for notable opportunities. At the lower end of the market, fast-moving consumer goods companies like PepsiCo and Procter & Gamble are targeting increased spending from the rural population, representing 65% of the total. Recent data show a strong propensity for this demographic to invest in packaged goods, cosmetics, toiletries, and household products. At the upper end, the rising number of high-income consumers is expected to lead to a doubling of households with net financial wealth exceeding $1 million, reaching over 234k by 2025.

Read the full study at the Economist Intelligence Unit

Contrasting economic prospects: Germany faces continued contraction, while Italy struggles to rebound in 2024

Embrace sustainable business practices and forge strategic partnerships to navigate global challenges and unlock new growth opportunities.

In the Euro area, growth appears to have bottomed out in 2023 It’s projected to crawl back to 0.8% in 2024, buoyed only by better exports, particularly in goods, and inching up to 1.2% in 2025 due to stronger domestic demand and rising real wages. Yet, this growth is far from robust; it’s precariously supported by a gradual loosening of monetary policy.

The real crisis lies in the details. Germany is grappling with the fallout of fiscal tightening, a drop in real estate prices, and structural headwinds. Meanwhile, Italy may see some relief from its EU-financed National Recovery and Resilience Plan, but its manufacturing sector remains a significant drag on potential growth. Globally, as monetary policy shifts back to neutral by 2025, the outlook remains bleak. For many economies the base case is even weaker growth over the mid-term.

Long-standing structural issues—such as aging populations, sluggish investment, and historically low total factor productivity growth—continue to constrain economic expansion in Europe. While some rebound in investment and productivity is on the horizon, the relentless demographic decline threatens to overshadow any potential gains and keeping overall growth trapped in a cycle of stagnation.

Advanced economies have hit a wall in 2023, with growth slowing significantly. Projections indicate a modest stabilization at around 1.7–1.8% annually through 2029. However, this apparent stability masks stark differences between countries as various cyclical forces unwind.

Read the full study at the International Monetary Fund

Recent insights from the Bank of Italy's report

The Bank of Italy's report shows significant contraction in manufacturing, with declining production levels and an unfavorable economic outlook amid weak euro-area performance.

In challenging times, companies must prioritize growth opportunities to increase survival rate.

According to the Bank of Italy's latest report, a substantial 52% of manufacturing segments reported a year-on-year contraction, with sharp declines in transport equipment and textiles, the latter continuing a long-term downward trend. The Purchasing Manager’s Index (PMI) for manufacturing remained below the expansion threshold in the third quarter. Qualitative surveys revealed a worsening in production levels, especially in the intermediate goods sector, with businesses holding an unfavorable view of the overall economic situation. Contributing factors include weak euro-area manufacturing, particularly in Germany. This raises the question of whether the overall economic situation is relatively stable and whether we are witnessing a broader trend of de-industrialization.

During economic downturns, businesses often excessively cut costs, which can hinder growth and long-term success. Instead, focusing on growth opportunities and investing in the future is essential for thriving during a crisis

Read the full study at Banca d'Italia

Middle East Crisis

The situation in the Middle East is constantly evolving. Until October the war had been largely confined to Gaza. With rising Iranian involvement, the risk of a spiraling regional conflict has alarmed world leaders.

Focus on broader market trends, while tracking crisis trajectories

The geopolitical situations tend to feedback directly into commodity prices, which are strategic to many businesses. In the graph below, JP Morgan highlights that geopolitical events are on average not significant for long-term trends. Economic conditions and the business cycle are more critical. However, for companies is still crucial to know which trajectory the crisis at hands take. Evidence like the Ukraine invasion or Arab Israeli War of 1973 show that firms should invest in understanding commodity price and supply chain disruptions for their own specific industry.

Insights of Mario Draghi Report (1/2)

Mario Draghi’s report, widely acclaimed when published on September 9th, looks at Europe's productivity challenge from a policy perspective. It, however, entails concrete business implications. The first topic is:

Increasing the access to financing for tech firms and scalable startups:

When Draghi says Europe needs to make it easier for “inventors to become investors”, it is a policy recommendation, but also highlights an opportunity - like any market imperfection: Both financial and strategic investors can seize the needs of funding of European startups by providing the capital and resources required for growth. Backing this up, Venture Capital (VC) financing in the US is quadruple the EU’s at every stage

Insights of Mario Draghi Report (2/2)

Mario Draghi’s report, widely acclaimed when published on September 9th, looks at Europe's productivity challenge from a policy perspective. It, however, entails concrete business implications. The second topic is:

Regulatory changes, a call to action for further integration in the single market

Several regulatory, fiscal, legal, and cultural differences across Member States limit the ability of EU companies to scale up efficiently as evidence by the fast majority of companies being present in only very few markets. In addition, investors lack information on cross-border investment opportunities or are deterred by intra-European complexities.
For businesses, this entails that if existing markets are saturated or becoming too competitive, it may be worth looking for more attractive markets right across the border. To tap these, however, requires local presence and expertise, which can e.g. be obtained through strategic add-on acquisitions.