After high hopes in January of an upswing in dealmaking activity, a thick fog of uncertainty descended on M&A markets, clouding M&A prospects and causing a precipitous decline in deals during the first half of 2024. What caused this fog, and, more importantly for dealmakers, how quickly could it lift? Breaking through the clouds, we have identified some macro factors, including a few surprising market anomalies that we believe hold the key to unlocking dealmakers’ confidence and charting a return to a healthier level of M&A activity.
If there is one certainty in all this uncertainty, it is that M&A activity will bounce back—although likely faster in some sectors than others. The M&A show must go on, even if the timing is uncertain. This is in large part because the need to do deals is greater than ever. As we noted in our 2024 M&A Outlook, each month that goes by with a restricted flow of deals creates more pressure on the strategic and economic fundamentals that underpin transactions. The lower levels of M&A activity over the past two and a half years have created pent-up demand (and supply), particularly in the private equity (PE) universe. In addition, corporates are turning to M&A to accelerate growth and reinvent their businesses at a time of dynamic change: AI is disrupting business models, and it seems as though everyone is investing in it. CEOs’ desire to accelerate their companies’ growth in a low-growth economy is also creating opportunities for M&A. And within sectors, specific factors are favouring a buy-versus-build approach in many situations.
None of the above imperatives will go away anytime soon. Thus, it is not a matter of if M&A will rise again. It is a matter of when. Behind the scenes, we are seeing an uptick in activity among sellers, with sale preparations mounting, full-potential business plans being developed and many vendor due diligence engagements already underway. While somewhat anecdotal—and too early to show in the reported deals data—this activity bodes well for buyers, too, as more quality assets are expected to come to market in the next six months.
“The daunting combination of high interest rates, current valuations and political uncertainty has been a showstopper for many deals. Nevertheless, the strategic need for M&A continues to grow stronger, creating pent-up demand which will be unleashed as these uncertainties resolve.”
Brian Levy,Global Deals Industries Leader, Partner, PwC USPE portfolios are ripe for sale. At the beginning of the year, according to PitchBook, PE firms held more than 27,000 portfolio companies globally, about half of which had been on the books for at least four years—typically the length of time at which they are primed for exits. Fast-forward to mid-2024, and the majority of those investments have aged another six months. Many PE firms in the process of raising new funds are being questioned by investors about the limited realisation of returns, increasing the pressure to sell. PE funds that fail to make distributions from existing fund investments may find it more challenging to raise new capital.
Corporates are focused on transactions to accelerate growth and achieve business transformation. Corporates are operating in a more disruptive, complex and uncertain environment, with macroeconomic factors, geopolitical issues and technological disruption—now heightened by AI—all of which create a need for companies to innovate and reinvent their businesses. Companies with well-thought-through M&A strategies for optimising their portfolios by acquiring the right capabilities, talent and technology or divesting non-core assets will be the best placed to succeed.
AI could be a catalyst for all sorts of transaction types. AI—particularly generative AI—has the ability to disrupt companies, from corporate behemoths to startups, as well as sectors and even entire industries. Although generative AI is still in the early stages, its impact on business and society is already starting to be significant. AI has the capability to create massive cost efficiencies, enable new revenue streams, open new channels to customers, and enhance the value proposition on the one hand and commoditise it on the other. The AI wave is coming, and we believe the powerful forces at play will require companies to reevaluate their strategies, business models, markets and competitors. The transactions created by all this movement may range from traditional M&A to partnerships, alliances and other innovative relationships we have not previously seen.
Inorganic growth is required to overcome anaemic organic growth. Macroeconomic factors and monetary policy actions in many countries have created an environment of low economic growth in which organic revenue growth will be much harder to achieve. Consequently, companies may need to turn to M&A as part of their inorganic growth strategies to fire up their top lines.
In January, with interest rates apparently at their peak and widely expected to decline, dealmakers were primed for an uptick in activity that would finally put an end to one of the worst M&A bear markets in a decade. Instead, central banks kept rates higher for longer than anticipated, and while some promising megadeals were announced in the first few weeks of the year, the momentum fizzled. At the half-year mark, deal volumes were down 25% compared to the first half of 2023, and many dealmakers have been left wondering how much worse things can get. However, deal values have held their own, growing 5% in the first half of 2024 mainly because of megadeal activity in the technology and energy sectors.
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Global: In the first half of 2024, while the value of M&A deals rose by 5% compared to the first half of 2023, overall transaction volume fell by 25%, continuing a downward trend that started in 2022. In the first half of 2024, deal volumes were just over 23,000 and deal values reached $1.3tn. This is a far cry from the record levels of activity in the second half of 2021, which saw almost 34,000 deals and deal values of $2.7tn.
Also noteworthy is the greater impact this downturn is having on PE firms than on corporates. M&A activity involving a financial sponsor was down 34% in the first half of 2024. For corporates, the decrease was 18%. While that is still significant, it means that the corporate share of the M&A pie has increased from 60% in the previous two years to 63%. This can be attributed in part to a competitive advantage from corporates’ lower dependence on debt.
PE has fared better from a deal value perspective, primarily because of some larger deals in the first half of the year. While the top corporate deals this year easily surpassed the largest PE ones, the deals PE firms have been involved in suggest that the industry’s appetite to do larger deals is coming back. Some of the larger PE buyout deals announced so far this year include the $12.6bn acquisition by an investor group led by private equity firms Stone Point Capital and Clayton, Dubilier & Rice of the remaining stake in Truist Insurance Holdings; BlackRock’s $12.5bn proposed acquisition of Global Infrastructure Partners; and Permira’s $6.9bn proposed acquisition of Squarespace, Inc.
Typically, there are some sector bright spots in any M&A downturn. But the current market hasn’t spared any sector from the decline in deals activity. Even sectors most affected by global megatrends—such as technology and energy—went underwater as M&A deal volume trends inverted across all sectors. Deal values fared slightly better, increasing in four sectors—technology, financial services, oil and gas and hospitality and leisure—largely because of recent large deal activity, including Capital One’s proposed $35.3bn merger with Discover Financial Services, Synopsys’s proposed $32.5bn acquisition of software company Ansys and Diamondback’s proposed $25.8bn acquisition of upstream oil and gas company Endeavor Energy Resources.
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Several factors have contributed to the slower M&A market over the past two years, and looking at prior periods of uncertainty can often provide clues as to how things may play out. But this time, some striking anomalies appear to have turned historical convention on its head. Understanding the various forces at play may help dealmakers better assess risks, scenario plan and develop strategies, giving them more confidence to act when the time is right.
While the factors listed above contribute to M&A market hesitation, we are also seeing significant markers that can help guide dealmakers out of the fog. We list the main ones here.
Given the uncertain timing of an M&A rebound, and the underlying challenges to completing transactions today, it is more important than ever for dealmakers to have a strategic roadmap for inorganic growth. Being prepared is the dominant message. But what does that mean in practice?
For buyers, that means the following:
For sellers, that means the following:
—including considering the disposal of non-performing or non-core parts of the business
Both buyers and sellers will need to be open to alternative structures, including partnerships, alliances, rolling part of a seller's equity interest, earnouts and other forms of capital structuring.
“Strong preparation and restoring confidence will be key for the resurgence of M&A activity. We are already seeing signs that deal preparation is gearing up, and once confidence follows, we expect the market—and dealmakers—will move quickly.”
Lucy Stapleton,Global Deals Leader, Partner, PwC UKFinally, momentum can be a self-fulfilling prophecy. Even in the current climate of uncertainty, with interest rates still high and valuations above expectations, the resolution of one or more of the uncertainties discussed here could be enough to provide the much-needed boost to the market and restore dealmakers’ confidence. In any case, for the PE industry, deals are their lifeblood, and we are confident PE firms will navigate the challenges in due course. For corporates, the strategic need for M&A with the technological pace of change and disruption is an imperative.
After all, the M&A show must go on.
Eric Janson
Global Private Equity, Real Assets and Sovereign Funds Leader, Partner, PwC US
Tel: +1 617-834-4900