Global M&A Intelligence Report 2024

We believe that there will be increased activity in 2024:

• inflation in many key markets appears to be slowing bringing a more stable interest rate environment. Many analysts have pencilled in rate cuts during 2024. While these rate cuts are not predicted to be as significant as previously thought, the more positive sentiment should give greater confidence to buyers over debt pricing;
• the significant amount of private equity ‘dry powder’ still needs to be utilised;
• investors are becoming less happy to make more commitments to PE houses until they see realisations – so there is pressure not to hold on to portfolio companies in the hope that valuations improve;
• many corporates have strong balance sheets, which may lead to opportunistic acquisitions funded without third party debt. However, we do expect corporates to continue to show caution in their dealmaking. We think that these deals are more likely to be smaller deals and not transformational / “bet the bank” transactions;
• similarly, we have seen corporates focussing on the core aspects of their businesses and exploring divesting non-core areas (including through carve-out transactions). We expect this trend to continue; and
• after a prolonged period of lower M&A activity, sellers may revisit their initial pricing expectations and acknowledge that they are unrealistic in this market. This may bring buyers and sellers closer on commercial terms and lead to an environment that facilitates deal-making. In certain sectors, we expect to see a continued increase in earn-outs to help bridge the valuation gap.

We have seen a number of transactions and processes begin in January. The deal pipeline looks more robust than it did this time last year. We do not expect to see an immediate strong market recovery in 2024, but we do anticipate an uptick in activity in the second half of 2024. However, the M&A market is notoriously difficult to predict and there are many that remain pessimistic about the outlook for 2024, particularly given the US general election later this year. One phrase gaining traction in the market is “survive until 25”. Hopefully, that pessimistic view turns out to be incorrect.

We are likely to see buyers continue to be cautious when pursuing acquisition targets and undertake more detailed (and perhaps staged to stagger adviser cost) due diligence (including from an ESG perspective). This will be one factor that results in deals continuing to take longer to complete.

An interesting, and perhaps surprising, theme seen in our recent Global M&A Intelligence Reports is the impact (or lack thereof) that the robustness of the M&A market has on deal terms. Since we launched our report ten years ago, we have seen a gradual drift in deal terms globally in favour of sellers. That is probably not a surprise in what has been a very hot M&A market for many of those years. However, generally, in a quieter market with fewer deals, it would be reasonable to expect a shift in deal terms back towards buyers. However, our data tells us that, to date, this is not the case. Over recent years, deal terms have either been stable or have continued to move in favour of sellers. The pace of change has been greater when the M&A market has been busy but, in general terms, our data shows there is little difference between deal terms in a busy M&A market (such as in 2021) and the quieter markets during COVID and H2 of 2022. Of course, what our data does not show us is whether in any given transaction a seller has had to accept a lower valuation than it had hoped to obtain and as part of the commercial bargain secures more seller-friendly deal terms.

Given how embedded certain seller-friendly deal terms have become, we do not expect to see a significant change in 2024 and, in an uncertain world, we expect sellers to continue to prioritise deal certainty as a key deal term.

In 2023, there were a limited number of new money debt deals and PE’s focus was on “portfolio management”, covering everything from funding bolt-on acquisitions, refinancings all the way through to taking the keys. Due to the lack of suitable opportunities to deploy capital, we did not really see a large shift in the terms and conditions of the debt documentation swinging back in favour of the lenders, as one might have expected in a more difficult market.

It's clear that “higher for longer” is currently the prevailing view and so, with the all-in cost of debt remaining more expensive than in the last ten years, this should impact on debt capacity and the associated cash capacity to service that debt, valuations and so dampen deal activity. However, if there is some degree of certainty around markets, interest rates and other macro-conditions, then we hope that market participants can start to properly price risk and value assets allowing for an increased deal flow.

However, the markets are adaptable and participants can, and will, find a way to do deals - as seen in the rise of NAV financings or hybrid products. Certainly, the liquidity raised in the private markets (both private equity and private debt) should prove a catalyst for deals to take place. In corporate lending, we are expecting a significant number of refinancings as the 2020 vintage deals (which were refinanced either on a 3 + 1 + 1 basis or a 5 year basis) will need to refinance again in 2024. Whether or not borrowers elect to do a full refinancing or simply kick the can down the road with an amend and extend remains to be seen. What we are confident about is that deals will continue. However, they will take longer to gather the necessary deal conviction and then to close. Deals will also be subject to greater scrutiny by all parties to ensure that they're not making a misstep or miscalculation meaning advisers will have to work harder and be more creative to come up with bespoke solutions for their clients.

The UK is expected to relax some aspects of its National Security & Investment Act notification regime, removing some deals from mandatory notification requirements. However, more countries, especially in the EU, are due to introduce FDI notification regimes, including Ireland. On the antitrust front, we expect a number of deals to be called in for review by the European Commission or national competition authorities in Europe even where the usual notification thresholds are not met. In the UK, additional CMA jurisdictional thresholds to be introduced by the forthcoming Digital Markets, Competition and Consumers Act which will expand the scope of CMA merger control intervention.

We expect the soft market for W&I to continue with favourable terms and pricing available to insureds. That said, we have seen a recent uptick in deal activity with many of our underwriter clients noting a significant increase in deal submissions with better quality transactions and quicker deal processes. This would suggest that the sluggish market may be slowly coming to an end.

We expect to continue to see a more bespoke approach to specific elements of a transaction: for example, we discuss particular issues (such as immaterial jurisdictions by revenue and number of employees) with underwriters at the outset of a transaction and prior to underwriter selection to ensure the W&I and the due diligence dovetail to ensure the best insurability of the transaction and that there are no “nasty surprises” after underwriting.

We also expect to see a greater use of new breach cover on transactions with a short period (e.g. up to two months) between signing and closing, as buyers look to gain protection against issues arising in the interim period.

Whilst much discussed during the pandemic, we have not yet seen particular use of synthetic policies to date; however, this appears to be changing where there are particular fact patterns that dictate its use, which reinforces the increasingly bespoke nature of policy terms, which is a welcome trend for buyers.

We expect to see the most activity in:

• Energy and Natural Resources
  The Energy Transition is a fundamental global shift from traditional, fossil-fuel-based energy systems to sustainable and renewable alternatives, impacting business across all industries. Dealmaking will be affected as there is a collective push to redefine how we price, produce, consume and think about energy.
• Technology
  We expect to see increased investment focus on AI. Despite some reservations voiced by dealmakers, businesses are progressively diverting their focus and resources toward enterprises rooted in AI. The emergence of this groundbreaking technology, coupled with the technical expertise found in AI startups, is being recognised as a potential catalyst for M&A and amplifying value creation.
• Life Sciences
  M&A activity looks set to increase, particularly in biopharma, after a relatively unremarkable 2023, although alliances and partnerships are also expected to feature. The prioritising of core assets is likely to continue with further divestments likely to create value and allow large groups to refocus. Obesity, oncology and immunology look to be high on investors’ priority lists.

Each of these sector trends will be explored in more detail through our sector supplements which will be launched following the main Report.