ITALY: An Introduction to Corporate/M&A: Mid-Market

Over the last decade it has become increasingly evident that the corporate M&A landscape is subject to cyclical shifts and volatility, with periods of intense activity followed by periods of dormancy. The pandemic, rising inflation, fluctuating interest rates and geopolitical complexities have made predicting the duration or strength of these cycles more challenging than ever. Nevertheless, the speculations about the year 2024 turned out to be more than accurate. It will be remembered as a record year for M&A activity in Italy and a year of recovery worldwide.

The Italian market has witnessed an impressive surge in activity, with nearly 1,400 deals successfully closed over the past year. This figure represents a record-high number of transactions completed in a year, reflecting robust economic engagement and market confidence. Additionally, the overall value of these transactions has experienced a significant increase, nearly doubling compared to 2023. Even so, we are still far from the record highs observed in 2021 during the post-COVID-19 recovery phase, when deal values peaked significantly and above the pre-COVID-19 values. One significant shift since 2021 is that companies are under growing pressure to change their strategies and focus more on creating value: it will increase corporate investors' opportunities to engage in deal activity. Therefore, there is still optimism for a further M&A push.

Among the emerging trends, the revival of the "mid-market" segment stands out prominently, and this trend is primarily driven by an increase in inbound cross-border transactions, indicating a shift towards more international enthusiasm in the market. This renewed activity reflects a strong interest from foreign investors eager to invest in the "Made in Italy" brand, both in the consumer goods and industrial sectors. The sustained interest from international players reflects confidence in the Italian economy and suggests a willingness to engage in collaborative growth ventures. In particular, the resilience and excellence of a vast array of Italian mid-cap companies continue to be on the radar of international investors. On the other hand, the outbound cross-border activity is also worth noting, with an increasing number of executed transactions highlighting the influential role of Italian corporates in the global arena.

In the context outlined above, it is essential to mention the progressive expansion of the sphere of application of the so-called “Golden Power” regime ‒ due to the continuously changing geopolitical scenario ‒ which now requires even more attention from the investors and leads companies to make increasingly frequent precautionary filings to the authority. Companies must now fulfil their notification (or pre-notification) obligations to the relevant authorities more cautiously and diligently than ever before. However, this increased focus on “Golden Power” aspects has not translated into more decisive intervention by the authorities. Looking at the data, given the increasing number of filings ‒ many of which were made as a precaution and were therefore not due ‒ there has been no proportional increase in prescriptions or objections. The evident downsides are increased transaction costs for investors and prolonged timeframes for deal completion. Foreign investors looking to engage with an Italian company in a strategic sector should first determine whether a filing under the Golden Power Law is required. It is advisable to conduct this evaluation before structuring the transaction to avoid unnecessary costs. Consequently, the entire process, from the letter of intent to the due diligence phase, should be planned with a “multi-disciplinary” approach, prompting the investor to appoint a law firm with all these capabilities.

In terms of new legislation that may boost M&A deals – if we look at small and mid-cap companies, where generational transitions and strategic exits by entrepreneurs are more frequent ‒ the “stabilisation” of the revaluation regime set for 2025 deserves a special mention. Under this preferential regime, certain entities have the option to revalue their shareholding costs or values, effectively exempting all or part of the capital gains incurred. Although the opportunity for revaluation is not a novelty, as it was initially provided for by Article 5 of Law No 448 of 28 December 2001 and extended several times by subsequent provisions, both the quantification of the payable substitute tax and the deadline for benefiting from the revaluation procedure were always different. Now, the “stabilisation” of the revaluation of shareholdings makes planning an M&A transaction (both buy-side and sell-side) easier. Investors can count on regulatory certainty that reduces the need for conditions precedent attached to the triggering of revaluation. On the other hand, it will incentivise those wishing to dispose of participations or restructure their portfolios, facilitating the calculation of tax costs and capital gains. The possibility of permanent revaluation of participations is thus a strategic tool for companies and individual investors, both to reduce the tax burden on future capital gains and to improve asset management.

Several other factors are expected to boost deal activity, hopefully giving rise to a new cycle. These include a more stable borrowing environment and swift economic changes driven by advancements in AI and technology. In this sense, private equity activity is projected to increase, fuelled by a more favourable credit environment resulting from recent interest rate cuts and the expectation of additional interest rate cuts, supported by lower inflation. Such a scenario looks much more intriguing if we consider that, in recent years, private equity funds have increasingly emerged as the primary investors within the Italian market. They play a crucial role not only as direct investors, particularly within the energy sector, where they contribute significant capital to support innovative projects and drive development but also as strategic partners in fostering the growth of Italian SMEs. This is often achieved through “add-on” acquisitions, where these funds identify and acquire complementary businesses to enhance the value of their portfolio companies. By doing so, they facilitate expanded market reach, operational efficiencies and accelerated growth, thereby strengthening the overall competitiveness of the Italian market.

In conclusion, while making predictions about M&A activity is always challenging, many industry experts are optimistic about a strong M&A market in 2025. In Europe, growth is expected to be driven by public investments from the Next Generation EU funds and a solid pipeline of high-value transactions, underscoring a positive outlook for the year ahead.