Deals across the industry

The UK industrials industry is entering a changing landscape for M&A. After navigating cost pressures and economic uncertainty through 2024 and 2025, business owners now face a market characterised by both promising opportunities and potential headwinds. After falling by a little over 1% in 2024, industrial output in the UK stabilised during the first half of 2025. Output increased as the manufacturing sector tried to get ahead of the US tariffs, which came into force in April 2025 and on average output got to its highest level since 2021, when lockdown caused demand for goods to soar. The big question is whether momentum can be maintained as companies adjust to tariffs, with ONS data indicating that manufacturing and production fell by c.1% in the three months to July 2025. What’s more, the Bank of England has cut interest rates five times since starting to reduce rates, easing financing costs for capital investment.

Deal activity in 2025 didn’t show signs of acceleration following the stabilisation of cost and inflationary pressures experienced over the past 18-24 months, in part due to unanticipated macro-economic events. UK M&A activity surged in 2024, with industrials M&A growing c.20% to return to post-covid levels. Momentum stalled in 2025, as volumes dipped slightly on the prior year, though Q4 (2025) showed an uptick – a positive sign for what is to come. Underlying UK Industrials multiples have seen a pullback between 2024 and 2025, primarily due to macro pressures and a shift toward smaller mid-market deals. The story is more nuanced however, with debt leveraged PE valuations softening, but strategic acquirers stepping up and paying higher multiples for targeted assets. The industries performance is mixed by sub-sector, with continued premiums on multiples being paid for assets with scarce capabilities such as automation, aerospace and defence adjacency and critical services.

Our recent investment survey with Make UK reinforces this cautious sentiment, with 16% of manufacturers identified strategic acquisitions as a key investment strategy – slightly down from 17% in 2024 – highlighting that while acquisitions remain part of growth plans, businesses are approaching M&A selectively amid a flat market and evolving economic conditions.

With stable output, deal activity and feedback from manufacturers on strategy, what will improve or slow the position in 2026? We explore this below.

Industrials outlook for 2026

Portfolio optimisation – companies are focusing resources on their core competencies. With ongoing capital constraints and high financing costs, businesses are prioritising the divestment of non-core assets to free up capital for strategically focused deals. Private equity maintains a strong presence in industrials, but will remain selective, focusing on platforms with resilient aftermarket and recurring revenues.

Digital transformation – the trend towards digital transformation and data analytics is significantly influencing activity as companies enhance efficiency and reduce costs. AI, automation, and advanced manufacturing technologies have become fundamental to remaining competitive and offset wage and energy costs.

Sustainability and ESG – investments in renewable energy and sustainable technologies are thriving as businesses prioritise ESG goals. Companies with demonstrable sustainability credentials and clear decarbonisation pathways are commanding premium valuations.

Infrastructure and defence – major capital programmes like AMP8 (£100bn+ water sector investment 2025-2030) are creating substantial opportunities for engineering services, construction, and utilities supply chain businesses. Spending in the defence sub-sector is also driving activity, with UK defence spend set to rise to 2.5% of GDP by 2027 (and up to 3% thereafter).

Supply chain resilience – reshoring and nearshoring are driving consolidation as companies seek greater control which de‑risks exposure to tariffs and shipping. Businesses with UK-based manufacturing capabilities are therefore attracting strategic interest.

The recent budget – on balance, we expect to see increased transaction activity following the Budget for several reasons. The measures announced are unlikely to have a significant inflationary effect, compared to some of the alternatives that could’ve been introduced. Freezing rail fares and cutting household electricity bills will help to reduce inflation by around 0.4ppts from April 2026. Whilst the Bank of England (BoE) will want to focus on underlying measures of inflation, which will be more persistent, this could give the BoE greater confidence to reduce interest rates further and support increased business investment over time. This needs to be weighed against the rate cuts that are being considered in the context of concerns over a slowdown in the economy, so the broader environment remains challenging. The decision to leave CGT rates unchanged and not introduce an exit charge should provide a period of stability, encouraging business owners to consider succession planning, at least over the next 10 months ahead of the next Budget.

Today’s UK industrials M&A challenges

Today’s UK industrials M&A environment is shaped by significant challenges – strategic clarity, disciplined valuations, and heightened risk assessment – leaving the outlook for higher deal volumes and multiples uncertain:

Regulatory complexity – rising costs from employers' NICs, CGT changes, and wage hikes are impacting valuations, particularly for SMEs. Tariff concerns add further complexity for internationally exposed businesses.

National headwinds – labour shortages, supply chain recalibration, and rising costs have put a squeeze on margins. Buyers are conducting thorough due diligence on earnings sustainability and management quality.

Financing constraints – high interest rates have increased the cost of debt, making financing certainty critical.

Market volatility – geopolitical uncertainty continues to create volatility, reinforcing a cautious approach that prioritises clear strategic rationale over opportunistic deals.