Thought Leadership  •  December 13, 2023

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M&A Industry Trends & Outlook 2024

M&A activity has slumped throughout 2023 due to a range of factors. The financial environment had a blend of recession fears and inflation. The Federal Reserve's move to raise interest rates and counteract inflation has left many players wary of borrowing money at inflated rates. Then there is the market volatility perhaps most on display in the financial sector, where several small to midsize lenders in the US failed.

Together, trends like these have contributed to a slow level of M&A activity. In the first quarter of 2023 alone, M&A volumes were down to $575 billion, from $1.1 trillion in Q1 of 2022. Through three quarters, the downward trend remained intact, and expectations were that there would be less than $3 trillion in M&A volumes for the full year for the first time since 2013.

The Federal Reserve has paused on inflation rate hikes for now, with its last hike coming in July 2023. Other sectors of the market seem calmer. Will these trends bring an increase in the amount of M&A activity moving into the new year? Or will things continue to remain choppy, with inflation still in play even while recession fears have so far proven unfounded?

Our M&A outlook for 2024 examines these and other global M&A industry trends.

M&A Market Trends

Here are a few of the biggest M&A trends to follow in 2024:

Digital Transformation

Digital transformation as a result of AI adoption is one of the largest mergers and acquisitions trends for 2024. Within the financial landscape, AI has its share of benefits and challenges as companies figure out the best way to harness its potential for growth.

On the positive side, AI will create new opportunities for M&A activity. AI analysis tools can help companies identify potential targets, perform due diligence, and stay on track of a challenging deal timeline. This can speed up the frequency and pace of M&A activity.

When it comes to the deal itself, both sides will increasingly rely on AI tools to mine, analyze and search due diligence data. Both parties are also paying more attention to the risks and rewards of AI tools. Buyers will need to take a SWOT analysis-informed view of AI tools to understand how their business model will be supported by AI usage within the target.

M&A Deal Volume Trends

Remember that 2021 was an excellent year overall for M&A deals. 2022 started off strong with mergers, with multiple deals worth more than $10 billion. In the second half of the year, volumes began to dip due to several factors. As previously mentioned, lower corporate valuations reduced the incentive to buy or sell. Rising interest rates made it unappealing to borrow money. Inflation shifted company focuses elsewhere. Global volatility also swayed companies to press pause on M&A activity.

These headwinds have started to slow in some global regions. Many expect the reduced friction to encourage more M&A activity. Experts have identified three trends they believe will exert a positive influence on M&A volumes:

  • Partners seek acquisitions to support the business core: Rather than acquire targets tangential to core business purpose, companies will seek M&A partners that closely align with their core. One example to note is the trend of pharmaceutical companies pairing up with biotech firms.
  • Private equity investors are increasing investment activity and shifting focus: In the past, private equity investors were in no rush to move into new market sectors. Often, they preferred to time the market. These days, private equity places a greater emphasis on action rather than waiting for the perfect time to invest. As a result, private equity firms are increasingly investing throughout the business cycle. Their increasing activity can buffer M&A volumes in down cycles. Not only are private equity firms no longer waiting to buy, but their focus has also shifted toward a portfolio-based approach to M&A. Instead of the larger deals in past years, firms are focusing on acquisitions that deliver a strategic edge. Take-privates, in which a public company is bought by private equity firms and delisted from the market, were at a record high in 2022, and that continued into at least the first half of 2023. The newly private company can transform away from the spotlight. If all goes well, it can deliver a lucrative return on investment for the private equity funders.
  • International deals increase to gain a competitive advantage: Twin forces of the pandemic and geopolitical instability led to a decline in cross-border deals. The reluctance to international M&A activity seems to be decreasing. Experts are forecasting a spike in international M&A volumes as players seek a competitive advantage within the supply chain by partnering with international firms.

Distressed M&As on the Rise as Companies Restructure 

2023 has brought an uptick in distressed M&A activity. One clear example is the financial sector acquisitions driven by US bank failures, with the most well-known example being Silicon Valley Bank. Experts expected the trend to continue in the second half of the year.

Companies that borrowed with the expectation of higher returns may find themselves struggling to repay debts due to lower-than-expected growth. Restructuring can provide companies with a new path forward. While this type of M&A may not be desired, it's often the best choice for a business that is struggling in the current market environment.

Companies That Can Acquire Without Financing See a Competitive Advantage

Cash is king, the saying goes. In the current environment, that may well be true. Companies that have access to capital without needing to finance are well-positioned to take advantage of the current market. For them, strategic acquisitions are actually a part of the business strategy. They can buy up partners when competition is low and gain a strategic advantage within their sector.

Shareholder Activism and ESG as Forces of Change

From 2021 to 2022, activist shareholder campaigns increased by 14%, Morgan Stanley analysts discovered. The most common complaint was the need for operational improvement. Activists have not rested: In the first half of 2023, the number of campaigns hit a record-high of 850, according to S&P Global Market Intelligence. Activist shareholders are taking advantage of the inflationary headwinds to compel companies to make changes, with a correlative increase on M&As. M&A activity can support a company's environmental, social and governance (ESG) objectives. Within the energy sector, increased interest in carbon capture technologies is driving acquisitions.

Small to Midsize Deals Stabilize and Strengthen

The decrease in M&A volumes appears to be one of size. Overall, deals worth more than $1 billion dropped more than twice the rate of deals worth less than $1 billion. There are a few reasons smaller deals are less affected and expected to recover sooner. One is volatility. Large deals are more likely to be affected by global market forces. Small deals are not as impacted by volatility and are less likely to go off-track because of external forces.

Small deals are also less expensive. Companies may be able to finance the purchase with existing financial reserves or by selling off assets, rather than seeking financing. Thus, the high interest rates are not as much of a turnoff as they are for companies that need to finance their M&A activity.

The regulatory environment also plays a role. Big deals are subject to stricter regulations than small ones. Regulatory and compliance issues can deter a large company from the M&A process. For smaller deals, the obstacle just isn't there. There are sectors of the market where M&A activity remains strong. For these reasons, some analysts forecast a steady rise in M&A activity in the coming year.

M&A Market Outlook for 2024

Taken together, analysts generally agree that M&A activity will rise. They share a caution that the rise may not be as immediate as some players would hope. This is in part due to the stickiness of several factors inhibiting deal making. Inflation and the correlating challenge to the borrowing environment is top of mind for many would-be dealmakers, who cannot bring themselves to borrow in the current environment unless it is absolutely necessary.

Taking somewhat of a silver linings approach, analysts widely believe that the challenging market conditions will themselves lead to opportunities for increased M&A activity. Consider the rise in corporate restructuring seen in many sectors. The root issue is low valuations, in which the company (or sections of the company) are seen as having less value. Companies may find themselves with subsidiaries or assets that feel mispriced relative to valuations. Disposing of the mispriced asset can free the company of unwanted weight; a cash-rich or private equity buyer may feel as if it’s a bargain.

Private equity firms tend to hold onto investments for an average of three to five years. Considering the uptick in private equity investments in 2020 and 2021, that three-to-five-year time frame is here. If these companies stick to the usual playbook, they'll soon be looking to cash out. This in turn can bring new life into a market that feels lackluster at present. Analysts are optimistic about M&A volumes moving into 2024.

Geopolitics will continue to exert an influence on the M&A outlook landscape. Domestically, the capital gains tax increase that many were fearing seems to be off the table for now — but with the presidential election in November 2024 and the balance of power in Congress at stake, there are no certainties. Internationally, the political landscape remains fraught with continued wars between Israel and Hamas and also in Ukraine. Investors are still cautious and attuned to threats on a global stage. However, the war in Ukraine is not as shocking as it was at onset; thus, there's reason to believe its influence is on the wane.

Looking ahead, many of the factors that suppressed M&A activity are still in play. There are also opportunities coming to fruition. Analysts believe that M&A activity will begin to rise, driven by several interrelated factors.

More than ever, companies that find themselves engaging in M&A activity need tools, workflow and file management capabilities that leverage advanced features including artificial intelligence. See why companies choose DFIN for their M&A software solutions.

Priya Shah

Priya Shah

Marketing Analyst