Intra-European dealmaking could benefit from a more aligned Franco-German partnership to boost the old continent’s industrial sovereignty, several European dealmakers told Mergermarket.

French president Emmanuel Macron and German chancellor-to-be Friedrich Merz, who share a background in M&A advisory, have pledged even closer collaboration, which could eventually spur intra-European deals, dealmakers said.

“We are seeing increasing political awareness for the need of European champions that can compete on a global scale” according to Tibor Kossa, co-head investment banking in Germany and Austria, at Goldman Sachs. “I think we are going to see more intra-European defensive M&A to increase competitiveness.”

While coalition talks in Germany have just started after recent general elections, Merz has already proposed a EUR 500bn plan to boost infrastructure and defence expenditure by loosening the country’s debt brake. Leaders of the European Union (EU) are also seeking to boost the bloc’s defence spending by EUR 800bn.

Deals are already coming through as a result of the new environment. For example, in February, Franco-German defence company KNDS, which is headquartered in Amsterdam in the Netherlands, exercised the option to increase its shareholding in RENK Group [FRA:R3NK], a German provider of propulsion solutions for military and civilian applications, from 6.7% to 25.1%. RENK had a market capitalisation of almost EUR 2.5bn at the time of the deal.

Looking at the wider picture, domestic European M&A values increased 18% year-over-year (YoY) to EUR 590bn, while deal count rose by 9% year over year to 14,161, according to Mergermarket data. In 2024, Germany and France both contributed about 12% by volume, respectively to deals in the region.

Meanwhile, German dealflow into France increased in 2024 YoY, while France’s outbound M&A to Germany also increased both in volume and count in 2024.

Germany and France are Europe’s biggest contributors to the bloc’s gross domestic product (GDP), with USD 4.52trn and USD 3.05trn respectively.

Defence sovereignty

For many dealmakers, a renewed emphasis on defence sovereignty and creating European champions could create positive spillover effects. This could benefit European defence players, including Airbus [EPA:AIR], Leonardo [BIT: FMNB] and Thales [EPA: CSF], but also key adjacent industries like energy and technology (particularly companies with dual-use plays).

However, political announcements cannot be expected to translate immediately into a surge in M&A, even if the politicians cut their teeth as dealmakers. The current uncertainty around the US declining to continue to support Ukraine, while imposing tariffs on allies are creating legal instability despite the still strong market fundamentals, a Paris-based M&A banker said.

Even so, more relaxed regulations can help. Goldman Sachs’ Kossa said: “There is an expectation and hope that the European Commission will look at consolidation in Europe more favourably to strengthen our competitiveness across a broader range of critical sectors.”

Progress towards a European Capital Markets Union (CMU) would also help dealmaking.

“A more flexible and harmonised regulatory framework for capital and financial markets in Europe would likely drive cross-border deal flow,” Philipp Suess, Head of Equity Capital Markets at Goldman Sachs in Germany and Austria, said.

In September 2024, European Central Bank (ECB) President and former Italian Prime Minister Mario Draghi presented a report on competitiveness which suggested looser merger rules in defence and other industries.

The EU’s competition chief, Teresa Ribera, reiterated last week that merger rules, now under review, could take more into consideration, such as sustainability, innovation, and social components. However, policy goals are not part of a regulator’s mission, she said. “European champions are not good as such, as you also need to protect consumers and the good functioning of the markets,” she added.

Despite this note of caution, it is worth noting that Germany’s competition authority in January cleared a military joint venture between German arms group Rheinmetall [ETR: RHM] and Italian company Leonardo.

Focus on defence & industrials

The defence sector is expected to be a huge political focus for former investment bankers Macron and Merz, with Airbus often cited as a positive example of the playbook for creating European champions.

The company was incorporated in 2000 following the merger of players from Germany, France, and Spain. Its main offices are in France, but its legal headquarters are in the Netherlands.

Airbus, which is backed by the French government (10.8%), the German government (10.8%), and the Spanish administration (4.1%), unveiled a space joint venture with Thales and Leonardo last month to potentially replace Elon Musk’s SpaceX and Starlink on the Ukrainian battlefield.

Meanwhile, Eutelsat [EPA:ETL] of France is in talks with the EU about ramping up satellite internet to Ukraine.

The speech by US Vice President JD Vance at the Munich Security conference in February became a watershed moment for US support towards European security. He said that internal threats to democracy were a greater problem for democracy in the EU than Russia or China. US President Donald Trump’s decision to withdraw military support for Ukraine underlined the depth of the pivot.

“This shows that Europe needs to take charge of its own security,” Maximilian Lasson, partner at Freshfields, said. “With the required political backing and an enabling regulatory framework at EU level, this can help drive consolidation in the European defence sector – which is long overdue if you look at the level of fragmentation and manual rather than industrial-scale production.”

Although defence is at the top of Macron and Merz’s inbox, other sectors – including manufacturing and artificial intelligence (AI) – will demand attention this year too, as will the CMU.