After a sluggish 2023 in which global merger and acquisition activity fell almost 20% to $2.87 trillion – the lowest level since 2013 – the question in the corporate world, is: ‘Will M&A roar back in 2024?’
The answer is optimistic due to several positive factors, including:
- Stabilized interest rate environment and less inflationary pressure;
- Committed capital that private equity firms may need to deploy in the new year; and
- Attractive consolidation and growth prospects within expanding industries and sectors such as industrial services, technology, healthcare, and renewable energy, as larger industry players vertically integrate and gain market share through the acquisition of competitors and suppliers.
M&A activity last year was slow - about 20 percent off of 2022 volumes, which was already 10 percent off of 2021 levels, the high watermark of M&A activity over the last several years.
In 2023, rising interest rates threw a wrench into deals as the typical 90-day timeline to get a deal across the goal line was impacted by parties trying to work out the right economics, and settle on agreed-upon prices. Deals occur when there is a common understanding of value among parties, and higher rates moved the goalposts around what acquirers were willing to pay, made debt financing more expensive, and lowered the value of acquisition targets. Companies may have postponed plans to go to market in 2023, but pent-up dealmaking energy may return in 2024.
Inflation appears to be cooling, offering hope for interest rate stability and even declines. This would make financing deals more attractive, encouraging activity. Acquirers that held back in 2023 due to uncertainty may be ready to pounce in 2024. Corporate profits are improving. The stock market is recovering, driving up the public market valuations of selling companies, and leading to more common ground in deals. Private equity firms have more resources to spend and will recalibrate how much cash they can put into a deal.
Additionally, several industry sectors exhibit strong potential for deal activity and possible consolidation in 2024, including:
- Industrial services, which have seen significant consolidation over the last 18 months. Technical and engineering services, industrial chemicals, services to extend the life-cycle of manufacturing and power industry facilities have been attractive to acquirers.
- The growth of artificial intelligence, cybersecurity, cloud computing, and Fintech startups, all make technology an appealing industry for increased M&A activity.
- Healthcare is another attractive sector due to advancements in medical technology, biotechnology, pharmaceutical and drug portfolios, and an increased need for more efficient services delivered by hospitals, specialty clinics, and management companies.
- Renewable energy, green technology, and sustainable solutions, such as carbon capture, are emerging areas to watch, as companies look to expand their portfolios, and gain market share. There remains a call for environmental, social, and governance considerations that may influence deal decisions.
Cities across the Adams and Reese footprint – southeastern United States, Denver, Washington, DC, and my home state Columbia, South Carolina – have seen an increase in M&A activity over the last 5-10 years as these areas of the country have been targets for inbound investment and ripe for further economic development. These areas have seen significant inbound migration of workers and talent – acquisition opportunities follow where people want to work and live. Taxes are generally lower. Regulatory hurdles are generally lower. These cities and states have economic climates that encourage the deployment of capital.
Caution to the Wind
While there are many factors that may improve M&A activity in 2024, there are some cautionary factors that we must keep an eye on. Geopolitical turmoil, conflicts among countries, and global instability could depress dealmaking, whereas resolutions to these conflicts or improved relationships among nations could unlock cross-border M&A opportunities. Market fluctuations and volatile equity markets could make valuations unpredictable. While lending conditions are improving, there may still be a credit market consciousness with acquirers wary of riskier deals.
2024 is an election year, and election years are hard to predict when it comes to impacting M&A. Some think election years freeze activity because of new leadership uncertainty, while there have also been election years when M&A deals undergo a frenzied pace because of anticipated changes to the tax code. We will see activity ebb and flow as we get closer to November.
Antitrust scrutiny and other regulatory hurdles are additional factors to watch. In December 2023, the Federal Trade Commission and U.S. Department of Justice released “Merger Guidelines,” identifying the likely procedures and enforcement practices the agencies will rely on as they review proposed transactions.
A press release by the agencies said the guidelines “emphasize the dynamic and complex nature of competition ranging from price competition to competition for the terms and conditions of employment, to platform competition. This approach enables the agencies to assess the commercial realities of the modern economy when making enforcement decisions and ensures that merger enforcement protects competition in all its forms.”
The Administration has shown a renewed interest in antitrust enforcement, particularly around large consolidations within industries. If you are a selling entity or acquirer that is in an industry that has experienced significant prior consolidation, these guidelines are something to keep an eye on. For example, if a private equity firm is rolling up a particular segment of health care – such as cancer clinics which are pretty contained, niche, and targeted – and is trying to acquire a large group of those centers in a particular area, let’s say across the Southeast, that kind of deal could draw the attention of regulators. Such activity can be viewed, in theory, as eliminating competition. Concentration and consolidation issues that are part of any rollup strategy that a private equity group may engage in - trying to consolidate players in one industry that is thinly spread to create one larger platform - is the type of thing that could put you on the radar of the FTC and Justice Department.
We will wait and see how active these guidelines become in the face of larger deals and industry consolidations, and how antitrust enforcement will impact M&A activity.
Prepare for M&A Deals with Experienced, Qualified Advisors
You could not do an M&A deal today without a qualified, M&A experienced attorney and/or financial advisor in your corner. Deals are too complex, and due diligence has become an art of its own. The buyers in this space are very sophisticated. They are using regional, national, and international law firms. They spend significant sums of money on due diligence, and they’re hiring some of the best consulting and accounting outfits in the world to conduct due diligence. You have sophisticated people who are getting under the hood of your business. They are asking tough questions and are engaged in a more invasive process that in prior years.
If you walk into that situation and are not properly prepared with experienced advisors and legal counsel who can help manage the amount of information that needs to be transferred and deal with inquiries coming from specialists who are picking apart your business, then you will not have the bandwidth to both deal with that process and simultaneously run your business successfully.
Have a dependable team of advisors – attorneys, financial advisors, and investment bankers – who can shoulder that burden and create the best results in your next M&A deal.
Conclusion
Predicting the future of M&A is never easy. However, with a mix of potential tailwinds and headwinds, 2024 appears poised for a cautious return to dealmaking activity. While large-scale mergers may remain elusive, increased mid-market transactions, sector-specific consolidation, and innovative deal structures could define the year. Ultimately, the M&A story of 2024 will unfold as economic and geopolitical uncertainties give way to either renewed confidence or persistent anxiety. The dance between these opposing forces will determine the rhythm of dealmaking in the months to come.
About Our Author
Rob Bethea leads the Adams and Reese Middle Market Mergers & Acquisitions Team. He is ranked by clients among the top Corporate M&A attorneys in South Carolina by Chambers USA. Practicing since 1997, Rob advises clients on business transactions and provides counsel on startups, mergers, stock and asset acquisitions, recapitalizations, taxation, business contracts and agreements, corporate governance, succession planning, franchising, securities, and finance. With advanced training in tax law, he has extensive experience advising clients on the often-complex tax consequences of business decisions and deal structures.