If there is one certainty in all this uncertainty, it is that M&A activity will bounce back.
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, PwC’s Global M&A Industry Trends: 2024 Mid-Year Outlook identifies some macro factors, including a few surprising market anomalies that could hold the key to unlocking dealmakers’ confidence and charting a return to a healthier level of M&A activity.
“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 US
“The Lithuanian M&A market in the first half of 2024 was rather calm, the number of transactions was 13% lower than a year ago. However, there is a sense that it will pick up significantly in the second half of the year if no “Black Swan” events occur. I stick to my optimistic view for 2024 presented at the beginning of the year that in light of interest rate cuts, the maturity of private equity (PE) funds and general strategic need to do deals, the rebound in M&A market is imminent.”
Rokas Žemaitis,Head of Deals, PwC Lithuania*includes disclosed deals with a primary location in Lithuania. Source: Mergermarket, PwC analysis
The Deals Imperative
Private equity (PE) portfolios are ripe for sale, with about half of the 27,000 portfolio companies globally having been on the books for over four years, which is a typical length of time at which they are primed for exits. Thus, investor pressure on PE funds to return capital is growing.
“Baltic private equity firms have their challenges as well. They are not only pressed for some major exits due to their maturity, but they also have to address lingering concerns and rebuilding investor trust following the dismissal of one of the largest Baltic fund managers last year due to discovered misconduct," – Rokas Žemaitis, Head of Deals, PwC Lithuania.
Corporates are focused on transactions to accelerate growth and achieve business transformation, as they operate in a more disruptive, complex, and uncertain environment. Thus, companies with well-thought 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, with its ability to disrupt companies, from corporate behemoths to startups, as well as sectors and even entire industries.
Inorganic growth is required to overcome anaemic organic growth. Macroeconomic factors and monetary policy actions have created an environment of low economic growth and companies may need to turn to M&A to fire up their top lines.
So just how is the M&A market performing?
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. Thus, Global Deal volumes dropped 25% in the first half of 2024 as compared to 2023.
However, deal values increased 5% with the deal values reaching $1.3tn in the first half of 2024 mainly influenced by some larger deals occurring in the technology and energy sectors.
Corporate’s share of M&A increased by 3 percentage points to 63%. Suddenly, it’s the corporates, not PE, that seem to have the upper hand. M&A activity involving a financial sponsor declined 34% in the first half of 2024 compared to 18% for corporates, allowing the corporates to take a greater share of the M&A pie.
Megadeals are up 16%, with 35 $5bn+ deals announced during the first half of 2024 . One country—the United States—and two sectors—technology and energy—saw most of the activity. In energy, for example, the worldwide transition to renewable energy sources is accelerating consolidation in the oil and gas sector. In the technology sector, the promise of AI and technological advances are keeping the sector active.
Sector trends invert, with the current market not sparing 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.
“The M&A market in Lithuania during the first half of 2024 was also supported by some already anticipated transactions. For example, the recently announced strategic investment of media group “15min” into the radio station group “M-1”, with the aim to become one of the strongest and largest media groups in Lithuania.”
Rokas Žemaitis,Head of Deals, PwC LithuaniaAn M&A Recovery: Obstacles to Clear
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. The main obstacles to an M&A recovery are interest rates, valuations, elections, and geopolitics. A resolution of each uncertainty—individually or collectively—could spur a major shift in the market.
“With Lithuania having just held presidential elections in May, European Parliament elections in June, and upcoming parliamentary elections in October, combined with the ongoing war in Ukraine and the upcoming US elections that could potentially alter current political alliances, there is a lot of uncertainty in the region, which impacts the M&A sector as well. Nevertheless, the Lithuanian economy is showing resilience and continued growth, while recent foreign investment has slightly rebounded. In Lithuania, cumulative FDI rose by 5.8% over the year, amounting to €33.7 billion as of 31 March 2024, according to Lietuvos Bankas,”– Rokas Žemaitis, Head of Deals, PwC Lithuania.
M&A Market Signals to Guide Dealmakers Forward
There are a number of markers that can help guide dealmakers out of the fog.
- Exit pressure grows, as the backlog of companies waiting to go public has grown and the hopes for IPO recovery remain, especially in tech sector. However, the window in 2024 is narrow due to elections in the UK and US.
- Debt and financing for M&A is on track to almost double compared to 2023, with stronger issuance activity in the United States and European high-yield bond markets and leveraged loan markets in the first half of 2024.
- US and European high-yield bond markets issuances were $201bn in the first half of 2024 compared to $223bn for the whole of 2023;
- US and European leveraged loan market issuances were $359bn in the first half of 2024 compared to $379bn for the whole of 2023.
- The onward march of private capital continues with ~$13tn of assets under management globally, growing at ~8% annually over the past five years.
- Investment in the energy transition will be significant requiring both public and private capital.
“The energy sector in Lithuania is anticipated to remain active in the context of M&A in 2024, mainly due to the continuous activity of energy companies and main developers. Already in May, Latvenergo concluded its largest wind farm acquisition deal by acquiring a 124 MW wind farm under development in Telsiai. Additionally, Ignitis Grupe announced the start of the sale process for a minority stake (up to 49%) in the Vilnius cogeneration power plant and other renewable energy companies as part of their asset rotation program. This deal could be concluded within the year and might become one of the largest energy deals in recent years."
- Corporates transform operating and business models to address technological disruption and adapt to other global megatrends which will lead to both acquisitions and divestitures.
- Restructuring and distressed M&A will offer opportunities for companies looking to fill gaps in competencies and geographies.
Key Actions for Dealmakers: Preparing to Break Through the Clouds
Strong preparation is essential for dealmaking success. For buyers, this means a focus on strategy, AI, data analysis, talent, sustainability, and the equity story. While for sellers, strategic reviews, pre-sale preparation and supporting data are critical. 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.”
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