The current M&A cycle has seen record highs in 2021 and a decade-low in 2023. Things are looking up for 2024, but obstacles still abound.
In an ideal world, 2023 should have been a perfect year for mergers and acquisitions. Advancements in generative AI, expiring pharma patents and record cash reserves should have sparked a flurry of deals.
Unfortunately, high interest rates, antitrust regulations and recession fears put a halt to that. Then something miraculous happened in Q4 and all of a sudden, confidence returned to the market, and with it hope for what NASDAQ is calling “The Year for M&A Resurgence.”
Strong signs of an M&A rebound
One of the major challenges to M&A activity last year was increased scrutiny of large scale transactions. Many companies were afraid of pursuing deals that might be overturned by overzealous antitrust legislators, resulting in fewer big-ticket (over $2 billion) deals.
The volume of deals in 2023 fell by 16% from 2022, while the value fell disproportionately by 23%.
But then the last quarter of the year came and the market went into a frenzy. Five of the largest ten deals of the year were announced in Q4, including the two $60 billion energy deals.
This was the first time that the old industries surpassed tech deals by value in a very long time, and the first sign that the market was making a comeback.
The other sign that sparked optimism was inflation cooling. As a result, there is every indication that the Federal Reserve will reduce interest rates at some point this year. The Bank of England and the European Central Bank are also expected to lower interest rates.
The third sign that 2024 is going to be a busy year for M&A is that it is no longer optional for two key industries: life sciences and private equity.
By the end of 2030, pharmaceutical patents worth $200 billion will expire, and that is after the Inflation Reduction Act will take an axe to drug prices starting in 2026. This will force many pharmaceuticals to dig into their cash reserves from Covid and splurge to increase their drug pipelines.
Private equity went quiet in 2023 with the volume of deals falling 33% year-on-year, due to a combination of high interest rates when they wanted to invest, and low valuations when they needed to sell. Now, they are being forced to do the latter as investors are withholding cash until they get some returns. “Sellers have conceded to lower valuations and the pressure to meet a certain return on investment is ticking,” said Pete Stavros, co-head of global private equity at KKR. PE firms have a record $2.8 trillion in investments and must now begin selling some of their long-held investments.
The final sign that M&A will rebound this year is increased activism. In the past year, activists have broadened their scope to large-cap companies and have increased their activities in Europe. “Activists continued to pressure boards to sell companies, in whole or, increasingly (perhaps reflecting the weaker M&A market), in part (via a spinoff or divestiture),” partners from Morrison Foerster wrote in a report.
If all of these signs hold true, then 2024 should exceed 2023 both in terms of value and volume of deals. Of course, some sectors will experience this positive shift more than others.
Sectors to Watch
While tech remained the busiest sector by volume, the surprise industry in 2023 was natural resources. Besides the two huge deals at the end of the year, there were smaller consolidations especially involving U.S. shale oil fields. That trend is expected to continue this year as energy companies continue to splurge on fossil fuels and green energy targets.
We have seen hints of that already. Chesapeake Energy is offering to buy Southwestern Energy for $7.4 billion to create the largest independent natural gas producer in the U.S. Britain’s Harbour Energy ended last year with an $11.2 billion offer for Wintershell Dea’s non-Russian assets.
The life sciences division is also prime for dealmakig. AbbVie announced two big-ticket deals in one week: $8.7 billion for Cerevel Therapeutics and $10.2 billion for ImmunoGen. Bristol Myers Squibb also announced two deals in a week in December worth a combined $18.2 billion. While analysts expect transformative deals to crescendo, smaller deals will increase in volume.
Asset management is also expected to blossom this year, spurred on by private credit and infrastructure deals. BlackRock got the ball rolling by splurging $12.5 billion on Global Infrastructure Partners. “Growing public deficits, a modernizing digital world, advancing energy independence and the energy transition are driving the mobilization of private capital to fund critical infrastructure,” said BlackRock founder, chairman and CEO Larry Fink.
Even though large tech companies are still in their austerity phase and continue to lay off staff, the race for the best AI product will continue to spark dealmaking. The tech industry has already provided the largest deal of the year so far with Synopsys snappiung up Ansys for $35 billion. It is also responsible for the second-largest deal – Hewlett Packard Enterprise’s acquisition of Juniper Networks for $14 billion.
As exciting as the year ahead looks, we must not ignore the elephant in the room.
Dealmaking hurdles still persist
In all of this pentup optimism, it would be naive not to acknowledge the challenges that still remain. Interest rates have not come down yet and there is no telling when they will. While most estimates predict Fed cuts in Q2, there has been no definitive timeline.
Campaigns against large-scale deals are still present, which could hurt deals valued at over $10 billion.
Most importantly, 2024 is the biggest election year in history, with half of the world’s population going to the ballot boxes. Elections tend to be bad for M&A due to uncertainty about new regulation.
If the market is somehow able to escape all of these hurdles, dealmakers are going to have their hands full this year.
M&A activity probably won’t reach the heights of 2024, but anything will be better than last year and that would be reason enough to celebrate.
