Overview of 2024 M&A Activity

The three-year-long headwinds tied to concerns over escalating geopolitical tensions, persisting inflationary pressures, rising interest rates and soaring energy costs kept M&A activity largely constrained throughout 2024. While the global inflation and interest rate outlook has shown early signs of stabilisation and moderation, M&A activity has struggled to gain a highly anticipated momentum, with market participants hesitant to commit, opting to delay engagement until positive macroeconomic trends translate into tangible impacts on the broader economy.

Despite a less pronounced, yet continuous decline in deal volumes, global M&A activity values experienced a modest uptick, driven by a notable rise in larger transactions. A marginal year-on-year increase in European M&A activity volumes and values signalled the return of cautious optimism amidst gradually dissipating market uncertainty and improving confidence among deal makers. Conversely, Latvian M&A practitioners observed a significant surge in local deal volumes, while aggregate deal values plunged to an unprecedented historic low, as none of the major transactions featured publicly disclosable financial terms.

M&A dynamics in the first half of 2024

The environmental, social and governance (ESG) risk assessment has evolved into an indispensable component of corporate M&A strategy, embedding sustainability considerations into the core of investment decision-making across various industries. A shared commitment to sustainability through innovation was central to IFCO SYSTEMS GmbH’s, a leading global provider of reusable packaging solutions, strategic acquisition of a 100% capital stake in BEPCO OÜ, a renowned Estonian reusable packaging pooling company with a subsidiary network across the Baltics, for an undisclosed amount in the first quarter of 2024.

Leading corporates are redefining their approach to sustainable growth, moving beyond viewing the ESG framework merely as a means of managing regulatory and reputational risks to leveraging it as a strategic tool for fostering innovative solutions, maximising efficiency gains and reducing capital costs. Although the green deal-making potential for long-term value creation is difficult to match, its realisation requires a comprehensive deal thesis that effectively integrates sustainability goals with financial performance metrics.

The divestiture of non-strategic assets has become essential for maintaining operational health of corporates, enabling C-suite executives to prioritise core activities, optimise resource allocation and streamline business processes in an increasingly competitive market environment. In order to recalibrate its operations, MADARA Cosmetics AS, a leading certified organic skincare products manufacturer, divested MOSSA Cosmetics, a popular natural cosmetics brand, to Oy Transmeri Ab, a Finland-based importer and marketer of cosmetics across the Nordics, for EUR4 million in the second quarter of 2024.

While market leaders often maintain a watchful eye on prospective targets, they frequently disregard fit signals emanating from their own business units, brands, or products due to emotional biases against divesture, which is mistakenly perceived as a sign of failure. However, the stigma surrounding divestiture is steadily waning in boardrooms, where the regular strategic reconfiguration of asset portfolios to prevent value erosion is progressively recognised as a critical element in maximising total shareholder return.

M&A dynamics in the second half of 2024

The energy transition has catalysed a surge in renewables-focused M&A activity, as market leaders seize opportunities to accelerate transformative growth, expand generation capacities and strengthen portfolio diversification. While the ink was still drying on its EUR200 million acquisition of the 124 MW Telšiai wind farm project in Lithuania, Langevergo AS, one of the largest pan-Baltic electricity suppliers, acquired a 100% capital stake in Laflora Energy SIA, a Latvian development company behind the 108.8 MW Kaigi Bog wind power plant, for an undisclosed amount in the third quarter of 2024. The race to secure reliable, affordable and sustainable energy sources has noticeably intensified, as local strategic incumbents ramp up investments in renewable infrastructure, actively acquiring ready-to-build wind and solar development projects across the Baltics.

Despite the strong momentum towards net zero, energy sector bidders have grown increasingly selective in assessing potential targets, driven by rising acquisition, construction and operation costs. Top management now demands state-of-the-art development projects featuring clearly defined construction timelines and commercial operation dates to ensure delivery of shareholder value in a turbulent macroeconomic landscape.

The mounting economic pressures of the post-COVID-19 pandemic era have spurred consolidation efforts across various highly fragmented industries, with even the most prominent market leaders now acknowledging the pressing need to merge or consolidate to sustain competitiveness in an increasingly challenging market environment. As part of this trend, Printful Inc and Printify Inc, two Latvia-headquartered key players in the print-on-demand industry, announced a strategic merger in the fourth quarter of 2024.

As a general rule, however, the volatile market environment of recent years primarily facilitates small and mid-cap M&A transactions, which pave the way for achieving scale, expanding reach and enhancing offering without the heightened regulatory scrutiny typically associated with larger transactions. The ongoing rapid transformation of highly fragmented markets, characteristic of the initial stages of the consolidation curve, compels corporates to refine their acquisition skills and strengthen integration capabilities. The seamless integration of people, assets and technologies into a cohesive organisational structure within the first-year post-acquisition is crucial to securing the long-term success of the serial acquisitions, central to consolidation strategies.

Due Diligence Trends

Ongoing digitalisation has been transforming deal-making dynamics as businesses increasingly shift their operations online by leveraging new technologies to engage with employees, partners, customers and other key stakeholders. The online environment generates vast volumes of data which provide a valuable insight into the business model, supply chain and customer base of the target companies. These datasets enable bidders to assess financial and non-financial assets of a target using advanced data analytics powered by artificial intelligence (AI).

Comprehensive AI-generated insights facilitate effective data-driven decision-making throughout the target sourcing and screening phases. As the volume of processable information continues to grow exponentially, M&A professionals are progressively adopting AI-powered tools to enhance the efficiency of the due diligence process. While AI is not a panacea, its targeted application in optimising manual tasks, automating repetitive processes and streamlining compliance data analysis in complex regulatory matters, such as: (i) the notification obligation under the Foreign Subsidies Regulation (the “FSR”); (ii) the examination of ESG disclosures; or (iii) the evaluation of cybersecurity compliance, has become indispensable for delivering accurate risk assessment in M&A transactions.

FSR notification obligation

The EU has further expanded its regulatory framework with the introduction of the FSR regime tackling perceived competitive imbalance between non-subsidised bidders and their counterparts benefiting from foreign state aid. The FSR establishes a mandatory notification and approval requirement for significant M&A transactions and joint ventures with a European footprint, as well as for major public tenders conducted within EU member states. An M&A transaction triggers the FSR filing requirement if: (i) at least one of the merging parties or the target company generated a minimum EU-wide turnover of EUR500 million during the preceding financial year; and (ii) the merging parties or the acquiror, together with the target, have collectively received more than EUR50 million in foreign financial contributions (FFCs) over three years prior to the transaction.

A manual FSR risk assessment and management process has already posed significant challenges for M&A stakeholders, given the large volume of relevant data continuously generated by the concentration parties across their potentially extensive portfolios. The deployment of AI-powered platforms for tracking, aggregating and collating FFCs’ data on the merging parties or the acquiror and its target is rapidly emerging as a critical tool for enhancing efficiency of the due diligence process.

ESG disclosure examination

A wave of EU initiatives advancing ESG principles, most recently strengthened by the adoption of the Corporate Sustainability Due Diligence Directive (the “CSDDD”) has elevated ESG compliance to the forefront of the corporate agenda. The CSDDD requires both EU and non-EU companies meeting progressively decreasing thresholds, ultimately reducible over the next five years to EUR450 million in net turnover and 1,000 in number of employees, to identify, assess, monitor, mitigate and prevent actual or potential adverse environmental and human rights impacts stemming from their operations.

Amid the growing EU trend of tying pecuniary fines for ESG violations to the worldwide turnover of the perpetrator, compliance with the increasingly rigourous ESG requirements is becoming a critical component of the due diligence process. However, a widespread prevalence of greenwashing in corporate disclosures presents significant challenges for bidders seeking reliable ESG performance data. Corporates are therefore increasingly turning to reputable alternative sources, such as AI-aggregated analysis of recent and historical news coverage from licensed outlets, to obtain an independent ESG track record and benchmark it against the officially presented ESG performance metrics of a target company. The ongoing integration of AI-infused data analytics solutions into due diligence significantly enhances the ability to detect inaccuracies and discrepancies in the representation of ESG data.

Cybersecurity compliance evaluation

The struggling implementation of the second Network and Information Systems Directive (the “NIS2”) across the EU presents unique due diligence challenges for M&A practitioners navigating the complexities of an increasingly stringent cybersecurity regulatory landscape. The NIS2 sets out baseline security requirements designed to harmonise and strengthen the cyber-resilience of both public and private entities operating across 18 critical industry sectors. All in scope entities are required to implement robust cybersecurity risk management systems in order to address a diverse spectrum of threats, ranging from cyber-attacks to physical disruptions, following an “all hazards” approach.

Besides assessing compliance with enacted or anticipated legal requirements, due diligence examines a wide range of actual and potential cyber-risks, including the adequacy of access controls, the resilience of malware defences and the effectiveness of intrusion detection systems. Leading corporates increasingly prioritise early-stage cybersecurity risk assessments in data-driven M&A transactions, as the evolving cyber posture of the target directly influences deal valuation, contractual terms and post-closure integration scenarios. The commoditisation of cybersecurity due diligence has been decisively replaced by a proactive approach to risk identification and mitigation, leveraging AI-powered tools to analyse vast security datasets, identify patterns and detect anomalies throughout the M&A life cycle at a level of precision unattainable with traditional methods.

Share Purchase Agreement Trends

The escalating geopolitical tensions among major global economies have prompted the EU to further tighten inward investment controls by strengthening anti-money laundering and sanctions frameworks, expanding FDI regulations, introducing FSR notifications and broadening merger control to capture previously unreportable transactions. The progressively restrictive regulatory environment has significantly prolonged the M&A timeline for contested transactions, as approval and clearance procedures grow increasingly more complex and less predictable.

In anticipation of heightened regulatory scrutiny, M&A transactions are rigourously stress-tested against key value drivers across multiple potential outcome scenarios to mitigate operational risks and minimise financial losses in the case of a prolonged interim period. The uncertainty surrounding the transaction completion phase presents a significant challenge to the effective planning of post-closure integration following deal announcement. M&A professionals develop a comprehensive integration strategy aligned with anticipated regulatory milestones, while carefully avoiding any risk of anti-competitive information exchange. The ever-evolving regulatory landscape also directly affects the terms and conditions of share purchase agreements, particularly in relation to compliance risk minimisation and allocation mechanisms, which are typically structured around: (i) pre-emptive divestitures; (ii) interim covenants; and (iii) “hell or high water” and “reverse break-up fee” clauses.

Pre-emptive divestitures

A “fix-it-first” strategy, centred on the pre-emptive divestiture of a carved-out or standalone business to proactively address potential regulatory concerns and secure clearance for big-ticket acquisitions, is gaining considerable traction in boardrooms. A pre-emptive divestiture is typically structured as a direct sale of a problematic asset, contingent upon regulatory clearance and completion of the main transaction. The pre-emptive divestiture is factored in by competition authorities during their assessment of the main transaction, thereby eliminating the need for additional post-clearance approval of the proposed remedy purchaser.

Beyond expediting the divestiture process, a “fix-it-first” approach also enables the divesting party to preserve its bargaining power. When a concentration party is compelled to divest as a result of a “classic” or “upfront buyer” conditional clearance, its perceived bargaining power tends to erode, leading to the risk of significant value being left on the table. The sale of a divestible asset prior to the announcement of a specific remedy package often yields a considerably more favourable financial outcome for the divesting party. A “fix-it-first” remedy therefore enables deal makers to maximise divestiture proceeds and shorten interim period by streamlining completion of the main transaction.

Interim covenants

Interim covenants governing the operation of the target company during the period between signing and closing have assumed greater importance due to the extended review timelines resulting from the growing complexities of the regulatory clearance process. The primary purpose of interim covenants is to preserve the value of the target company by ensuring its operations continue in the ordinary course of business consistent with past practice throughout the interim period.

The acquiror reasonably expects firm assurances that the seller and the management of the target company will exert its best efforts to keep key partners, retain critical talents and maintain core clients. The acquiror also typically negotiates a detailed list of specific restrictions and secures consent rights over any other actions by the target company falling outside the ordinary course of business. The interim covenants require precise and delicate drafting to avoid the risk of “gun-jumping” associated with asserting control over the target company prior to securing clearance. However, tight restrictions tolerable for a period of up to six months become untenable in the long term, as their continued application inhibits the progressive development of the target company. The risk of asset degradation caused by interim restrictions is often offset by a “hell or high water” clause.

A “hell or high water” clause

A true “hell or high water” clause imposes an unconditional obligation on the acquiror to address any objections and undertake all actions required by the competition authority, including implementing structural or behavioural remedies, to ensure the successful completion of the transaction. Thus, the acquiror fully assumes the competition risk by committing to implement any remedy package to secure clearance. The scope of the “hell or high water” clause has been recently expanded to encompass emerging regulatory risks and prescribed remedies under the FDI regime.

If the “hell or high water” clause is drafted with greater flexibility by qualifying the efforts of the acquiror or excluding specific remedies for transaction approval, the seller typically expects regulatory risks to be covered by a “reverse break-up fee” clause. The reverse break-up fee represents a negotiable lump sum payable to the seller in the event the transaction fails to complete due to the inability of the acquiror to obtain the necessary regulatory approvals. The amount of the lump sum depends on the wording of the “hell or high water” clause, particularly the scope of excluded potential remedies, unless the majority of regulatory risks have already been proactively resolved through a “fix-it-first” approach.

Recent Local Legislative Developments

The EU technology landscape is undergoing a fundamental transformation, driven by successive waves of legislative initiatives covering privacy and data protection, online content moderation, cybersecurity and fair digital market regulation, all designed to foster a secure, transparent and competitive digital ecosystem. The Artificial Intelligence Act (the “AI Act”) further strengthens the EU regulatory framework by mandating responsible and accountable deployment of general-purpose AI models and AI systems within the EU.

The AI Act establishes a broad range of obligations for both EU and non-EU AI providers, product manufacturers, importers, distributors and deployers, aligned with a four-tier classification reflecting the level of risk AI systems pose to the individuals. The operational freedom once enjoyed in a comparatively unregulated AI landscape has increasingly given way to heightened regulatory scrutiny, influencing deal structures, due diligence, valuation and contractual terms in AI-driven M&A transactions. As a result, technology companies are shifting towards a state of continuous adaptation, closely monitoring the evolving regulatory framework and assessing its actual and potential impact on both existing and emerging AI assets.

AI systems classification

Although the enforcement timeline for the AI Act extends until the end of 2030, AI systems leveraging practices deemed to pose an unacceptable risk to health, safety or fundamental rights have been banned from the EU market since 2 February 2025. The AI Act prohibits AI practices employing subliminal techniques, exploiting personal vulnerabilities, performing social scoring, assessing criminal offence risk, conducting facial scraping, enabling emotional recognition and supporting biometric categorisation or remote identification. The regulatory burden on all other AI systems diminishes in direct correlation to their assessed level of risk, with high-risk AI systems subject to the most stringent legal requirements, while limited and minimal risk AI systems operate with little to no regulatory oversight. While the four-tier risk framework under the AI Act appears relatively straightforward, the classification of AI systems in practice demands a highly nuanced assessment. Misclassification often results in undercompliance, exposing in-scope entities to significant legal risks and substantial regulatory fines, or overcompliance, leading to undue operational constraints and excessive maintenance costs.

National implementation

The AI Act becomes directly applicable upon its entry into force thereby obviating the need for national transposition measures. However, EU member states retain broad discretion in structuring the designated national authorities responsible for supervising and enforcing the AI Act at the national level. Latvia has adopted a decentralised approach by assigning the market surveillance of high-risk AI systems, whether as standalone products or safety components, to more than ten existing sectoral authorities, each ensuring compliance with the relevant EU harmonisation legislation.

The Ministry of Economy is expected to assume the role of the notifying authority entrusted with establishing the relevant procedures for assessment, designation and notification of conformity assessment bodies (CABs), while the Latvian National Accreditation Bureau (the “LNAB”) is anticipated to handle CABs’ assessment and supervision. The Ombudsman’s Office is likely to be designated as the national authority responsible for enforcing the fundamental rights of individuals in relation to the use of high-risk AI systems. The newly established Artificial Intelligence Centre is tasked with overseeing the development and management of the national AI regulatory sandbox, enabling AI practitioners to design, test and validate AI solutions in a controlled environment before their deployment in the EU market.

Overview of 2025 M&A Trends

The global push for digitalisation and automation has heightened pressure on corporates to reinvent their core offerings through AI-powered innovation, while maintaining a strong balance sheet amidst an increasingly turbulent macroeconomic environment. The continuous market volatility has unsettled the previously steadfast reliance on scope deals to drive growth in the technology, media and telecommunications (TMT) sector, prompting a strong resurgence of scale acquisitions, underpinned by robust value creation within the first-year post-acquisition. In the pursuit of its strategic initiative to strengthen team capabilities and broaden its local client base, Mapon AS, a leading regional fleet management solutions provider, acquired a 100% capital stake in Trackon Fleet Management UAB, a Lithuania-based telematics services provider, for an undisclosed amount.

The growing emphasis on capturing both revenue and cost synergies has become a defining characteristic of a well-calibrated M&A strategy, as revenue synergies from cross-selling and portfolio integration alone are no longer sufficient to generate meaningful value without the concurrent realisation of cost synergies. Despite lagging behind the dynamism seen during the low interest rate period prior to 2022, scope acquisitions albeit increasingly complex will continue to fuel M&A activity in the TMT sector for many years, as both tech leaders and non-tech players seek to acquire innovative capabilities to facilitate business transformation.

The growing demand for commercially and technologically viable renewable energy assets has intensified competition among energy and utilities companies, driving a surge in wind and solar project acquisitions across the Baltics and beyond. Market leaders are actively scaling renewable energy assets and forming strategic partnerships with leading greenfield developers to build diversified power generation portfolios, ensuring long-term energy resilience in response to intensifying competition in the energy, mining and utilities (EMU) sector.

As part of this trend, Langevergo AS has concluded its multi-transaction 2024 expansion spree with the acquisition of a 100% capital stake in DSE Aizpute Solar SIA, a local development company behind the 265 MWp Aizpute solar park at ready-to-build stage, for an undisclosed amount, from Danish Sun Energy ApS, a leading photovoltaic (PV) system solution provider with a global reach. While energy generation remains the primary focus for most market players, the limited availability of reliable energy storage capacity and transmission infrastructure is creating new investment opportunities in smart grid technologies. Energy transition and decarbonisation efforts will continue to boost M&A activity in the EMU sector for years ahead, as asset-heavy national incumbents pursue portfolio diversification to accelerate the transition towards a low-carbon economy in pursuit of climate neutrality.

The ESG considerations have reinforced the circular economy narrative, positioning businesses focused on renewing, reusing and recycling resources at the centre of the widespread drive for sustainable long-term value creation. The waste management and recycling (WM&R) sector plays a pivotal role in closing the circular economy loop by reintegrating recycled materials into manufacturing processes and reducing demand for primary natural resources. Amid the growing demand for sustainable waste management, Eco Baltia AS, the largest full-cycle environmental resource management operator across the Baltics, further expanded its recycling capabilities with the acquisition of a 100% capital stake in Eko Osta SIA, a leading Latvian recycler of environmentally harmful and hazardous waste, for an undisclosed amount.

The revenue potential of recycled materials is set for sustained growth, driven by continuous advancements in the quality of recycled components, the gradual price convergence between primary and secondary resources and regulatory incentives requiring minimum recycled content in manufactured products. The ongoing shift from linear to circular business models will continue to stimulate M&A activity in the WM&R sector, as industry players accelerate consolidation efforts to achieve economies of scale, enhance waste stream management capabilities and strengthen market position in an increasingly expanding industry.

Concluding Remarks

The ongoing macroeconomic volatility necessitates a highly disciplined approach to value creation through M&A activity, as corporates continue to navigate a challenging market environment in pursuit of sustainable growth. Any easing of persistent headwinds has yet to generate the anticipated momentum for M&A stakeholders, who remain constrained by mounting geopolitical tensions, tightening financial conditions and evolving regulatory landscapes. The COVID-19 pandemic was the first to expose the vulnerability of open regional and national economies to disruptions in global value chains and commodity markets, underscoring their deep integration into the global economy. The high level of trade and financial openness has historically driven down import costs, broadened export opportunities, intensified foreign competition and ultimately created productivity gains for the EU economy.

However, the ongoing strategic, economic and regulatory fragmentation of the global market is gradually eroding these gains, curbing trade specialisation, disrupting resource allocation and restricting technology diffusion on a global scale. The ramifications of major elections worldwide have further reinforced the national interest paradigm, leading to greater interventionism in national economies and stronger protectionism in foreign trade and direct investment. Whether Latvian M&A activity will sustain its positive trajectory in this emerging era of regionalisation remains to be seen.