Geopolitical tensions reshaping M&A

October 2025  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

October 2025 Issue

M&A activity has faced significant challenges over the past five years. Since the onset of the COVID-19 pandemic in early 2020, which caused deal values and volumes to plummet to their lowest levels in decades, companies worldwide have endured a prolonged period of disruption. As the global economy began to recover, soaring interest rates in 2021 prompted many executives to reassess deal economics, slowing activity to near-pandemic lows. Geopolitical uncertainty – particularly the wars in Ukraine and the Middle East – further compounded these challenges by increasing volatility, impacting valuations and tightening financing conditions. The cumulative effect of these pressures has led to a recalibration of corporate ambition. Where bold expansion plans once dominated boardroom agendas, caution and contingency now prevail.

The war in Ukraine, which began in 2022, has disrupted European security and strained global supply chains, leading to higher costs and operational uncertainty for businesses worldwide. Similarly, conflicts in the Middle East have heightened geopolitical risk, contributing to energy market volatility and broader economic instability. These conflicts have not only reshaped regional alliances but have also forced multinational corporations to reconsider their exposure to politically sensitive jurisdictions.

In response to these dynamics – alongside the enduring lessons of the pandemic and mounting climate risks – many businesses are reassessing their M&A strategies. Boards and investment committees are increasingly scrutinising geopolitical risks in acquisitions, joint ventures and supply chains. Across industry surveys and reports, geopolitical risk is now cited as one of the most influential factors shaping investment strategies. This marks a significant shift in corporate governance, where geopolitical literacy is becoming as essential as financial acumen. The boardroom is no longer a sanctuary from global turbulence – it is a frontline for strategic adaptation.

The shift from growth to risk management

Uneven growth forecasts and abundant dry powder are creating both opportunities and challenges. As of December 2024, global dry powder stood at $2.5 trillion, according to S&P Global Market Intelligence. US funds lead the way, with firms such as KKR and Apollo Global Management each reportedly holding over $40bn. Political and economic turbulence in the US and Europe throughout 2024 – including widespread elections – prompted many dealmakers to pause and reassess. The sheer volume of undeployed capital is both a source of optimism and anxiety: optimism for potential dealmaking, anxiety due to the pressure to deploy it wisely amid uncertainty. Capital is abundant, but confidence is elusive.

Further complicating the landscape, the impact of US tariffs on various countries and trading blocs has undermined market confidence. Financial markets reacted sharply to tariff announcements, introducing volatility that dampened M&A activity. The most notable concern remains the US-China relationship. Tensions escalated during President Trump’s first term and have continued into his second, with the administration supporting intensified protectionist policies. These include higher tariffs on Chinese imports, stricter enforcement of foreign investment regulations under the Committee on Foreign Investment in the United States, or CFIUS, and increased scrutiny of Chinese technology investments. This regulatory tightening has led to a chilling effect on cross-border dealmaking, particularly in sectors deemed strategically sensitive.

From January 2025, US persons and their controlled foreign entities became subject to restrictions when engaging in transactions with foreign persons in “countries of concern” – currently limited to China, including the Hong Kong and Macau special administrative regions – in sensitive sectors such as semiconductors, microelectronics, quantum information technologies and artificial intelligence (AI). The European Commission has expressed interest in implementing a similar regime. If adopted, such measures could signal a new era of transatlantic alignment on investment controls, further fragmenting the global M&A landscape.

Despite these headwinds, deals are still being completed. According to PwC, global M&A volumes declined by 9 percent in the first half of 2025 compared with the same period in 2024, yet deal values rose by 15 percent. Mergermarket data shows that US deal volumes at the start of 2025 fell to their lowest level in over two decades, with only 1100 transactions signed by 18 February – the slowest start since 2003. This divergence between volume and value suggests that while fewer deals are being done, those that proceed are larger, more strategic and more thoroughly vetted. Quality is overtaking quantity as the new metric of deal success.

PwC observed continued activity in companies with a domestic focus and in sectors less exposed to tariffs, such as services. Larger firms with strong cash flow and healthy prospects remain attractive targets. However, companies outside these parameters have struggled. In the US, a PwC Pulse Survey from May 2025 revealed that 30 percent of companies had paused or revisited deals due to tariff uncertainty. Nevertheless, 51 percent of US companies still plan to pursue deals, reflecting a persistent drive to transform and reinvent business models. This resilience underscores the enduring appeal of M&A as a lever for strategic transformation, even in turbulent times.

Boston Consulting Group reported that total global M&A deal value in the first half of 2025 reached $1.1 trillion – a 2 percent decline from the previous six months and below historical averages. Regional disparities were significant. Transactions involving targets in the Americas totalled $724bn, up 23 percent from the second half of 2024. North America, particularly the US, accounted for $685bn, or 62 percent of global deal value. European deal value fell to $201bn, a 14 percent decrease, while Asia-Pacific activity dropped 43 percent to $155bn, reflecting ongoing geopolitical tensions and local challenges. The steep decline in Asia-Pacific activity highlights the vulnerability of emerging markets to geopolitical shocks and regulatory unpredictability.

Sector performance varied. The industrials sector saw the strongest rebound, with a 62 percent increase in aggregate deal value, followed by energy (54 percent) and healthcare (23 percent). In contrast, the materials and consumer sectors experienced sharp declines of 49 and 50 percent respectively, due to fewer large transactions. This uneven sectoral performance reflects shifting investor priorities, with capital flowing toward resilience and away from discretionary exposure. Investors are chasing certainty, not just returns.

Megadeal activity – defined as transactions exceeding $10bn – remained steady, with 24 deals announced in the first half of 2025, matching the previous six months. However, the number of large deals (valued at over $500m) fell below the long-term average of 60 to 80 per month, indicating continued caution among dealmakers. The persistence of megadeals amid broader caution suggests that strategic imperatives are still driving bold moves, albeit selectively.

Private equity (PE) activity increased during the first half of 2025, as financial sponsors faced mounting pressure to deploy their substantial dry powder. In contrast, early and late stage funding for start-ups remained subdued, despite strong interest in AI ventures. Bifurcation between PE and venture capital reflects differing risk appetites and time horizons in the current climate.

Protectionism and policy: the new barriers to M&A

While the US has led the charge on protectionist policies, it is not alone. Other jurisdictions are also adopting measures that complicate dealmaking. The European Union’s Carbon Border Adjustment Mechanism, set to take effect in 2026, will impose tariffs on carbon-intensive imports to protect domestic industries. In the UK, the government has expanded its powers to scrutinise and potentially block foreign M&A on national security grounds. The scope of reviewable transactions has widened, particularly in critical sectors such as defence, dual-use technologies and advanced tech. These developments have hindered M&A and deterred foreign direct investment (FDI). According to the Department for Business and Trade, the number of FDI projects in the UK fell to 1375 in the financial year ending March 2025 – a 12 percent decline from the previous year and the lowest level since records began in 2007-08. This decline in FDI is a sobering reminder that national security concerns, while legitimate, can carry unintended economic consequences.

In this climate, dealmakers are increasingly turning to innovative structuring techniques to navigate regulatory scrutiny and geopolitical headwinds. Dual-track processes – where companies simultaneously pursue a sale and an initial public offering – are gaining popularity as a way to hedge against market volatility. Meanwhile, reverse mergers and special purpose acquisition company (SPAC) transactions, though less dominant than in previous years, are still being considered in niche scenarios where traditional exits are constrained. Creativity in deal structuring has become a strategic necessity.

Legal and compliance teams are playing a more central role in deal execution, often involved from the earliest stages of due diligence. Their input is critical in assessing exposure to sanctions regimes, export controls and foreign ownership restrictions. This shift reflects a broader trend toward embedding geopolitical intelligence into the core of corporate strategy, rather than treating it as a peripheral concern. The rise of legal foresight as a strategic asset is transforming how deals are conceived, negotiated and closed.

Technology is also reshaping how deals are sourced, evaluated and executed. Advanced analytics and AI-driven platforms are helping firms model complex risk scenarios and simulate post-merger integration outcomes. These tools are particularly valuable in cross-border transactions, where regulatory landscapes can shift rapidly and unpredictably. Digital tools are no longer confined to streamlining operations – they are reshaping how organisations perceive, interpret and act on strategic intelligence.

Environmental, social and governance (ESG) factors are becoming more prominent in M&A decision making. Investors and boards are increasingly demanding that acquisitions align with sustainability goals and ethical standards. This has led to heightened scrutiny of targets’ supply chains, labour practices and carbon footprints. In some cases, ESG considerations have been decisive in deal approval or rejection – a compass guiding strategic direction.

The talent dimension of M&A is also evolving. With remote work and digital collaboration now entrenched, integration planning must account for cultural alignment across dispersed teams. Human capital assessments – once a secondary concern – are now central to value creation strategies, especially in knowledge-intensive sectors such as technology and professional services. People strategy is emerging as a critical determinant of post-deal success.

Creativity, compliance and culture

Looking ahead, dealmakers will need to balance agility with discipline. The ability to pivot quickly in response to geopolitical shocks must be matched by rigorous planning and execution. Those who succeed will likely be firms that combine strategic clarity with operational flexibility, supported by robust governance frameworks and a deep understanding of global dynamics. In this new era, adaptability is a competitive advantage.

M&A leaders are refining their strategies in several ways. Risk analysis is being intensified, with robust scenario planning to anticipate disruptions – although the unpredictability of the Trump administration’s tariff policy presents a particular challenge. Firms are also exploring earn-outs and contingent payments to mitigate economic volatility. Many are pivoting toward domestic transactions to reduce cross-border risk. Moreover, dealmakers are prioritising long-term value creation over short-term gains, adopting a more cautious and strategic approach. This recalibration signals a maturing of the M&A mindset – one that favours resilience over rapid returns.

Despite persistent uncertainty, companies remain committed to pursuing M&A. The scale of geopolitical risk is reshaping strategies, but businesses have demonstrated resilience and adaptability. As they continue to navigate these turbulent conditions, creativity and foresight will be essential in charting a course through the evolving global M&A landscape.

© Financier Worldwide

BY

Richard Summerfield