US Deals 2024 midyear outlook: PwC

M&A recovery starts to take shape

Strong corporate profits, rising executive confidence and stabilizing inflation are driving an M&A recovery after a sluggish 2023. A fixation on potential interest rate cuts has so far hindered a broader bounceback, but we believe dealmakers should accept the new reality instead of wishing for a return of low interest rates.

This is a critical time for dealmakers. In the US, 82% of US CEOs say the average company in their industry will not be in business in 10 years if it fails to change its current business model, according to a recent PwC Pulse Survey. They have an even more urgent near-term outlook: 34% of US CEOs say an average competitor won't survive three years if it doesn't change. Many of those companies may need to strike transformative deals. With a fledgling M&A recovery already underway, companies that stay on the sidelines risk being left behind. Despite the need for change, many companies haven't adjusted their strategic priorities to reflect the beginning of an M&A recovery. The Pulse survey found that only 28% of business executives say they're planning an acquisition or a divestiture in the next 12 to 18 months.

There are opportunity costs from letting the M&A engine idle. According to our research, dealmaking during the bottom of the M&A cycle can generate returns that are over three times higher than regular investments in organic growth. From a strategic standpoint, early movers also will have their choice of targets, enabling them to transform the competitive environment to their advantage — forcing everyone else to play defense.

Our analysis is based on a view that the M&A market hit bottom in 2023 before starting a recovery at the end of the year.

Trends that shaped our analysis include:

Overall deal value in the first five months of 2024 totaled $535 billion, up nearly 30% from the $412 billion in the same period a year ago.
The trendline shows that deal value dropped in the first three quarters of 2023 before beginning to rebound in the fourth quarter. (Deal value is reported in about 30% of deals.)
Motivated in part by AI or energy transition opportunities and challenges, the biggest players have already jumped back into the game with major bets: Twelve transactions valued at more than $10 billion have been announced year-to-date — the strongest start to any calendar year in at least a decade.
April saw strong participation from financial sponsors, which potentially signals the bottom in private equity-involved M&A. M&A value involving financial buyers was higher in April than in any month since May 2022, and four of the seven megadeals announced in April were take-private transactions involving alternative fund buyers.

Our 27^th Annual Global CEO Survey found that 64% of chief executives had not made a major acquisition in the last three years, but 60% of them planned to do so in the next three years.
The stock market indices have touched all-time highs this year. A bounceback in share repurchases reflects C-suite leaders’ optimism regarding their balance sheets.
The initial public offering (IPO) market has shown tentative signs of life with 31 traditional IPOs raising $13.9 billion as of June 6, according to Dealogic. That number is already ahead of the 17 IPOs for $7.7 billion recorded through the first six months of 2023.

Despite these reasons for optimism, several factors have tempered the M&A recovery so far, including increased regulatory scrutiny and a volatile political and geopolitical environment. But the biggest mitigating factor has been the battle against inflation. Continued, elevated interest rates have resulted in fewer deals for more money; M&A volume has been roughly flat since plateauing in the back half of 2023.

Key trends that are shaping the M&A landscape

We’re seeing four main M&A trends as we work with clients across industries.

Capital considerations
Technology and reinvention
Improving confidence
Regulatory evolution

Capital considerations

Stop fixating on rate cuts

The M&A recovery is born from a mixed — though mostly positive — bag of macroeconomic news. While each week brings new data points that have made the past few months feel like it’s a “two steps forward, one step back” economy, a few trends have emerged:

The largest interest rate hikes in decades have helped reduce inflation.
While it has dropped, inflation’s decline stalled before hitting the Federal Reserve's preferred long-term level of 2%.
The economy seems less likely to enter a recession than it did at the beginning of the rate hikes but a “new normal” is still taking shape.

While the Federal Reserve may still ease rates before year-end, how much and when remain to be seen. Our view is that if or when rates drop, they probably won’t stabilize at levels that many dealmakers are accustomed to. But as rate policy becomes clearer, it will encourage buyers to move forward sooner.

At the same time, pressures on margins remain high, creating a kind of winner-take-all environment: The largest companies are benefiting from their investments in technology, including in generative AI (GenAI), automation and machine learning. They are retaining strong margins and showing the value of innovation investments.

PwC research found that since 2019 the top 25 companies have been responsible for at least one-fourth of all growth in revenue, profit, spending and investment among US-listed companies; the top 50 companies have been responsible for almost one-third of growth in several of these metrics. But many smaller companies’ margins are shrinking, particularly as some consumers trade down to lower-cost alternatives.

These companies thus need to boost earnings at a time when the higher cost of capital has raised hurdle rates for deals. We’ve seen companies compensate by using divestitures to clean up balance sheets and raise capital to reinvest in better strategic fits. The market is rewarding sellers focused on balance sheets: Since the beginning of 2023, the median six-month post-announcement excess return for these sellers was 9.5%, according to a PwC analysis of data from Capital IQ.

Despite the potential benefits, sales and spin-offs of business units are well below their average rate of activity over the last decade. In our experience, companies often hold on to non-core businesses too long due to biases, including management’s overconfidence in its ability to improve performance. According to a PwC study, 57% of respondents who tried to fix a business unit said the unit’s value deteriorated or stagnated.

Corporates in certain industries also are seeing trillions in capital flows from the government, particularly in areas such as infrastructure and defense. As a result, we believe industrial products companies are among those to watch in M&A going forward.

Private equity (PE) firms have a different challenge related to interest rates. During the 2010s and the post-pandemic recovery, many PE sponsors benefited from a rising tide that lifted most portfolio company boats. Exits were often plentiful and profitable. Higher interest rates stemmed that tide. Exits have plummeted over the past few years, leading to a record holding period of around 6½ years. As of early May, PE firms are sitting on more than $1 trillion in dry powder, which is just shy of the previous record high, according to Preqin. Some firms have turned to net asset value loans to help return money to investors.

In our view, PE firms need to focus on diligence and operational excellence in order to acquire undervalued targets — such as mismanaged businesses hidden in large corporates — and improve their efficiency. Leading firms are already focusing on strong fundamentals instead of being seduced by the tantalizing growth projections of yesteryear. To reduce volatility, many of the deals we’re seeing are highly structured, including requests for preferred equity or by providing private credit instead of buying a company outright.

In public markets, the most successful IPOs in 2024 have come from mature companies with strong brand recognition. We continue to advise private companies to focus on operating like a public company in advance of any IPO, with an emphasis on strong top line growth, profitability or a path to profitability, and positive cash flow metrics. Any additional rate cuts would likely serve as a strong tail wind for capital markets activity.

Technology and reinvention

Pace of AI-influenced deals picking up

Several megatrends – such as demographic shifts, climate change, political realignment and technological advancements – are forcing companies to reinvent their business models. Companies whose growth strategies are heavily dependent on globalization, plentiful labor and deregulation may be particularly vulnerable.

One way to transform is to embrace new technology. A PwC analysis found that there were eight AI-influenced deals and four green energy-influenced deals worth over $1 billion in the first four months of 2024. That put AI deals on a noticeably faster pace than last year (eight in all of 2023) while green energy deals were slightly ahead of pace (11 in 2023).

Corporates and PE firms should conduct due diligence with an eye to how AI can boost value in potential acquisitions — such as improving the customer experience or employee training. For example, we’ve seen companies use AI to guide call center interactions with customers — prompting workers with less experience or training on ways to better address a customer’s needs.

Improving confidence

Execs close to hitting key level for M&A activity

Executive confidence, a powerful measure of future deal activity, is rising. The Business Confidence Index is nearing a level in which M&A volumes increase the majority of the time. The CEO Conference Board index is also showing relative optimism.

The profit recession we saw in the first half of 2023 and the latter half of 2022 is over. Executives have bought into the soft landing outlook and know that further rate hikes are unlikely. They do still have some concerns, however, including election uncertainty and managing margins in an environment with generally weaker pricing power and tight labor markets.

On the PE side, firms are striking more highly structured deals than in the past — such as by providing private credit or asking for preferred equity. These arrangements help increase confidence in the deal thesis by reducing volatility. Corporates also have tried to mitigate risk (and boost confidence in a deal) by partnering in joint ventures instead of acquiring another business.

Regulatory evolution

Divided government could boost M&A

The regulatory environment is evolving rapidly in the US and internationally as the broad deregulatory approach prominent since the 1980s continues to erode. US regulators are more active, including making antitrust arguments outside of a deal’s impact on consumers — which had been the traditional barometer for decades. While these arguments haven’t always been successful, they still add complexity — and legal costs — to potential transactions.

This year’s elections will likely impact regulation — but perhaps not in the usual historical dichotomy. Though they often differ on points of emphasis, both major parties are generally more pro-regulation than they’ve been in the past, as evidenced by “Khanservative” fans of Lina Khan’s FTC and both presidential candidates floating ideas for additional trade barriers.

A divided government — the Congress in one party’s hands and the presidency in the other’s — generally indicates more of the same and can provide a stable dealmaking ecosystem. But a unified government in either direction could shift which and how intensely deals are scrutinized.

In our view, due diligence is even more critical since it helps companies anticipate potential antitrust concerns and develop plans to address them. Companies also can use alternative deal structures, such as partnerships and joint ventures, to pursue business objectives without running afoul of regulators.

We’ve also seen companies use M&A to add ancillary or niche capabilities, often as bolt-on acquisitions. In some cases, companies are using smaller M&A transactions to consolidate fragmented markets. These deals often garner less regulatory scrutiny than larger transactions.

Other geopolitical factors, including elections in dozens of countries around the world this year, are also becoming more important. Nearly two-thirds (64%) of respondents in our global CEO survey reported that the regulatory environment, to a large or moderate extent, was limiting the way their companies create, capture and deliver value.

Pillar Two, also sometimes referred to as the Global Minimum Tax, may make some international tax strategies less effective. Pillar Two broadly imposes a 15% minimum tax in each jurisdiction in which a multinational group operates, computed on a country-by-country basis, using financial statement income as a starting point. In addition to complex computations that in some cases require more than 200 data points, the results under Pillar Two are not always intuitive.

For example, while the US has a 21% headline corporate rate, many US multinationals are finding their Pillar Two effective tax rate (ETR) for the US to be below 15% due to the manner in which the ETR is computed. A tax benefit under US tax principles may nevertheless be potentially clawed back under Pillar Two principles. Accordingly, the need for tax diligence and modeling in the deal space is more important than ever.

No matter political outcomes in the US, climate concerns remain a top priority with regulators globally. The Basel III Endgame update to global capital standards will likely affect financing and, even if not adopted by the US, could also affect the flows of capital between the US and other countries.

Ongoing tensions with China over trade, cybersecurity and other issues could make M&A activity with that country more challenging. Deals involving strategic assets or critical technologies — semiconductors, critical minerals and even social media — could face significant headwinds. We’ve seen foreign direct investment in China decline over the past few years while India and the UAE are becoming more popular destinations.

In the public markets, annual US IPO volumes typically reveal a pattern of relative consistency across election and non-election years, though there has been some impact on industry specific activity and IPO timing. Historically there is a noticeable dip in IPO activity in November spurred by general political and economic uncertainty. In 2013, 2017 and 2021, we saw slight upticks of activity following the election as political uncertainty settled. If companies are looking to go out in 2024, they may accelerate the IPO process prior to November.

SPAC IPO transactions, which generated significant popularity a few years ago, have declined significantly amidst closer regulatory scrutiny and disappointing performance in general. In light of those developments, we think companies that are ready to go public are typically better off pursuing a traditional IPO.

The bottom line

Business imperatives don’t suddenly disappear because interest rates remain higher than the market would like. Dealmakers are starting to get off the sidelines as they accept that the ultralow rates that shaped the economy during much of the past 15 years won’t be returning any time soon. While rates may drop later this year, the Fed’s current posture suggests any easing would be moderate. Proactive companies have already jumped back in the game to strike an eye-catching number of megadeals. PE firms, which still have mountains of dry powder, are identifying targets in which they can improve operational excellence at speed. While expanding geopolitical conflicts or an unexpected economic U-turn could still upend dealmaking sentiment, cautious optimism is slowly returning to the M&A market.

Industry spotlights

The US 2024 Deals midyear outlook includes a closer look at individual industries in our industry reports. Below, we spotlight three industries that will be especially worth watching in the remainder of 2024.

Technology, media and telecommunications

Despite a decline in volume, there were still more than 1,000 tech industry deals in the first four months of 2024, the most of any industry, according to S&P Capital IQ. AI is a major disruptive force whose potential impact is difficult to overstate. Nearly half (48%) of TMT companies overall report GenAI adoption in a few or many areas of their business. The enormous computing power that AI requires is also driving significant action in chipmaking and infrastructure.

Many tech and media companies are working to take advantage of vast stores of consumer data. The streaming industry, which has consolidated in the last few years, is now turning to data as a way to boost profits. This includes offering advertisers better targeting, improving users’ experience by suggesting content they might enjoy and becoming better at targeting tiers of services (e.g., ad-supported versus ad-free) to the right customers.

Big tech has critics in both political parties, meaning acquisitions in this industry are likely to face more scrutiny no matter what happens in the fall elections. Additionally, regulators are more closely scrutinizing horizontal and vertical transactions, data privacy and cybersecurity-related considerations, and national security implications. This trend has been evident for the past few years, which is now formalized by new merger guidelines released in December 2023.

Energy

Deal activity has heated up as companies reposition themselves to address geopolitical shockwaves and a continuing transition to clean energy. Deal value nearly tripled to $83 billion in the first four months of 2024 compared to the same period a year ago, according to S&P Capital IQ. Divestiture volume, while small, also tripled in the first four months of this year compared to the same period in 2023.

Conflicts in the Middle East and eastern Europe are top of mind since both regions contain major oil exporters. That can create opportunities for other large producers, including the United States. It also can drive deals as various players weigh the costs and benefits of alternative energy sources.

Investments in carbon capture and green energy continue, but a wholesale move away from fossil fuels isn’t practical in the short or medium term. Some private equity funds that announced a shift away from fossil fuel investments in the last few years are coming back to the industry as they see the potential for outsized returns. The industry is also consolidating. Upstream companies, such as oil and gas exploration firms, are showing interest in midstream assets like refineries and distribution networks.

Financial services

The financial services sector deserves a closer look due to notching $2.5 billion in divestitures in the first four months of 2024, a 244% increase from the same period last year. Acquisition value also jumped about 50% to $169 billion.

Increased insurance capital requirements in Bermuda have impacted transaction volume. But we expect dealmaking will likely accelerate in the second half of the year as the requirements get priced into deal terms. Thanks to high returns in the financial markets, insurers are earning record profits, so they’ll be well equipped for acquisitions.

Insurance brokerages continue to find buyers among both private equity-funded buyers and corporates. With deal volume steady and deal value staying relatively high, only larger companies have the debt or equity for these acquisitions.

Among large banks, there seems to be little appetite for significant acquisitions at the moment, due in part to uncertainty over the fall election. There is more interest in some non-US assets, such as in Canada and Japan, where demographics and other forces are creating opportunities for consolidation.

Heavy exposure to commercial real estate — where some subsectors continue to struggle — could lead to losses or impaired assets on some community and regional bank balance sheets. That, plus the opportunity to consolidate, might lead to more deal volume for those institutions.

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