Mergers and Acquisitions in 2024: Headwinds to Tailwinds?

World mergers and acquisitions plunged to a decade low final 12 months, with $2.9 trillion in deal worth introduced, down 17% from 2022. Dealmakers principally stayed on the sidelines as they grappled with greater inflation, rising rates of interest, elevated regulatory scrutiny, and market uncertainty, whereas potential sellers remained anchored to earlier, richer valuations.

Exercise amongst non-public fairness (PE) patrons declined final 12 months after accounting for almost 25% of all buyouts within the earlier two years as tighter financing situations and better rates of interest made finishing leveraged buyouts harder. In Canada, of the 441 accomplished transactions final 12 months, most had been bolt-ons to an present firm inside a PE portfolio.

PE corporations discovered methods to maintain doing offers in the next fee setting by buying minority pursuits in corporations. They preserved capital by writing smaller checks however allowed the goal firm shareholders to take care of curiosity within the firm ought to the valuation recuperate.

There have been some vivid spots. Exercise picked up amongst commodity and industrial sector corporations as inflation benefited lots of them and corporations appeared to scale their operations to drive improved efficiencies. The power sector led M&A exercise with a number of mega merger offers introduced within the again half of the 12 months with deal exercise within the US Permian shale area surpassing $100 billion. Whereas know-how sector M&A fell general, two massive offers — Activision Blizzard’s $69 billion acquisition by Microsoft and VMware’s $61 billion acquisition by Broadcom Inc — closed efficiently. Within the well being care sector, exercise elevated as properly with dozens of biotech and pharmaceutical merger bulletins, whereas many giant drugmakers face steep patent cliffs over the subsequent decade and are looking for to refresh and prolong their patent drug portfolios.

Regardless of the challenges of 2023, the pick-up within the final quarter gave buyers a glimpse of higher days forward. In 2024, dealmakers are battle-hardened and have tailored to the brand new regime by using extra structured offers to steadiness threat. These embrace using earn-outs, contingent worth rights, carve-outs, and spin-offs. Dealmakers are additionally structuring transactions with all or half inventory consideration versus all money. Acquirers usually construction offers with all money consideration once they have ample money or entry to financing and are assured sufficient to imagine all the chance. With tighter financing situations on the whole and particularly for offers in capital-intensive industries, sharing the chance and reward with shareholders is changing into extra widespread.

Final 12 months’s headwinds could develop into this 12 months’s tailwinds, and we’re optimistic concerning the outlook for M&A and merger arbitrage in 2024. As inflation cools, rate of interest expectations pattern decrease, and corporations adapt to the put up pandemic setting, investor confidence is returning. Regardless of the geopolitical and financial backdrop of uncertainty, savvy corporations are looking for alternatives to drive future development and purchase the applied sciences and capabilities wanted to compete and in any other case keep away from being disrupted.

On the deal facet, indications from funding banks, advisors, and firm insiders all counsel that the M&A pipeline is strong. Rising fairness markets have given administration and boards confidence to make offers with a rising variety of corporations in lively dialogue. Shareholder activism can also be rising as annoyed buyers search to unlock worth in shares buying and selling at what they understand as deep reductions to intrinsic worth. Heading into proxy season, ineffective boards could develop into targets, and elevated shareholder dissent might carry opportunistic acquirers to the desk.

Merger arbitrage can also provide a sexy funding alternative, with merger arbitrage yields exceeding 10% for the typical North American merger deal. This can be a materials premium relative to historic ranges and a big unfold over high-yield bonds. Amid a extra hostile regulatory setting, arbitrage buyers now perceive what types of offers could come beneath larger regulatory scrutiny.

After a string of losses, regulators are stretched skinny. With broad spreads, an improved playbook for assessing deal threat, and the potential for extra M&A exercise to materialize, 2024 could possibly be a powerful 12 months for merger arbitrage efficiency. 

If you happen to favored this put up, don’t neglect to subscribe to Enterprising Investor and the CFA Institute Research and Policy Center.

All posts are the opinion of the creator. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the creator’s employer.

Picture credit score: ©Getty Photos / noomcpk2528

Skilled Studying for CFA Institute Members

CFA Institute members are empowered to self-determine and self-report skilled studying (PL) credit earned, together with content material on Enterprising Investor. Members can file credit simply utilizing their online PL tracker.