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Boards may want to prepare themselves for a potential resurgence in M&A transactions this year. In 2023, deal activity was hampered as dealmakers took a wait-and-see approach as they sought equilibrium in a world with sizable valuation gaps, higher-for-longer interest rates and geopolitical-driven economic de-couplings. But an apparent earnings recovery that started in the fourth quarter, inflation that appears to be in check and more than $1 trillion in private equity funds ready to be invested could have a notable impact on the pace of M&A recovery over the next 12 months.
Key M&A factors for boards to keep an eye on in 2024
Boards should view any resurgence in M&A as an opportunity to “transact to transform” that can create value and provide your company with an edge on its competitors. PwC’s US Deals 2024 outlook described several catalysts that could drive the 2024 deals environment:
Earnings recovery: 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.
Shrinking valuation gaps: Valuation gaps between sellers and buyers seem to be closing for all but the largest deals.
Capital ready to be deployed: Private equity funds are sitting on more than $1 trillion in dry powder and are under increasing pressure to deploy that capital.
Alternative deal structures: 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.
One open question is government scrutiny over roll-up deals, which involve a company buying a competitor 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. There have also been government concerns about international deals in sensitive sectors such as technology.
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US Deals 2024 outlook: signs of a potential rebound in M&A
The bottom line
While a soft economic landing is looking more likely due to decreases in inflation, the runway for M&A deals isn’t completely free of uncertainty because of geopolitical shifts and increased regulatory activity. But boards should remember that their previous hesitancy hasn’t stopped the clock from ticking on business model reinvention. These deals are still imperative to achieve the growth and profit expectations in current valuations and to transform the business so that it remains relevant over the long term.
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