Navigating the Fog: M&A Market Trends and Recovery Prospects for 2024
The global M&A market faced a significant slowdown in 2023, reaching its lowest activity levels in nearly a decade. Factors such as aggressive rate hikes, geopolitical tensions, high inflation, and a banking crisis dampened CEO sentiment. However, as the fourth quarter unfolded, a clearer outlook on interest rates helped revive deal activity. Early 2024 has continued this positive trend, showing promise for M&A recovery.
Current Market Dynamics
Deal Flow Gathers Pace: In 2023, Mergers and Acquisitions activity was at a low point, but the tide began to turn as the year ended. As of early 2024, global deal volumes have surged, with a 66% increase over 2023, driven primarily by the Natural Resources and Technology sectors. This momentum is expected to shape the M&A landscape for the year, marked by five key trends:
- Corporates Will Continue to Be Ambitious:
- Corporates are leading the M&A rebound, making up over 80% of transaction volume. With stronger balance sheets and more cash on hand compared to pre-pandemic levels, companies are well-positioned for M&A activity. Historical data supports that firms making early-cycle acquisitions often achieve long-term outperformance.
- Sponsors Will Become More Active:
- While sponsors have been less active so far in 2024, this is set to change. With a record $1.46 trillion in dry powder, private equity firms are poised to increase their M&A involvement. The current low level of exits relative to investments pressures PE firms to return capital to their limited partners before committing to new funds. Improving debt capital market conditions are expected to offer more opportunities for sponsors to monetize assets.
- Rate Cut and Soft-Landing Expectations Drive CEO Confidence:
- CEOs are gaining confidence from expectations of easing interest rates and the resilience of the US economy. The consensus is that the most aggressive rate tightening cycle in a generation may end soon, with forecasts anticipating modest GDP growth in 2024. This environment is likely to keep US assets in the spotlight.
- Transactors Will Accept Some Regulatory and Political Uncertainty:
- Despite recent successes by regulators in anti-trust challenges, transactors are increasingly willing to navigate regulatory risks. Non-traditional regulatory approaches have been contested successfully in several cases. The impact of the upcoming presidential election on M&A activity remains uncertain, but corporates are expected to continue pursuing transformative deals. Mergers might require longer timelines between signing and closing due to regulatory and political uncertainties.
- Activists Will Catalyse Additional M&A Activity:
- Activist investors are increasingly demanding M&A as a strategy. Early in the cycle, activists are effective at pushing for deals in a recovering macroeconomic environment. Activism is becoming less stigmatized, with activists and private equity often collaborating. Even unsuccessful activist campaigns can impact M&A activity by putting assets in play that attract strategic buyers.
Sector-Specific Trends
- Technology: This sector remains a bright spot in the M&A landscape, driven by ongoing digital transformation and innovation needs.
- Financial Services: Shifts in regulation and technology are influencing M&A strategies within the financial sector.
- Energy: The transition to renewable energy is prompting significant deal activity in the energy sector.
- Hospitality and Leisure: Consolidation in this sector continues as companies adapt to post-pandemic consumer behaviors.
Outlook for Recovery
- The M&A market’s recovery will likely depend on several factors:
- Interest Rates: Potential reductions could ease financing conditions and stimulate deal making.
- Valuations: Adjustments in market valuations may bridge gaps between buyers and sellers.
- Political and Geopolitical Stability: Resolution of uncertainties could create a more favorable environment for M&A.
- Technological Advancements: Ongoing innovations, particularly in AI, will drive Mergers and Acquisitions as companies seek to stay competitive.
Conclusion
The Mergers and Acquisitions market in 2024 is poised for recovery after a challenging 2023. With corporates and sponsors increasingly active, and growing confidence driven by interest rate expectations and economic resilience, the landscape is set for a rebound. Companies and investors should remain attuned to sector-specific trends and regulatory developments as they navigate this evolving market.
Also read our article The Impact of Generative AI In Shaping the Financial Services Sector
