M&A in 2024: Navigating opportunities and challenges

Market Sentiment and Activity Levels (2023-2024)

• Dialogue levels in late 2023 have reached those seen in 2021 and the first half of 2022, described as the most active M&A markets in history, though actual transaction volume has not yet matched this dialogue intensity.
• 2023 dealmaking suffered a slow start due to rapid interest rate escalations, recession fears, and geopolitical instability, creating a prolonged period where buyers and sellers could not align on valuation paradigms.
• Valuation realization is taking longer than the typical 6–9 month cycle due to strong earnings and cash flows persisting despite rising discount rates, particularly in North America.

Sector Performance and Trends

• Natural resources (energy, chemicals, metals, and mining) have been "torrid," driven by high cash flows, long-term macro demand, and a strategic accumulation of scale ("molecules").
• Healthcare remains highly active, fueled by record cash balances among large pharmaceutical companies and the development of new attractive molecules.
• Technology M&A experienced a significant decline in volume compared to 2019–2020 peaks but shows a recent rebound and is expected to resume in 2024 as valuation shifts become more accepted.
• Industrials have maintained consistent activity throughout the pre-2020, COVID, and post-2023 periods without a significant dip.
• Mega-deals (exceeding $10 billion) remain resilient, concentrated in energy and healthcare, while activity in technology mega-deals has notably declined compared to previous cycles.

Buyer and Seller Dynamics

• Private Equity (PE) deal volume has shrunk dramatically from a peak of 35–40% of the M&A market, primarily due to high financing costs challenging return targets and valuation mismatches.
• Corporate M&A volumes have remained relatively robust and consistent compared to 2018–2019 levels, with corporations acting as a stabilizing force as PE capacity contracted.
• Public-to-private transactions by private equity and infrastructure funds have seen record activity this year, serving as a primary outlet for large-scale PE exits.
• PE clients are under pressure to monetize over 1,000 portfolio companies due to demands from limited partners for capital returns and the expectation of a "higher for longer" interest rate environment.
• The recovery in PE activity is expected to begin with smaller and midsize asset exits before returning to larger portfolio asset sales.

Structural Drivers and Deal Types

• Corporate simplification and spinoffs are expected to continue in 2024, driven by activist investor pressure and the ability of boards to execute unilateral decisions without reliance on buyers or IPO markets.
• CEO and board confidence is identified as the number one driver of M&A decisions, with a prevailing view that there is no "perfect time" to transact and opportunities should be seized when windows open.
• In 2024, inflation is expected to decline and interest rates to normalize in the second half, potentially improving the macro outlook and giving CEOs greater confidence to plan strategic moves.

Geographic and Risk Factors

• M&A activity outside the US, particularly in Europe and Asia, is expected to lag US trends by approximately six to nine months due to weaker macro growth forecasts and higher exposure to regional geopolitical risks.
• Key risks that could derail the optimistic outlook include the US election year uncertainty, unpredictable interest rate moves in response to inflation data, and further geopolitical instability.
• Historical data suggests that when client sentiment shifts to "risk-on," M&A activity can ramp up very quickly.
• The ratio of M&A activity to GDP is currently at a record low (low single-digit percentage) compared to historical mid-single-digit levels, suggesting significant long-term upside potential.