Is M&A Making a Comeback?

This is the first article in Citi Institute’s Q&A series where we speak to experts across the bank about the themes that will top the agenda in the coming years. Phil Drury, Citi’s Global Head of Technology and Communications in Banking , shares his views on the likelihood of a pick-up in M&A, the possible return of mega-deals, and the race for AI innovation. 

What is the outlook for M&A and IPOs in the next 24 months? 

Phil Drury: From a product standpoint, we're expecting an increase in the investment banking universe’s wallet opportunity through a growth in initial public offerings (IPOs). The IPO market was relatively dormant in 2023 and 2023, off its peak in 2021. Now we expect an uptick in deals. 

We also believe there will be more mergers and acquisitions (M&A), for several reasons. A key aspect is the new US Administration, which is expected to promote a more supportive environment in terms of deal-making. 

Will companies continue to focus on organic growth or are we likely to see more M&A? 

Several publicly traded, seasoned technology companies are under pressure to continue to innovate, especially when it comes to artificial intelligence (AI). We think this is most likely to result in inorganic growth through the acquisition of other businesses. 

We also think there will be a more receptive selling market. The background is that technology companies’ valuation multiples came off their peak in 2021 and then the market sold off in 2022 and 2023 in a relatively short period of time when interest rates spiked. Many companies were well capitalized at the time, so private equity sellers didn’t feel the need to do anything. Apart from a few tuck-in acquisitions, most focused on growing their businesses organically. 

Consequently, private equity has a historically low distribution to paid-in capital (DPI), which measures how much capital is returned to investors. We are therefore likely to see more private equity sales of portfolio companies in 2025 and 2026. 

Are high interest rates still a deal breaker or have we bedded into a new normal? 

I think we’re in a “new normal” period. When interest rates went up very quickly and sharply, it stifled activity levels. Now we’ve had some rate reductions, and we continue to forecast reductions, but at a steadier rate. 

Banks have unencumbered balance sheets, and companies on the acquisition path also have access to direct credit providers as alternative sources of funding, so there's no shortage of capital available for borrowers. 

Overall, I think this is a good environment for doing deals. 

What kind of deal activity are we likely to see around AI? 

AI is likely to be a significant driver for deals in several sectors, including software and the digital infrastructure space. Private equity firms own quite a few software companies that I think will be ripe for selling in 2025 and 2026. 

As the AI ecosystem builds out, we're also focused on the adjacencies to technology: the need for power, data centers, and the raw ingredients to produce the necessary compute. The question of how much electricity is needed to train, deploy, and operate AI systems is very topical in light of recent news from China about DeepSeek, a new and purportedly more energy-efficient AI. 

We're going to see a lot of innovation in AI, and it will be hyper competitive between the US, China and other nation states to be innovation leaders. 

Can we expect the return of mega-M&A deals? 

If we're right in suggesting that the US Administration may create a more pro-dealmaking environment, it could potentially mean more transformational deals. Our working assumption is that the environment over the next two years will lead to some jumbo, transformational M&A. I also think we will see a higher cadence of private equity sales in the $1 billion to $5 billion range. 

What is your outlook for the different regions around the world? 

North America: Clients appear to be bold and risk-on, and, I think, excited about what the next three years might entail. We've obviously seen some reduction in interest rates, but I think future reductions could be more cautious as the U.S Federal Reserve uses clutch control to manage inflationary pressures. I think companies feel that this is an environment where they can do business. 

There are certainly risks, especially geopolitical ones. Tariffs can also have an impact, with some segments of the economy more affected than others. 

Europe: While the outlook for Europe feels less positive, I think there is the potential for greater collaboration and consolidation that could well see European “superpower” companies going toe to toe with some of the US giants. A strong North America that puts up more boundaries and increases tariffs may also naturally lead to more European partnership. However, the situation is complicated by the greater political polarization in Europe. 

Asia: India and Southeast Asia, more generally, have been beneficiaries of increased investment flows. Given the recent tensions in trade between the US and China, these flows are likely to continue. India, for example, has been a bright spot for domestic IPOs, with a particular focus on retail. There was a time when many of India’s technology companies would list in the US, but now they're maximizing their valuation potential by listing in India. 

Countries such as Indonesia, Thailand, and Vietnam are also growth economies with fast-growing, young populations. 

Middle East: Middle Eastern countries have been for some years been investing outside of the region in an effort to diversify. More recently, however, there has been a pivot within Saudi Arabia and the United Arab Emirates (UAE) to make their countries more attractive for inbound investment. What are the challenges ahead? I think the biggest challenge is the fear of the unknown. For example, last year we had more elections around the world than in any previous year. That level of uncertainty, where it is difficult to forecast policy or economic direction, makes dealmaking more problematic. Now we're through that, we have greater clarity for the next few years in most jurisdictions, irrespective of political persuasion. It is very helpful in terms of dealmaking. 

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