M&A trends and outlook for 2024 – turning a corner?

February 2024 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

February 2024 Issue

From an M&A perspective, 2023 was a year marked by uncertainty and strong headwinds. Indeed, the deal landscape was shaped by some of the most prolonged challenges since the 2008-09 financial crisis. A combination of factors, including rising interest rates, geopolitical instability and looming recession, among others, caused a decline in global activity in 2022 and in the first quarter of 2023. Financing for transactions became more difficult to obtain. Persistently high interest rates, stricter requirements and more extensive due diligence also combined to make dealmaking more arduous.

But the rest of the year saw tentative green shoots of a recovery begin to emerge. Despite global M&A activity dropping 50 percent from the peak of 2021, according to Gartner, the outlook for 2024 appears to be more positive.

Data from WTW suggests that market sentiment may finally be starting to turn. According to the firm’s quarterly deals performance benchmark, global M&A activity increased in the third quarter of 2023, with volume rising by 16 percent. Every region saw an upswing. Between July and September, 151 deals over $100m in value were completed, making it the busiest quarter of the year so far.

Among the notable announced deals last year were Exxon Mobil’s $60bn planned purchase of oil producer Pioneer Natural Resources, Pfizer’s $43bn tie-up with Seagen, a biotechnology firm that focuses on cancer drugs, Chevron Corp.’s purchase of energy competitor Hess in an all-stock transaction valued at $53bn, and Cisco Systems Inc’s acquisition of Splunk in a deal valued at about $28bn.

However, while there was a rise in deal numbers, values continued to flatline. Transactions valued over $1bn saw a steady decline, consistent with a trend beginning back in 2021. The third quarter of 2023 saw just 32 mega-deals close, with continued uncertainty making the hefty price tag a risk few investors were willing to countenance. In contrast, for the same quarters in 2022 and 2021, 50 and 67 large deals were completed, respectively.

While it is difficult to predict where the market will go, dealmaking in 2024 is likely to be driven by several positive trends.

One is the amount of capital available for acquisitions in the war chests of private equity (PE) firms, sovereign wealth funds, venture capital investors and some large companies. For PE firms in particular, there is significant cash on hand to pursue the right deal. According to S&P Global research, PE firms were sitting on a record $2.49 trillion of dry powder around the middle of 2023 – an 11 percent increase over December 2022. Despite struggling to invest capital, PE firms did not halt their efforts to continue raising it.

“While it is difficult to predict where the market will go, dealmaking in 2024 is likely to be driven by several positive trends.”

Another is that converging price gaps could lead to an increase in deal activity. Disparities between sellers’ and buyers’ price expectations are beginning to stabilise, a process which is expected to continue throughout 2024 as interest rates stabilise and inflation comes down.

Efforts to bolster and revitalise supply chains may also fuel deals. Supply chain resilience has been thrust into the spotlight since the pandemic. Processes such as near-shoring, friend-shoring and other regionalisation strategies may spur dealmaking for companies that can facilitate these goals.

According to Gartner, technology will be at the heart of M&A activity this year. Startup companies in particular may be attractive to acquirers. Those that struggle to raise additional venture funding may seek alternatives, allowing strategic buyers to swoop in for attractive opportunities. In general, smaller tech businesses with limited access to funding may be viable targets.

Environmental, social and governance (ESG) issues will also create M&A opportunities, as well as headaches for acquirers. According to CMS, although 85 percent of companies expect M&A activity to come under more scrutiny relating to ESG regulations over the next three years, 64 percent also believe ESG regulation will ultimately provide a boost to dealmaking in Europe. Stakeholders are increasingly interested in ESG, and dealmaking may provide companies with the opportunity to differentiate themselves from the competition by completing ESG-focused transactions.

Regardless of the improving outlook, however, there are challenges ahead. In the US, for example, recent merger guidelines released by the US Department of Justice and the Federal Trade Commission signal increased scrutiny of cross-border deals. Such moves are being seen across many jurisdictions, driven by antitrust and national security concerns.

Yet despite the uncertainty encompassing the global economy, and the prospect of important political elections across several jurisdictions, there is cautious optimism that 2024 will be a more buoyant year for M&A.

Richard Summerfield