International M&A trends: 2024 a year of recovery?

July 2024 | SPECIAL REPORT: MERGERS & ACQUISITIONS

Financier Worldwide Magazine

July 2024 Issue

The past few years have been challenging for M&A, with several factors contributing to the downward trend in the market. These include the complex interplay of global geopolitics, rising commodity prices, escalating energy costs, mounting public debt levels and the gradual easing of inflation rates.

These variables have collectively influenced the M&A landscape and altered the path (or pace) of transactional activity. Despite these challenges, the overall focus remains on economic and financial recovery and stakeholders maintain a steady focus on navigating these turbulent waters, seeking avenues for sustainable growth and stability.

Nonetheless, several market sectors are demonstrating notable activity in the M&A market during the first few months of 2024.

Technology

The technology sector has been particularly active, driven by the demand for innovative solutions, digital transformation and the adoption of emerging technologies such as artificial intelligence (AI), cyber security and cloud computing. In the tech sector, investments in technology-driven startups will continue to be a trend and will have a transversal scope, thus fostering many sectors such as healthcare, finance (i.e., FinTechs) and cyber security.

Governments and regulators are increasingly responding to the burgeoning AI landscape, prompting a continued spotlight on tech M&A deals. However, the fragmented legal framework surrounding AI throughout the usual jurisdictions and associated uncertainties are poised to influence business strategies, thus fostering a climate ripe for M&A activity.

Telecommunications

Similarly, the telecommunications sector has been successful due to ongoing investments in infrastructure upgrades, the rollout of 5G networks and the convergence of telecommunications with media and technology. Given the ongoing transformations affecting this sector, the current rollout of 5G technology in certain markets (such as the US, South Korea and Spain) as well as the fierce competition among the existing players, many telecoms companies are expected to rely on M&A deals to adapt their businesses.

Renewable energy

The renewable energy sector has witnessed during the last few years a steady increase in the number of M&A transactions, spurred by government incentives and regulatory support, as well as a growing emphasis on sustainability and environmental responsibility. Renewable energy remains at the forefront of this dominant trend. The ongoing energy transition will continue to shape government policies across various markets, thereby propelling M&A activity.

The Spanish market, in particular, offers ample opportunities for investments in renewable energy, driven by a steadfast commitment to sustainability. Recent innovations such as self-consumption and hybridisation projects further bolster the appeal of this sector, ensuring sustained interest and investment.

In the European framework, it is worth noting that in July 2020 the European Council agreed to approve and establish a new public assistance programme known as ‘Next Generation EU’ for EU member states. Its main objectives are, among others, boosting the energy transition and the digitalisation of the industry.

Healthcare and pharmaceutical

In the healthcare and pharmaceutical sectors, heightened M&A activity has been fuelled by demographic trends, advancements in medical technology and the pursuit of economies of scale by healthcare providers and pharmaceutical companies.

As outlined in Bain & Company’s ‘M&A in Healthcare and Life Sciences: A Shrinking Margin for Error in Deals’ released in January 2024, deal value has increased notably, driven by substantial transactions within the pharmaceutical and medical technology domains.

Within the healthcare sector, the emphasis on revenue growth outweighs that of margin growth, making M&A particularly appealing. This trend is projected to persist and potentially intensify in the coming years.

Real estate

Despite some fluctuations, the real estate sector also remains active, driven by the strong performance of tourism on a worldwide scale and developing urban trends (and investment opportunities in commercial and residential properties) as house price growth continues despite falling demand.

Retail

M&A activity in the consumer goods and retail sector has been driven by changing consumer preferences, e-commerce growth and the need for companies to adapt to evolving market dynamics through acquisitions, mergers and strategic partnerships.

Securing supply chains

Global political instability is boosting the need to secure supply chains, driving M&A activity across various industries, from automotive to retail, agro-industrial, e-commerce and healthcare. Acquisitions, strategic alliances and joint ventures will be pursued to ensure access to resources and to improve stability in supply chains.

As noted in McKinsey & Company’s 2024 article ‘Consumer goods: a changing landscape for successful M&A’, during the early years of the past decade, companies seeking growth and expansion moved away from the conventional strategy of strengthening their core portfolios through major consolidation deals. Instead, smaller deals targeting companies capable of delivering high revenue growth intensified.

However, the recent upturn in inflationary pressures has led consumers to reduce their purchases in several consumer goods sectors, prompting investors to reassess their priorities. This adjustment is reflected in M&A strategies adopted by consumer companies, which are witnessing a resurgence of traditional consolidation deals prioritising cost synergies and margin improvement.

Financial services

Within the financial services sector, moderate activity has been observed in areas such as FinTech, banking and insurance. M&A growth in the financial sector will progress more slowly during 2024, but the need for consolidation and transformation of existing financial institutions and their propensity to pool resources in order to generate cost synergies should propel M&A.

Regulatory scrutiny

As regulators increase their scrutiny of potential M&A transactions in 2024, it will be more important than ever to have a coherent global antitrust and merger control, foreign direct investment and EU Foreign Subsidies Regulation strategy to support investment decisions, deal flow and execution. Unpredictable regulators wielding increased power add risk to the transaction, extend deal timelines and lead to new deal structures.

Meanwhile, M&A players will continue to look for solutions to reduce exposure to risk, such as through improved due diligence processes, protecting against downside risk and creating transaction value, avoiding legal challenges with audit and compliance assessments or through warranty & indemnity insurance solutions, among others.

Outlook

The outlook for M&A is encouraging and 2024 is expected to be a turning point in the negative trend experienced over recent years. That said, a combination of continued inflation, elevated interest rates, increased tensions in the Middle East and declining consumer demand could continue to hold back growth.

The M&A market has proved resilient in terms of value and players believe that the number of deals will start to gradually increase, eventually picking up in the last quarter of 2024, mainly as a result of moderate valuations and improved financing conditions (although a return to near-zero interest rates seems to be something far down the road)

These improved conditions will give dealmakers sufficient confidence for more transactions, although more expensive debt and increased scrutiny from purchasers will still put pressure on valuations, returns expectations and deal timeframes.

Jose M. Llanos Alperi is a partner at Cases & Lacambra. He can be contacted on +34 910 616 061 or by email: josemanuel.llanos@caseslacambra.com.