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Four key M&A trends for 2024

Inflationary pressures, geopolitical instability, recession fears, and increasing regulatory scrutiny were significant factors that contributed to a slowdown in mergers and acquisitions (M&A) activity in 2023. However, the primary reason that led to subdued dealmaking last year was rising interest rates, pushing borrowing costs too high for corporations to justify acquisitions.

With most central banks expected to cut interest rates this year, dealmakers are cautiously optimistic about the M&A outlook for 2024, despite economic, regulatory, and geopolitical headwinds. This bodes well for M&A, which is set to pick up in the coming months.

Given the numerous challenges that await business leaders, finance chiefs and corporate treasurers this year, including artificial intelligence (AI)-generated misinformation and disinformation risks, climate vulnerabilities, and a probable spike in cyber attacks, the likelihood of a significant disruption in 2024 is considerable, making it difficult to accurately predict the M&A market’s outlook.

Nevertheless, there exists a window of opportunity to pursue strategic deals, and with the core drivers of dealmaking activity remaining unchanged, we outline our top M&A trends for 2024.

Small deals to drive deal flow

Higher costs to finance big deals and the fact that large deals carry sizable risks is likely to translate into fewer mega deals in 2024.

In support of this assertion is David Dean, Managing Director of Global M&A at WTW, who says that “Large deals (valued over US $1 billion) have continued to see a steady decline in volume since 2020. The prevailing high interest rate environment has sparked a distinct trend in M&A to continue into 2024, as dealmakers increasingly target smaller mid-market transactions that are easier to execute, less risky to finance, and offer a unique and strategic fit within an acquirer’s portfolio.”

Furthermore, “Engaging in major transformative M&A is an extremely risky strategy, given the intricacies of due diligence, execution, and post-merger integration. Such deals can also distract management, causing them to overlook other critical areas of the business”, according to Ten Lessons from 20 Years of Boston Consulting Group’s (BCG) M&A Report.

BCG’s M&A research consistently shows that “Serial acquirers of small to midsize targets generate the highest long-term value creation” and suggest that engaging in such deals “Strengthens the organization's M&A capabilities, fostering experienced and well-coordinated teams, streamlined processes, and tested playbooks.”

Increasing antitrust scrutiny of big mergers is another crucial factor that may lower large deals this year. “Regulatory scrutiny is likely to translate into fewer mega deals, however. Adobe Inc. recently abandoned its $20 billion acquisition of Figma Inc. in the face of ongoing opposition from the UK's Competition and Markets Authority and the EU's European Commission. While Microsoft Corp. was able to close its $68.7 billion Activision Blizzard buy, it took nearly two years to complete the deal amid an intense fight with the regulators”, as per S&P Global Market Intelligence .

The stringent regulatory environment is poised to hinder, in particular large tech M&A, but according to S&P Global Market Intelligence, “Strategic buyers are likely to focus on smaller tuck-ins that do not tempt regulators to intervene.”

Growth of AI-driven M&A

In 2023, the companies that “Attracted the highest valuations generally fell into the cybersecurity and AI categories”, as per  451 Research, a part of S&P Global Market Intelligence.

This trend is likely to continue in 2024, particularly in bolstering the growth of AI-driven or AI-related deals.

Backing up this argument, Dean observes, “A seismic shift in investment focus towards artificial intelligence (AI) is expected in 2024. Although dealmakers have expressed reservations about AI, companies are increasingly directing their attention and resources toward AI-based businesses. This breakthrough technology and the technical talent within AI start-ups are also being seen as a potential boon for improving M&A processes and value creation.”

Expounding on the capabilities of AI, Dean goes on to say, “From enhancing efficiency through automation to fostering innovation, AI’s potential is vast.”

Despite the vast potential of AI, considering the growing influence and use of AI in the corporate world, and the fact that industry experts believe that in the realm of AI, making acquisitions is a faster and more economically efficient option than building an AI-based business, it is likely to spur increased M&A interest in AI-based or AI-centric businesses in 2024.

Moreover, with Thomson Reuters acquiring Casetext, a legal startup with an AI-powered assistant for law professionals, for $650 million in cash last year, the growth of AI-driven M&A that was confined primarily to technology companies, is now expected to ramp up and spread across other industries.

Rise in alternative M&A deal structures

Against the backdrop of elevated capital costs and cautious valuations, financial sponsors in M&A are diverging from the norm, exploring creative deals and alternative structures that extend beyond the realm of conventional majority acquisitions.

Corroborating this viewpoint, Dean states, “With a higher cost of capital and greater regulatory scrutiny further complicating the M&A landscape, we expect joint ventures, strategic alliances and minority investments to gather pace in 2024 as companies respond to market disruption by sharing and mitigating risk.”

Reinforcing this perspective, the Ten Lessons from 20 Years of BCG’s M&A Report mentions that the global consulting company has observed “A consistent rise in alternative deal types, such as minority shareholdings, joint ventures, strategic partnerships, and corporate venturing. These structures may be more complex to execute and manage after closing, but they open new strategic options by giving dealmakers much-needed flexibility to customize capital allocation in response to specific conditions.”

In 2024, a spectrum of options, including minority investments, joint ventures, and licensing agreements, will empower corporations with strategic alternatives. Acquiring companies will benefit by gaining access to markets or technology without taking on the complexities of a full-fledged acquisition. The acquired or target company, in turn, may leverage these structures to cultivate new revenue streams.

ESG influence on dealmaking to grow

Environmental, social and governance (ESG) considerations have leapt up the global corporate agenda in recent years, influencing M&A activity in 2023. This trend is expected to persist in 2024.

Substantiating this perspective, Foley & Lardner LLP’s blog post titled M&A Trends to Watch in 2024: Navigating the Shifting Landscape points out that due to the central focus on ESG considerations by businesses, investors, and stakeholders, “In 2024, ESG integration will be pivotal in M&A transactions.” This suggests that the acquiring company will evaluate not only the financial performance of the target company, but also its commitment to sustainability, diversity, and ethical business practices.

Foley & Lardner LLP’s blog post explains this further, stating that “Buyers will scrutinize targets’ ESG performance and assess potential risks associated with environmental and social issues. ESG factors will be integrated into due diligence processes, deal structuring, negotiations, and post-merger integrations, making them integral to the success of M&A deals.” 

This heightened focus on ESG, experts reckon, is primarily because acquirers are increasingly recognising that a robust ESG foundation will play an important role in driving long-term value creation.

In conclusion, given the fragility of the global economy, the conventional instinct may be to pause deal activities and preserve cash. However, that is unlikely, as all signs point to the M&A landscape gaining steam this year.

To enable this, finance chiefs and corporate treasurers must stay agile and understand the key M&A themes explored within the confines of this article to seize appropriate dealmaking opportunities. By doing so, they will be able to make strategic acquisitions that pay off when global economic activity rebounds.

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