All quiet on the M&A front?

January 2024 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

January 2024 Issue

In the dealmaking space, the last few years have been a rollercoaster ride. Uncertainty caused by the onset of the coronavirus (COVID-19) pandemic contributed to a sharp decline in deal activity in 2020, but was followed by a rapid rebound that saw record transaction volumes in 2021 and Q1 2022.

After the initial shock, the pandemic forced dealmakers to get creative. Deal volumes and average deal size increased sharply, particularly in the middle market. M&A activity held strong in the first half of 2022, continuing the momentum of the previous year.

However, a combination of factors applied the brakes heading into 2023. Geopolitics, regulation and other external factors curtailed deal activity. In the US, the Federal Reserve Bank’s interest rate hike, combined with heightened macroeconomic volatility, resulted in a 36 percent decline in annual M&A value, according to Bain.

Activity is yet to recover. Persistently high interest rates have resulted in global dealmaking falling to a 10-year low. According to the London Stock Exchange Group, the first nine months of 2023 saw $2 trillion worth of deals announced, the lowest since 2013 and down 28 percent on the same period in 2022. The third quarter was the worst third quarter recorded since 2012, with just $616bn in aggregate deal value.

“In the current geopolitical and economic climate, M&A remains challenging. It has become more difficult to agree and complete deals.”

Mega mergers, those deals worth $10bn and above, have experienced a sharp fall, dropping 42 percent over the first nine months of the year compared with the same period in 2022. Dealmaking in technology, which typically accounts for one of the largest shares of overall activity, fell by around 51 percent in 2023, according to Dealogic.

Tough year

Notably, private equity (PE) buyers have been more reluctant to pursue deals. PE deal volumes, year on year, were down 48 percent to $313.73bn by the end of the third quarter of 2023. Higher rates have driven up the cost of borrowing to fund acquisitions. That has taken a toll on PE firms, with tighter credit leading many buyers to tap the private debt market.

PE firms have also turned to solutions such as earn-out structures and contingent value rights (CVRs) to reconcile price differences. Many rolled over stakes in existing companies that were targeted by other sponsors, acquired companies with portable debt structures, and took private publicly-listed companies in which they already owned sizeable stakes.

Given the fall in PE dealmaking, global PE dry powder soared to a record $2.49 trillion around the middle of 2023. Sluggish dealmaking limited opportunities for the deployment of uncommitted capital into buyouts and other investments, according to S&P Global Market Intelligence and Preqin data. The global dry powder total as of early July 2023 represented a greater than 11 percent increase over December 2022’s $2.24 trillion.

An increasingly hostile merger approval process across many jurisdictions is further deterring would-be buyers. Antitrust and national security questions have forced some companies to place potential deals on hold.

That is not to say that 2023 did not see some notable transactions. In September, US technology company Cisco agreed to acquire US software maker Splunk in a $28bn deal, the largest in Cisco’s history. Elsewhere, Norwegian classifieds business Adevinta received a non-binding approach from private equity houses Permira and Blackstone, pushing its enterprise value up to about $14bn including debt. WestRock and Smurfit Kappa also announced a deal to create a global group worth almost $20bn.

The US was the only real bright spot for dealmaking in 2023. According to Dealogic, US M&A contributed a larger-than-usual share of global activity, accounting for about half, and offset a decline in volumes in Europe and Asia Pacific.

Glimpses of optimism

In the current geopolitical and economic climate, M&A remains challenging. It has become more difficult to agree and complete deals. Economic headwinds and increasing regulatory scrutiny will continue to present obstacles to acquirers – especially as inflationary pressures are not subsiding as quickly as hoped, and there are no signs of interest rates being scaled back. Gaining antitrust approvals will be harder for certain acquirers in certain sectors, as will obtaining finance for buyers generally.

Going forward, despite macroeconomic, geopolitical and regulatory conditions, there is hope that the sustained downturn in dealmaking activity reached its nadir in the first half of 2023 and that things are slowly improving.

Companies are expected to begin pursuing acquisitions, divestitures or a combination of the two in order to bolster growth and reshape businesses. Middle Eastern and other sovereign wealth funds are likely to continue to invest across a variety of regions and sectors as they look to diversify away from natural resources. Transformational deals focusing on environmental, social and governance (ESG) and digitalisation should continue as companies funnel resources into these key areas.

Though 2023 was a relatively quiet year for dealmaking, there is optimism that 2024 will mark the start of a recovery.

Richard Summerfield