US Deals 2024 outlook

Corporate profits and alternative structures provide reason for optimism

M&A activity has been hampered as dealmakers seek clear economic signals. The swings of COVID-era volatility have subsided but executives are still searching for equilibrium in a world with sizable valuation gaps, higher-for-longer interest rates and geopolitical-driven economic de-couplings.

While deals are still getting done, many executives have taken a wait-and-see approach, especially when it comes to the transformational deals that abounded in prior years. But hesitancy isn't stopping the clock from ticking. Business reinvention is an imperative across industries; business-as-usual strategies need the catalyst of transformation to achieve the growth and profit expectations in current valuations. A combination of divestitures and acquisitions are increasingly the fuel to accelerated business transformation.

Savvy leaders that “transact to transform” now have a chance to create greater value and gain an edge on less decisive competitors. 

Looking ahead

Historically, the end of corporate profit recessions has led to M&A rebounds as earnings rise. There are indications of an earnings recovery in the fourth quarter of 2023, led by earnings growth outside of rate-sensitive and commodities-driven sectors. Our estimates for 2024 see that recovery continuing, which could herald more dealmaking.

Valuation gaps between sellers and buyers also seem to be closing for all but the largest deals, providing another reason for optimism that dealmaking could pick up in 2024.

Several factors make this period of profit recovery different from previous earnings recoveries. Private equity (PE) funds are sitting on more than $1 trillion in dry powder and are under increasing pressure to deploy that capital and deliver returns to limited partners (LPs). Forces that affect PE dealmaking, therefore, could have a notable impact on the pace of M&A recovery.

On the regulatory front, PEs are seeing increasing scrutiny over roll-ups, in which they buy companies in similar industries to build a larger business platform with greater market share. PE firms have seen the value in successful roll-ups over the last 15 years, but this strategy faces challenges due to the complications of potential regulator vetoes.

As we noted in our regulatory playbook, the scope of deals under review is increasing. In December, federal agencies formalized new guidelines that lower the market-concentration threshold for presuming a deal is anticompetitive. They reflect a greater focus on a deal's impact for workers, creators and suppliers — rather than just consumers. In addition to increased scrutiny of roll-ups, they also signal increased scrutiny of tech acquisitions that eliminate potential entrants or nascent competitors, as well as deals involving platforms.

Heightened U.S. government concerns about international deals in sensitive sectors such as technology mean that dealmakers will have to keep a close eye on Washington. These pressures also spotlight the political uncertainty in the 2024 election cycle, which could influence dealmaking for both PEs and corporates.

Besides security concerns, recent geopolitical fluctuations are also impacting commodity costs. While higher commodity costs generally restrain economic growth, in some sectors, such as energy, those rising prices could provide companies with more cash for deals.

While PE has a great deal of capital, relatively high interest rates and other headwinds are slowing the pace of deals. PE firms are using alternative capital structures and private debt along with more traditional bank and leveraged financing. Often, that means rates are 200-300 basis points higher. There is considerable creativity with deal structuring, with PEs often collaborating with corporates (and nonprofits in the healthcare sector) to put together joint ventures, minority investment stakes and other less common structures.

Alternative deal structures

Despite market uncertainty, companies still need to achieve business goals — including transforming their organizations to remain relevant in the future. Higher capital costs are prompting many companies to explore creative ways to achieve strategic goals.

Joint ventures, minority investments, licensing agreements, supply-distribution deals and other structures give leaders more options. For acquirers, it may allow them access to technology or markets without the overhead of a full-blown acquisition. For sellers, it can be a source of new revenue or, for PE firms, allow the partial return of capital at a time when market conditions for IPOs are not ripe.

These alternative deal structures aren’t visible in market data yet, but we are hearing and participating in many more discussions as clients navigate the higher cost of capital.

Sector spotlights

The US 2024 Deals outlook includes a closer look at individual industries in our sector reports. Below, we spotlight three sectors that will be worth watching in the first half of 2024.

Technology, media and telecommunications

Always one of the most active sectors in dealmaking, technology, media and telecommunications (TMT), is seeing smaller, niche transactions and companies strategizing on divestitures. Overall, the sector is being slow and cautious given the market. Big technology transactions still face regulatory scrutiny, which means that some deals may be pushed back until after the November 2024 election, when there should be more clarity about regulation, including updates to the Hart-Scott-Rodino Antitrust Improvements Act that could impact filing. Additionally, TMT organizations operating in Europe that have been designated as gatekeepers by the Digital Markets Act are now required to inform the European Commission of certain merger activity.

Startups in artificial intelligence, semiconductors and cleantech are generating venture funding, giving us perspective on where we may see IPOs in the future. And smaller deals — often with PE backing — are still getting done in software as a service (SaaS) and cybersecurity. As with many sectors, creative deal structure, including co-investments between PE firms and corporates, are being used to fund transactions.

Learn more

Pharmaceutical and life sciences

Sluggish capital markets are creating challenges for pharmaceutical IPOs, but there are still opportunities for firms with drug candidates backed by clinically differentiated trial results. Glucagon-like peptide-1 (GLP-1) compounds, which can be used in weight loss drugs, are also attracting a lot of investor interest particularly as the quest for an oral GLP-1 heats up. The need for M&A remains high due to many blockbuster expirations coming through 2030 and an ongoing drive to increase margins. The market is robust for smaller deals, but given still narrow credit spreads, high benchmark rates are the most important headwind limiting a recovery in large M&A and private equity activity. Companies looking to make deals likely need to strike the right combination of acquiring in-line Phase III products to meet near-term portfolio needs with longer-term (Phase I and II) high-value pipeline assets.

Learn more

Health services

Among payers and providers, there is cautious optimism about the state of the market. More deals are being struck with PE backing between nonprofits and for-profits as well as with other non-traditional retailers, while payers and providers rationalize their portfolios with divestitures and carve outs. Businesses with models that reduce costs and improve quality, plus other retail clinics and technology elements, are also attracting interest. However, federal and state regulators continue to remain focused on minimizing disruptions to healthcare access.

Learn more

The bottom line

A soft landing for dealmakers looks more likely due to decreases in inflation. A strong job market and substantial household savings have helped buffer the economy so far. But higher-for-longer interest rates, geopolitical shifts and increased regulatory activity are contributing to continued uncertainty in M&A activity. Regardless of the current conditions, business reinvention is still a medium-to-long-term corporate imperative for many companies. Due to higher interest rates, corporates with cash have a window of opportunity to make transformative acquisitions in technology, sustainability and business reinvention. We also expect firms to use divestitures to focus portfolios and raise capital that can be used for transformation activities or to reinvest in core businesses. 

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