Mergers and Acquisitions in 2024: Headwinds to Tailwinds?

International mergers and acquisitions plunged to a decade low final yr, 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) consumers declined final yr after accounting for practically 25% of all buyouts within the earlier two years as tighter financing circumstances and better rates of interest made finishing leveraged buyouts harder. In Canada, of the 441 accomplished transactions final yr, most had been bolt-ons to an present firm inside a PE portfolio.

PE corporations discovered methods to maintain doing offers in the next price 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 get better.

There have been some vibrant spots. Exercise picked up amongst commodity and industrial sector corporations as inflation benefited lots of them and firms regarded 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 yr with deal exercise within the US Permian shale area surpassing $100 billion. Whereas expertise sector M&A fell total, two large 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 nicely with dozens of biotech and pharmaceutical merger bulletins, whereas many giant drugmakers face steep patent cliffs over the subsequent decade and are in search of to refresh and lengthen 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 stability threat. These embody the usage of 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 circumstances on the whole and particularly for offers in capital-intensive industries, sharing the chance and reward with shareholders is turning into extra widespread.

Final yr’s headwinds could turn into this yr’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 firms adapt to the publish pandemic setting, investor confidence is returning. Regardless of the geopolitical and financial backdrop of uncertainty, savvy corporations are in search of alternatives to drive future progress 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 energetic dialogue. Shareholder activism can 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 turn into targets, and elevated shareholder dissent may convey opportunistic acquirers to the desk.

Merger arbitrage can also provide a gorgeous funding alternative, with merger arbitrage yields exceeding 10% for the common North American merger deal. It is 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 below larger regulatory scrutiny.

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

When you preferred this publish, don’t neglect to subscribe to Enterprising Investor and the CFA Institute Research and Policy Center.

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

Picture credit score: ©Getty Pictures / 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.