Overall M&A activity in 2024 continued to be subdued; however, the fourth quarter, especially after the Trump bump, showed signs of a significant pick up. Our M&A outlook for 2025 suggests the potential for a banner year. Numerous variables could hinder deal activity, but improving economic conditions coupled with enhanced net interest margins (NIMs) from lower short term interest rates and possible tax cuts should improve fundamentals. Moreover, a less hostile regulatory regime should eliminate a risk overhang to earnings.[1] The prospect for a more relaxed antitrust enforcement regime or at least less distrust of business combinations could create significant opportunities for strategic growth and investment.
Positive Factors for Dealmaking in 2025
- CEO Confidence and Stock Market Performance. CEO confidence continues to go up, which can give C-suites and boards the necessary conviction to pursue M&A. If economic conditions improve, then capital markets should also strengthen. M&A volume frequently tracks stock market performance. In addition, improved economic conditions and higher trading price multiples could narrow valuation gaps between buyers and sellers that were obstacles to some transactions last year.
- Antitrust. Not since Grover Cleveland has a President lost a bid for reelection and then ran again successfully. Thus, while a change in Presidential administration and political party leadership ordinarily brings policy uncertainty, we can look to President Trump’s first term for some guidance – but no guarantees – as to how his administration may govern this time around. This is particularly the case with the current regulatory skepticism, if not hostility, toward M&A. In 2023, President Biden adopted an Executive Order ostensibly designed to promote competition. The effect of that admonition was that regulators touching M&A across his administration, whether as part of an independent agency or otherwise, added criteria for M&A while also slowing the pace of review to allow for greater scrutiny. Bank regulators leaned into this Executive Order. Over the next four years, we generally expect regulators to be more open to structural remedies and less likely to block mergers outright. But caution is warranted. We may see bipartisan scrutiny of certain aspects of banking such as Fintech in light of lingering Synapse concerns. There are also populist views in the Trump administration and Congress that may scrutinize major consolidations or mergers, particularly if they will impact US jobs. The current expectation is also that the recently adopted HSR filing requirements for nonbank acquisitions will remain in effect.
- Lower Interest Rates. Acquisition financing should become more attractive if the Federal Reserve moderates its rate cutting, so that long-term rates might stabilize. Because acquisition financing tends to be longer term in duration, long term rates are much more important. If Department of Government Efficiency (DOGE) is truly effective in cutting spending or at least the pace of increased spending, then long-term rates might actually come down. Private equity financing of corporate debt has taken bank market share. This competition has lead to greater availability of deal funding. An open issue is whether private credit will continue to play as large a role in corporate financing if the cost of traditional bank debt goes down.
- For bank buyers, the Federal Reserve may maintain the current Fed Funds rate. As a result, NIMs may continue to widen as the yield curve steepens. Short term deposit rates have declined while the bond market expects long term rates to increase from inflationary tariffs, government spending and tax policy. Wider NIMs lead to higher bank valuations.
- Tax Policy. If Congress pursues tax cuts, the resulting savings could generate more cash flow to pursue acquisitions and make exit transactions even more attractive to selling shareholders. Another issue to watch is whether the Tax Cuts and Jobs Act (TCJA), which expires at the end of 2025, is extended and/or modified.
- Deregulation. Dealmaking could be impacted if the new administration carries out its goal of deregulation, although it is not clear how quickly that impact might be felt. Deregulation is most likely to open M&A doors not just in banking but for fintech, crypto, and financial services generally. The nominations of Scott Bessent for Treasury, Kevin Hassett for the National Economic Council, and Paul Atkins for the Securities and Exchange Commission all indicate a more hospitable banking environment.
While we expect a significant uptick in M&A activity, we may see particular volume from the following:
- Private Equity Exits. It has been widely reported that many private equity funds need to sell their interests in portfolio companies in order to wind-up and return profits to their investors. Exit transactions have been delayed for a variety of reasons, including valuation gaps and a lack of sponsor-to-sponsor M&A activity (largely due to the increased cost of capital associated with leveraged acquisitions caused by higher interest rates).
- Strategic Divestments. Banks will continue to explore divesting branches, non-core assets and business lines, especially insurance, to simplify their organizations and footprints and possibly to ward off threats from activist shareholders.
- Credit Unions. While we have started to see pushback on credit union and bank tie ups from state regulators, it is likely that the NCUA will continue to permit such combinations. The rise in bank stock valuations may add competition in 2025 that was not available for many deals in 2024. Nonetheless, the lack of credit union taxation or comparable tangible equity requirement and risk-based capital rules should enable credit unions to continue to compete effectively for deals.
- Higher Long-term Rates. Certain banks continue to suffer AOCI pressure from the run-up in long-term rates that accompanied recent Federal Reserve rate cuts. Increasingly, national banks with less than 2% tangible capital and all banks with poor NIMs may be pushed by their regulators to sell or at least engage in a dilutive capital raise.
- Purchase Accounting/Stock Valuations. For over 40 years, economies of scale have led to vibrant annual results for bank M&A transactions. The punishing accounting marks (AOCI, loan mark-to-market and core deposit intangibles) from M&A have held back such pent up need for growth. Buyers need to use stock consideration to replace the capital from purchase accounting. Higher stock prices are allowing more buyers to do so with less dilution to their shareholders.
Countervailing Factors and Uncertainties
Of course, M&A activity in 2025 may fall short of expectations, particularly if economic conditions deteriorate. Various factors that could adversely impact M&A in 2025 include:
- Trade Wars / Tariffs. President Trump has made clear his goal to negotiate trade agreements and expressed his willingness to impose tariffs, which would necessarily impact borrowers in affected industries as well as inbound/outbound investment involving certain countries. As with most government policies, tariffs invariably have winners and losers. To the extent tariffs allow businesses to raise prices, the higher returns could impact creditworthiness, while other businesses will suffer if their supply chain falls apart or they are unable to pass along higher costs to consumers. There may also be bipartisan support for some tariffs, particularly on China.
- Politics. Uncertainty over important government policies could hold M&A back. There is the constant specter of disfunction in Washington, D.C., and a thin Republican majority. In addition, proposed cuts in government spending—perhaps led by DOGE—could impact the economy. Staffing or other budget cuts at key governmental agencies (e.g., banking regulators) could also delay the ability to consummate M&A transactions.
- Near-Term Transition Issues. Compared to his first term, President Trump is acting more quickly in naming key appointees. Nonetheless, the people who need to run the various important government agencies must obtain Senate approval, where a successful confirmation is not guaranteed and there is a backlogged Senate calendar. Delayed appointments may also stall President Trump’s high-priority items such as border security and tax policy.
- Inflationary Pressures. Ongoing inflation will impact markets and economic conditions generally. There are also particular government policies under discussion (e.g., immigration) that could contribute to inflationary pressures. If the Federal Reserve reverses recent accommodation, banks may again suffer shrinking NIMs. This would revive the negative spiral of reduced valuations and impact whether there can be a meeting of the minds on price.
- State Attorneys General/State Bank Regulators. A more business-friendly antitrust posture from the federal government could be offset by state attorneys general or state level bank regulators. This could be led by more localized concerns about competition or by state officials who see political upside in challenging transactions.
- Geopolitical Risks. Numerous geopolitical risks could escalate in 2025, including the spread of war in the Middle East, Europe or elsewhere, acts of terrorism, sanctions, and the worsening of diplomatic and economic relations with certain countries, any of which could adversely affect markets.
[1] Bank Director survey indicated that almost 75% of bankers viewed regulatory risk as one of the top three risk areas.
Carleton Goss, Michael R. Horne, Lucia Jacangelo, Nathaniel “Nate” Jones, Jay Kestenbaum, Marysia Laskowski, Abigail M. Lyle, Brian R. Marek, Joshua McNulty, Betsy Lee Montague, Alexandra Noetzel, Sumaira Shaikh, Jake Stribling, and Taylor Williams also contributed to this article.