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    INVESTMENT BANKING | INNOVATION EDGE

    Five factors that could drive M&A in 2024 

    08 Mar 2024

    Following a slow market in 2023, M&A volumes are set to increase as sponsors become more active while corporates continue to leverage their healthy balance sheets in search of strategic transactions. With growing expectations of rate cuts and a soft landing in the US and healthy pressure from activists, 2024 could shape up to be a solid year for the market, according to our Global M&A team.

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    Five factors that could drive M&A in 2024
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    Deal flow gathers pace

    In 2023, global M&A activity slowed to the lowest level in almost 10 years as aggressive rate hikes, geopolitical tensions, high inflation and a banking crisis depressed CEO sentiment. But as the fourth quarter began, the market started to get a clearer picture of the likely trajectory of rates, prompting a notable pickup in deal activity and a return of confidence. 

    Momentum has continued to build in early 2024. As of 1 March, YTD global volumes are up 66% over 2023, with particular strength in the Natural Resources and Technology sectors. As the year continues, M&A recovery is likely to be characterised by five key trends: 

    1. Corporates will continue to be ambitious

    Corporates are leading the way in the early stages of the M&A rebound, accounting for more than 80% of transaction volume. Companies are better positioned from a balance sheet perspective than before the pandemic (with less leverage and more cash on hand), and benefit from relatively robust equity currency for use in M&A transactions. Importantly, firms also see a strategic need to transact and are likely to continue to press their short-term advantage.  Current high levels of activity are supported by historical trends; companies that make acquisitions early during the cycle significantly outperform over the long run.

    2. Sponsors will become more active

    Of the 15 largest M&A deals announced in 2024 so far, only four1 have involved a sponsor. But the rest of the year is likely to look significantly different, with a sharp rise in activity expected, as sponsors have a record $1.46 trillion of dry powder.2

    At the same time, the low level of exits relative to investments means that private equity firms are under pressure from limited partners to return capital before they commit to new funds. With debt capital market conditions improving, there will be increased opportunities for sponsors to monetize assets.

    1 FactSet
    2 Prequin Global Report Private Equity 2024

    3. Rate cut and soft-landing expectations are driving CEO confidence

    Decision makers’ confidence is driven by an easing rate cycle and the resilience of the US economy, which is likely to keep the spotlight on US assets. The current consensus opinion is for an end to the most aggressive central bank rate tightening cycle in a generation, and most forecasts anticipate positive – though relatively weak – GDP growth in 2024

    M&A drives nearly half of all activist campaigns

    4. Transactors will accept some regulatory and political uncertainty

    Regulators have had some recent successes with classic anti-trust challenges. However, where regulators have taken non-traditional approaches – such as contesting vertical integration – to challenge transactions, transactors have still prevailed on a number of occasions. This has encouraged transactors to take calculated risks in relation to the regulatory environment.

    The impact of the upcoming presidential election on activity is currently unknown. Despite low sentiment towards corporates on both sides of the House, corporates are expected to plough on with deals, especially those that are transformational.

    That said, in the current environment, transactors should expect mergers to require longer timelines between signing and closing.

    5. Activists will catalyse additional M&A activity

    M&A constitutes one of the most frequent demands by and consistently effective strategies of activist investors. Activists are typically emboldened early in the cycle, as it is relatively straightforward to generate returns from their demands in an improving macroeconomic and financing environment. Activism has largely been destigmatised in the US, allowing activists to behave more like private equity. Indeed, private equity has adopted many approaches common to activists and the two groups now often collaborate. Even where activists are unsuccessful, they can have a significant impact, as companies put in play by activists can allow strategic buyers to target assets that would not otherwise be available.

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    What to expect in 2024

    A favourable environment

    The M&A market faced a wide range of macro uncertainties in 2023. Not all of these have fallen by the wayside – the geopolitical environment is more fraught than a year ago, while headwinds in China continue to grow.

    However, much has changed as the outlook for Fed policy and inflation has become clearer. A resilient US labour market and expectations for both positive GDP growth and rate cuts should contribute to a favourable dealmaking environment with continued corporate appetite and renewed sponsor activity.

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