Global M&A Industry Trends

We are hearing the starting bell sounding for an upswing in M&A activity, signalling an end to one of the worst bear markets for M&A in a decade. Whilst the strength and speed of the recovery remain uncertain due to lingering macroeconomic and geopolitical challenges, we believe we have reached a tipping point. We expect the M&A markets to embark on a new upward trajectory, with a steady increase in activity as the year progresses. Indeed, a flurry of deals in the past few months suggests that this rise in dealmaking may already have started in some sectors.

Three main factors underline our newfound optimism that we are entering a new phase of dealmaking in 2024: first, the recent improvement in financial markets, spurred by decelerating inflation and expected reductions in interest rates; second, the pent-up demand for (and supply of) deals; and third, the pressing strategic need for many companies to adapt and transform business models that is the very essence of dealmaking.

The M&A market is entering a new phase in 2024 that will differ from prior ones. The upturn will almost certainly be more measured than the surge of dealmaking activity which occurred during late 2020 and in the record-breaking year of 2021. Dealmakers will be facing very different conditions in 2024 to the past few years and will need to adapt their playbooks accordingly. For example, although credit markets have reopened, financing is more expensive than it has been for a decade. The higher cost of capital will put downward pressure on valuations and require dealmakers to create more value to deliver the same return as before. As the wider macroeconomic and geopolitical landscape remains uncertain, dealmakers that are able to assess risks and plan for different scenarios will be more confident taking actions than those who may be waiting for greater clarity to arrive.

From an industry perspective, we are seeing some important sectoral variations: the M&A rebound has already started in energy, technology and pharma, for example, whereas other sectors—including banking and healthcare—remain slower, mirroring the broader market conditions. Many companies in sectors such as retail, real estate and construction are still recovering, or are in restructuring mode, creating potential opportunities for M&A.

Overall, we believe successful dealmakers will be those who prioritise strategy and assess the impact of the megatrends—such as technological disruption (including the rise of artificial intelligence), climate change and demographic shifts—on their business models and who are able to use transactions to take steps along their transformational journey. Key elements to drive value creation in 2024 will be a need for speed, a focus on talent and the willingness to be bold.

Dealmakers are understandably eager for the worst market for M&A since the period following the global financial crisis in 2008 to be over—and soon. Global deal values halved in just two years to US$2.5tn in 2023 from their peak of more than US$5tn in 2021. Global deal volumes also declined, down 17% from just over 65,000 deals in 2021 to around 55,000 deals in 2023. As we predicted in our 2023 mid-year M&A outlook, mid-market deals held up because they were easier to get done in a difficult financing environment and dealmakers followed a strategy of making a series of smaller deals to drive transformation and growth.

However, megadeals—transactions with a value in excess of US$5bn—fell by 60% from their peak of almost 150 deals in 2021 to less than 60 in 2023 but are starting to grab headlines again. The two largest deals in 2023 were both energy deals announced in October—Exxon’s US$59.5bn proposed acquisition of Pioneer and Chevron’s US$53bn proposed acquisition of Hess. And although January often spells a quieter month for deal announcements, 2024 has already seen several megadeals being announced, including Hewlett Packard Enterprise’s proposed US$14bn acquisition of Juniper Networks, Blackrock’s US$12.5bn proposed acquisition of Global Infrastructure Partners, Chesapeake Energy and Southwestern’s proposed US$7.4bn merger, and DigitalBridge and Silver Lake’s US$6.4bn proposed equity investment in Vantage Data Centers.

We believe that these transactions highlight a greater willingness among dealmakers to do larger, more complex deals. At times, that means finding creative solutions to address current challenges, such as financing and regulatory oversight, to grow and create value and sustained outcomes.

A closer look at individual sectors and subsectors indicates where M&A is already turning upwards. In 2023, deal volumes increased in aerospace and defence, mining and metals, power and utilities, pharma, industrial manufacturing, automotive, and technology compared to 2022. These sectors look set to continue, and future subsector hotspots include AI, semiconductors, electric vehicles, batteries and energy storage, biotech, space, consumer health, and insurance brokerage.

In some sectors, M&A activity has started to recover.

• In energy, utilities and resources (EU&R), the energy transition continues to drive business transformation as companies reposition themselves to meet sustainability challenges. The number of EU&R megadeals almost tripled in 2023 compared to the prior year, and the two largest deals of the year were energy ones.  

• In TMT, technology continues to be a key focus, and the software deals market is attractive for PE players. The largest tech deal of 2023 was Cisco’s US$28bn proposed acquisition of Splunk, which was announced in September 2023.

• In pharma, large-cap companies pursuing midsize biotech targets to fill drug pipeline gaps, strong investor interest around diabetes and weight loss GLP-1 drugs, and a continued focus on precision medicine are likely to fuel M&A activity in 2024.

For others, M&A may take longer to recover. 

• Financial services M&A is likely to remain challenging in 2024, but the need for financial institutions to transform should give dealmakers greater optimism. 

• Healthcare services will likely see some distressed hospital deals as companies grapple with financial and operational difficulties such as funding cutbacks and clinical workforce shortages. Digital innovation will help address staffing issues, and telehealth and health tech and analytics companies will continue to be attractive to investors and create opportunities for M&A.

• In consumer, where purchasing power is still constrained—especially for middle-income families—retail, hospitality and leisure sectors may lag. While hospitality and leisure dealmaking showed declines in both deal volumes and values in 2023 compared to the prior year, we expect the return of tourism to pre-pandemic levels and consumer preferences for experiences will increase the flow of businesses coming to market in 2024.

An improved outlook

The recent improvement in the financial markets provides the backdrop for a resumption of a healthier M&A market. The repeated hikes in interest rates over the past two years appear to have ended, with most bankers predicting between three and six rate cuts in the US, possibly beginning as early as March. Even if rates drop more gradually, the financing environment will be more stable, and thus it will be easier for dealmakers to price, execute and plan their deals. 

The mood in financial markets has changed markedly. In the last two months of 2023, the S&P 500 and the NASDAQ composite indices posted double-digit gains of 12% and 15%, respectively and the Nikkei 225 and FTSE 100 gained 6% and 5%, respectively, over the same period. The almost 100 basis point decline in 10-year US Treasury notes, from a peak of just under 5% in early November to around 4% at the beginning of 2024, amounts to a massive sigh of relief: the markets now believe inflation, while remaining stubborn, will no longer present a debilitating challenge to the economy. 

Enterprise value to forward EBITDA multiples for major indices increased by about 15-20% in 2023. Nonetheless, forward multiples remain below three-year highs, which suggests valuations still have some room to run. Furthermore, the increase in multiples lags the overall increase in enterprise value, which implies the strong performance in the major markets is grounded in improving fundamentals and expectations. Investors in 2023 were concerned about a possible recession, but they have entered 2024 with more optimism, which we believe will support a reactivation of the M&A market over the coming year.

The subdued IPO markets are another factor supporting our view that an upturn in M&A activity will occur in 2024. Quieter IPO markets tend to create more opportunities for M&A as companies seek an alternative exit strategy. With global IPO proceeds down 30% in 2023 from 2022 (from US$173bn to US$121bn), the backlog of companies waiting to go public has grown. Whilst there is cautious optimism for an IPO recovery, windows will be tight due to upcoming elections in many countries. Investor tolerance for risk has declined due to recent disappointing post-IPO performance, and we expect issuers will be challenged on their equity story, profitability, cash generation, and, ultimately, valuations. We expect many companies will plan for optionality, with a dual-track approach to exits in 2024, likely resulting in an increase in M&A.

Demand and supply

Each month that goes by without a normal flow of deals puts more pressure on transactions that need to be done. We believe dealmaking has reached an inflection point: the lower levels of M&A activity in 2023 have created pent-up buyer demand and a buildup in seller assets.

Private capital has almost US$4tn of ‘dry powder’—capital which needs to be put to work or returned to limited partners. At the same time, private capital has approximately US$12tn of assets under management (AUM), almost double the amount in 2019 before the start of the global pandemic, highlighting the significant build-up in unrealised value in portfolios over the past three to four years. With numerous PE funds either nearing or past their typical deadlines for their portfolio investments, they will find themselves under increasing pressure from their limited partners to return capital, and we expect this will lead to an increase in exit activity.

The attractiveness of M&A on the corporate side has also been building. At a time when rapid change from global megatrends, including digitalisation and decarbonisation, is bringing about major transformations, companies are re-evaluating their strategies and looking to reinvent to stay ahead. As companies look to scale, gain access to technology and talent, and accelerate growth, acquisitions are one obvious path forward. Alternatively—or additionally—divestitures of non-core or underperforming assets will allow them to focus financial and managerial resources on core strategic growth areas.

Time to go further, faster

CEOs and PE funds are taking a closer look at how to create value—and quickly. From unlocking new sources of value with technology to accelerating decarbonisation, businesses believe transactions are, in many cases, the best way to keep up with market developments and will allow them to transform faster than would otherwise be feasible. 

We think that both the conditions and the expectations for M&A will be substantially different in 2024 than they were before—and even during—the pandemic, particularly as they relate to navigating uncertainty, financing and restructuring.

Navigating uncertainty

Many uncertainties continue to cloud the outlook for 2024, including economic volatility, geopolitical tensions, increased regulatory scrutiny, supply chain disruptions and upcoming elections in several countries. However, CEOs have learned a lot over the past few years, including how to navigate amid uncertainty, and are showing greater willingness to take calculated risks and to find solutions to equip their businesses for the future. We believe this will extend to developing an M&A strategy which will support their growth and business transformation objectives.

Financing

Credit conditions in early 2024 are markedly improved compared to during 2023, when institutional lenders were struggling to syndicate debt and the debt markets were effectively shut. In the past decade, private credit funds have emerged as key players in the credit markets—providing capital to support leveraged buyouts, recapitalisations and other types of private equity transactions, and offering more flexible and customised financing solutions. Private credit is playing an ever-increasing role in the provision of financing for deals and with global dry powder of US$450bn at the end of December 2023, they are in a strong position to support an increased level of dealmaking activity in 2024.

With the recent stock market performance and overall heightened public company valuations, the use of stock as a currency to finance deals is expected to increase and thus avoid the need for debt financing entirely. The two oil and gas megadeals announced in late 2023 are recent examples of mergers for which the consideration was 100% stock.

Distressed opportunities

There are approximately US$300bn of leveraged loans maturing between 2024 and 2026. In a higher interest rate environment, this will inevitably translate into a steady rise in dislocated capital structures. Where value breaks in the equity, but a vanilla refinancing is unachievable, shareholders may either explore a refinancing with an alternative credit provider, an amend-and-extend (A&E) arrangement with existing creditors, or may opt for an M&A exit. However, where value breaks in the debt, there may also be potential for more innovative M&A solutions—for example, partial disposals to service debt. In situations where credit fund lenders take over businesses in a restructuring, they will likely be open to right-sizing balance sheets and using M&A and refinancing tools to drive a turnaround, and accelerate their internal rates of return. This will likely translate into more M&A opportunities.

In late 2023, the fall in US Treasury yields prompted some companies to refinance debt maturing in the next few years rather than wait for expected interest rate cuts in 2024 to lower borrowing costs. Companies unable to refinance may find themselves burdened with higher debt servicing costs. This may create a need to restructure to reposition themselves for the future. In these situations, restructuring to improve the ability to refinance is not just financial, and it may come in different forms—for example, portfolio assessments to improve the balance sheet by selling parts of the business—or operational restructuring to improve profitability and reduce risk. Distressed businesses are also seeking to strengthen their balance sheets and cash positions through M&A solutions, whereby they are being acquired by a stronger new parent. When this occurs, it may be necessary to be executed through a legal process such as a UK scheme or similar arrangement, depending on the jurisdiction. Furthermore, we are seeing examples in sectors such as retail and hospitality where companies are taking action to reduce debt by removing some of the more capital-intensive assets, such as real estate, from balance sheets.

As the M&A rebound takes hold, dealmakers will need to be prepared for the change in conditions and expectations that will accompany it. Four essential aspects to bear in mind in 2024:

• The need for speed. Due to the pent-up buyer demand and a reluctance to sell at lower valuations, when quality assets do come to market, we expect them to be highly competitive. In such situations, preparedness will be key, and speed can be an important differentiator. We anticipate AI may soon provide the ability to accelerate dealmaking preparedness by removing some barriers to transactions, speeding up the deal process and helping reduce the number of failed deals. Dealmakers should have buy-in from key stakeholders and decision makers—including boards, investment committees and C-suites—well in advance. 
• Reinventing your business model. PwC’s 27th Annual Global CEO Survey found that 45% of CEOs doubt their company’s current trajectory will keep them viable beyond the next decade. While 97% of CEOs report having taken some steps to change how they create, deliver and capture value over the past five years, it is clear that more action is needed, particularly in sectors likely to be most affected by the force of the global megatrends such as technological disruption, climate and demographic shifts. Dealmakers need to take proactive steps to assess the risks and opportunities and be prepared to pivot to find new sources of value. CEOs who apply a broader lens on areas such as strategy and new business models, operations, workforce, sustainability, tax, risk and regulatory compliance into their value creation approach and business transformation will be best positioned to accelerate their strategic goals and achieve sustainable growth.
• Where’s the talent? As companies look to leverage technology and transform, generative AI will become more widely deployed, and talent will again be at a premium—and a key value driver. Dealmakers will need to answer important questions before transacting: what are the acquirors’ capabilities needed, who possesses those capabilities at both the acquiror and acquiree, and what programs and plans are required to ensure the key talent sticks around?
• Being bolder. We could come up with 10 or more reasons why this is a bad time to do deals, ranging from the macroeconomic uncertainties to the higher cost of capital. But the next wave of M&A is coming, whether you are ready for it or not. Of course we recommend you weigh the pros and cons carefully, and take the new challenges into account. But don’t let them hold you back. Hearing the starting bell ring should trigger action for companies looking to adapt to the rapidly changing landscape across sectors. If you want to get ahead of competitors for the future, you need to act now.

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