M&A: Thoughts on the Cycle in 2024

We are updating our M&A market outlook with thoughts for the new year ahead. FactSet’s U.S. Mergers and Acquisitions (M&A) data revealed continued weakness for M&A as 2023 progressed. Though deal values bottomed in 1Q23 and saw an uptick in October with the large Exxon/Pioneer and the Chevron/Hess deals, they dipped again in November and aggregate transaction counts were lower through the first 11 months.

Aggregate deal values and deal counts in FactSet’s data are both lower by ~25% year-to-date, a disappointment after the sharper declines in 2H22 of nearly 50% year/year. With these declines in hand, and some improving sentiment on interest rates, our initial bias is that it’s easy to be more optimistic about rising M&A activity in 2024, though a sharp rebound also seems unlikely.

Headwinds...

2023 was a weak year for M&A both in count and dollar amounts because of recession fears, rising inflation and interest rates, bank failures, and global trade and military conflicts. And this weakness was despite reserves in private capital pools and new large government spending programs. Though perceptions of an interest rate peak have helped market sentiment in the past couple months, rates may remain higher than recent history during the next few years, even with modest declines. In addition, geopolitical tensions and lingering recession fears should remain headwinds for M&A activity.

... But the Setup is Improving

While meaningful headwinds are still in place, market comfort is improving with the future cost of capital. Importantly we see significant changes on many fronts that should drive the desire to make strategic changes across industry. Businesses are seemingly faced with an extraordinary set of major shifts in the markets, to which they must respond.

Any levels of continuing economic uncertainty may lead some to become sellers, perhaps not of entire companies, but of divisions and assets, particularly in those cases where there is relatively high leverage. In other words, we see companies taking advantage of the recent improvement in market sentiment. These types of transactions would continue the recent trend of smaller average deals and would also fit in the “resilience” themes among buyers bolstering their stronger areas and sellers jettisoning weaker areas.

Strategic response to geopolitical tensions should also drive M&A activity. Whether shifts in global trade, avoiding hot spots, or improving supply chain security, there are strong reasons for companies to on-shore production, friend-shore production, or secure resource supply chains.

Some may focus on bolstering or repositioning domestic operations while others may add international operations to reduce dependency on others while still others may reconfigure supply chains to better assure resource and component supplies. Separately or in conjunction, these drivers could all lift M&A activity as firms adjust their positioning.

Efforts to decarbonize operations could also drive some M&A deals to access lower carbon energy or other technologies. Industrial automation and monitoring devices, for example, should continue to be in-demand businesses.

Varying regional carbon policies are also evolving and will impact regulatory costs in some jurisdictions. These trends could suggest a business shift as well. In these cases, the objectives of joint ventures and other structures (rather than full-company M&A) may be to keep operations balanced and change exposures—either because of seller requirements or scarcity of targets.

“Carbon” decisions could also be an added factor in global supply-chain adjustments. Real assets with energy transition benefits and resource plays could accordingly garner more M&A interest.

Continued digitalization and AI are also possible M&A drivers as companies determine how to leverage new technologies for decision intelligence. Machine learning—with ever more powerful algorithms and more data—could benefit and redirect many hard-asset companies.

Controls, greater resources, and supply processing ownership could be targeted areas to optimize businesses further for growth and efficiency. Healthcare, particularly treatment algorithms and drug development, and technology itself seem like areas ripe for AI application. Some in both sectors may choose M&A opportunities to leverage or capture the tech.

Private buyers including some international funds remain in good positions to continue buying businesses. That said, private equity firms were very inactive in 2023, and indeed many took the sub-optimal path of returning money to shareholders. Higher rates made leveraged buyout math more difficult and widened the buyer-seller value gap.

The IPO market is a key factor in the private capital cycle. That is, there’s a cash-out or monetization goal for many private funds after a period of time. Many private equity funds chose not to sell businesses in 2023 due to interest rate, market, and economic uncertainties.

IPO activity in 2023 plunged again after a tough 2022. But after lower IPO counts in 2022 and 2023, there are some signs that private capital pools may increasingly look for more sales or IPOs and hold portfolio companies to maturity. Some activity, too, may be driven by private capital’s continuing trend to both:

• Improve weaker businesses out of public market view

• Win the ongoing race to control cream-of-the-crop businesses

We see several positive and negative variables that could develop and impact M&A levels going forward.

Conclusion

There remain some meaningful headwinds for the M&A markets but, with less concern about rising interest rates and recession of late, the setup should yield improved levels of M&A activity in 2024. Despite some wildcards that could go either direction, levels of M&A should be driven higher by the significant changes in globalization, decarbonization, and private capital cycles.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.