Global M&A Industry Trends

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.

PE 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.

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.

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.

• Interest rates: Will higher-for-longer rates mean lower-for-longer M&A? In the bond market, US Treasury bond yields have been inverted for almost two years, meaning that short-term bonds yield more than longer ones. Historically, an inverted yield curve was considered a predictor of a pending recession, but a recession hasn’t happened yet. Larger economies such as the United States are managing to stay on track, partly because of continued government stimulus and a robust labour market. Recent interest rate cuts announced by Switzerland, Sweden, Canada and the European Central Bank may signal that further rate cuts are coming. These long-awaited interest rate cuts will be welcomed by dealmakers seeking to fund acquisitions via debt. Today’s higher interest rates squeeze returns, putting a greater emphasis on a potential deal’s value creation story.
• Valuations: Sustained current levels mean higher hurdles for returns. The gap between buyers and sellers remains significant in many sectors, in part because assets that have transacted over the last year have tended to be the stronger ones which have traded at good multiples. This has given some owners artificial hope as to the multiples they can expect to get on ordinary assets. PE owners, in particular, have some trepidation that other portfolio assets—if transacted—may reveal values below limited partners’ expectations. The still-buoyant stock market is also a factor—with valuations that are pumped up, in part by the promise of generative AI, despite the slower-than-anticipated action on interest rates. It’s as if financial markets have priced in central bank rate cuts well before they happen. Uncertainty can be good for M&A activity if depressed markets allow dealmakers the opportunity to take risks. But in this case, the combination of uncertainty and high valuations is a showstopper.
• Elections: Political uncertainty is postponing major corporate decisions, but voting will be over by year-end. This year has already seen a burst of electoral activity, with further elections in the United Kingdom, United States and other countries due to take place in the second half of the year. That’s also when the outcomes of June elections in France, India and the European Parliament will be digested. Dealmakers and markets tend to be wary of elections because of the uncertainty they create about policy direction. And central banks tend to be wary of making moves on interest rates if the timing could be construed (rightly or wrongly) as politically motivated. In the United States, that means the Federal Reserve could wait until the end of the year or early 2025 before finally delivering the rate cuts that the market has long hoped for.
• Geopolitics: Global tensions have grown and are contributing to the fog. No easy or quick resolutions to the war in Ukraine or the conflict in the Middle East seem likely. Indeed, the risk of escalation can’t be ignored. The United States–China relationship also continues to weigh on markets, not least in a US election year. All of this contributes to the uncertain geopolitical climate.
• A resolution of each uncertainty—individually or collectively—could spur a major shift in the market. A weakening economy, especially if it tips into recession, could prompt rate cuts, but it may make growth challenging, a separate uncertainty for dealmakers to grapple with. The recent European Central Bank rate cuts, along with those of some other countries, may provide a glimmer of hope that momentum around interest rates is already shifting. A financial market correction could close valuation gaps—although so far this year, stock markets have continued on a bull run, and many are at record highs. We expect that by the end of the year, economic data will determine the direction of rates and, barring surprises, election results should be largely confirmed. The sooner current challenges resolve, without new challenges arising to replace them, the more favourable market conditions will be for M&A.

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:

• ensuring M&A strategy is aligned with corporate strategy, including transformation and business model reinvention
• evaluating how AI will impact business models—for the acquiror and the target 
• conducting deeper data analysis and due diligence to increase confidence in the business case
• putting a plan in place to identify and retain key talent
• refining an approach to sustainability to both preserve and create value 
• developing a compelling equity story with a robust value creation plan
• getting early buy-in from investment committees and boards

For sellers, that means the following:

• conducting regular strategic reviews to ensure the company’s portfolio is optimised

  —including considering the disposal of non-performing or non-core parts of the business

• performing in-depth pre-sale preparation, including comprehensive business due diligence and scenario planning
• ensuring credible links between offering documents and supporting data, including historical and projected financial information

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.

Finally, 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.