“Buoyed by expectations of falling interest rates and fading recession concerns, an overwhelming percentage of merger and acquisition professionals expect deal activity to increase over the next six months,” according to Grant Thornton’s new M&A Pulse Survey.

Pitchbook statistics indicate that North American mergers and acquisitions (M&A) deals decreased from a peak of 20,413 in 2021 to an estimated 16,391 last year. Despite this decline, the positive economic outlook in the U.S. is fuelling predictions of a rebound.

In the wake of two years of declining deal volumes, 81% of M&A professionals foresee an increase or substantial increase in transaction volumes in the next six months. In fact, of the 238 M&A professionals surveyed in the new Grant Thornton survey report, which includes investment bankers, private equity investors, M&A attorneys, and in-house corporate development team members, only 4% expect a decline in deal volume. This suggests that the two-year stagnation in deals has bottomed out.

Staffing up to support rising M&A deal volume

One of the most encouraging signs for deals, as per the survey report, is that many M&A leaders are substantiating their optimism for higher deal volume by hiring additional investment professionals, anticipating more work now or shortly. Nearly half (47%) plan to expand their teams within the next six months, with a mere 3% expecting to downsize.

 “If these M&A leaders are investing in professionals, that really backs the fact that they expect growth,” said Grant Thornton Transaction Advisory Managing Director Max Mitchell. “They’re hiring ahead of it, or while it’s happening.”

Technology deals point to a spark in other industries

“As artificial intelligence and cybersecurity needs and capabilities grow exponentially across the business landscape, the Grant Thornton M&A survey respondents identified technology, media, entertainment and telecommunications as the industry that would have the most deal activity in the next 12 months.”

Data from Pitchbook reveals that the deal activity and value in the IT sector dropped significantly in 2023, with the total IT deal value hitting a six-year low. According to Grant Thornton Transaction Advisory Partner Brent Johnson, at the onset of the most recent deal surge in the summer of 2020, the tech industry experienced a notable increase in M&A activity, which was subsequently followed by other industries.

“This may be a signal,” Johnson observed. “As that segment begins to pick up, it may be the bellwether that suggests that an uptick is coming in other industries.”

Furthermore, the survey report notes that consolidation in the media and entertainment sectors, marked by several high-profile deals recently may be driving predictions of increased activity in this area.

Equity component in funding projected to grow

Even with a potential reduction in interest rates in 2024, securing traditional bank funding for M&A deals may still pose difficulties.

As highlighted by the survey report, loans have become harder to secure as banking partners are wary that corporate borrowers may struggle to keep up with M&A payments unless their performance is immediately and consistently exceptional.

Reflecting funding difficulties, the M&A survey shows that nearly half (47%) of respondents have increased the equity component in financing due to current lending constraints. Another sizeable portion (38%) reported exploring alternative financing options as a result of these lending restrictions.

Although the new Basel III capital requirement regulations could strain banking resources in the years ahead, Mitchell stated that bankers are nevertheless optimistic they will have more funds available to lend in the near future.

“But until that bank lending comes back, private financing is going to remain a pretty strong component of the deal environment,” Mitchell asserted.

As regards the role of politics, the US presidential election in November is likely to have no effect on M&A. While the upcoming presidential election could substantially influence tax and regulatory policies, over half (60%) of respondents indicated that their M&A plans would remain unaffected. However, around 35% expressed intentions to accelerate their deals to finalize them before the election, with only 5% choosing to wait until after the election.

In conclusion, although not all free-response survey answers foresee an increase in M&A activity, many respondents were optimistic about the near-future deal market, citing factors such as an improving financial market, anticipated interest rate decreases, advancements in AI, and rising demand for decarbonisation and sustainability solutions.

According to the survey, the easing of the supersized earnings driven by the US government pandemic stimulus payments in 2021 may also support the deal environment.

“A lot of buyers didn’t know quite how to interpret those outsized earnings, and a lot of those waters have receded, and you see some contraction happening in certain places,” Johnson noted. “As you put more of those constraint issues in the rear-view mirror and get some stability and history on what sustained earnings looks like, it puts more confidence in buyers’ minds.”

This renewed confidence is fuelling strong expectations for M&A growth, particularly after a “tepid year” when many buyers chose to remain on the sidelines.