By: Lindsey Ling, Class of 2026
Background
During 2023, global mergers and acquisitions (M&A) activity fell to its lowest level in over a decade.[1] Driven by aggressive interest rate hikes and tight financing markets impacting companies’ deal making confidence, total M&A volume fell 18%, to $3 trillion in 2023.[2] Heightened interest rates increased the expense for private equity firms and companies with low credit ratings to raise acquisition financing, driving the overall market downwards.[3] In addition, market volatility complicated negotiations between acquirers and sellers to agree on deal prices, increasing the gap between buyer and seller value.[4] Other factors for the decline, including above-average inflation, fears of recession, and geopolitical tensions, are also responsible for the downward trend in the market over the past two years.[5]
High Financing Costs and the Valuation Gap
With the secured overnight financing rate (SOFR) hikes that accompanied Federal Funds rate increases in 2023, debt funding costs were significantly higher in 2023 than in recent years.[6] Additionally, fears of a potential recession due to lagging effects of policy tightening from the Federal Reserve are responsible for dampening M&A activity.[7] As the declining market increased uncertainty amongst buyers, sellers were often faced with lowball offers reflecting the higher cost of capital throughout 2023.[8]
Market Impact
A contracting M&A market may strain companies seeking growth or investment.[9] The case for buying is often strong, and many companies strategically use M&A when seeking to expand.[10] Acquisition is likely to be faster, cheaper, and a more effective way to generate value than organic development of the same capabilities.[11] Accordingly, shareholder return has been shown to dramatically increase after large deals during periods of economic weakness, illustrated by the average public company acquirer outperforming the S&P 500 by around 16%.[12] Disparate views on value, dependent on buyers’ perceived economic health, can severely impact businesses looking to expand in this way.[13]
2024 Holds Promise
Bankers and lawyers expect a rebound in M&A activity, but the exact timeline is uncertain.[14] As impatience builds, complications such as lengthy deal making timelines in tech and cross-border activity may become water under the bridge.[15] Additionally, increased pressure from shareholders to consider deal making options may force increased deal making levels within the next two years.[16]
As it stands today, the M&A market is showing early signs of revitalization.[17] Cooling inflation, increased supply chain resilience, and the first quarter surge in activity across sectors suggest dynamic market growth in the near future.[18] Further, recently recovering public equity markets signal greater confidence and stability in the economy and contribute to an improved overall tone in the M&A market.[19] Notable developments to watch include recent deals by pharmaceutical giants to acquire biotechs[20] and the integration of technology in the financial and energy industries through M&A.[21] Despite an unprecedented drop in M&A value over the past few years, experts predict that 2024 may be the year when the backlogged pipeline will burst.[22] As this rebound of backlogged deals is valuated near $4.7 trillion, the future holds great promise for a strong return of M&A activity in 2024.[23]
[1] Michael Flaherty, Global mergers and acquisitions hit lowest level in a decade, Axios (Dec. 28, 2023), https://www.axios.com/2023/12/28/year-end-deals-data.
[2] Anirban Sen, Anousha Sakoui, Dealmakers see rebound after global M&A volumes hit decade-low, Reuters (Dec. 21, 2023, 6:15 AM), https://www.reuters.com/markets/deals/dealmakers-see-rebound-after-global-ma-volumes-hit-decade-low-2023-12-21/.
[3] Id.
[4] Id.
[5] Jens Kengelbach, Daniel Friedman, Georg Keienburg, Tobias Söllner, Dominik Degen, Lianne Pot, Roy Huang, M&A Is Looking Up After Bottoming Out, Boston Consulting Grp. (Oct. 26, 2023), https://www.bcg.com/publications/2023/m-and-a-outlook-looking-up-after-bottoming-out.
[6] Mid-Year 2023 M&A Outlook – Light at the End of the Tunnel?, Baird (July 6, 2023), https://www.rwbaird.com/newsroom/news/2023/07/gib-mid-year-2023-ma-outlook-light-at-the-end-of-the-tunnel/.
[7] Id.
[8] Id.
[9] Flaherty, supra note 1.
[10] Id.
[11] Les Baird, Suzanne Kumar, Bain & Company’s Global M&A Report sees opportunity for bold moves in an uncertain 2023 market, Bain & Co. (Jan. 31, 2023), https://www.bain.com/about/media-center/press-releases/2023/bain--companys-global-ma-report-sees-opportunity-for-bold-moves--in-an-uncertain-2023-market/.
[12] Mid-Year 2023 M&A Outlook – Light at the End of the Tunnel?, supra, note 6.
[13] Id.
[14] Sen, Sakoui, supra, note 2.
[15] Id.
[16] Id.
[17] Id.
[18] Mark Williams, 2024: The Year for M&A Resurgence, Nasdaq (Dec. 19, 2023, 11:10 AM), https://www.nasdaq.com/articles/2024-the-year-for-ma-resurgence.
[19] Mid-Year 2023 M&A Outlook – Light at the End of the Tunnel?, supra note 6.
[20] Dana Cimilluca, Lauren Thomas, Laura Cooper, Novartis in Advanced Talks to Buy Cytokinetics, The Wall St. J. (Jan. 8, 2024, 5:14 PM), https://www.wsj.com/business/deals/novartis-in-advanced-talks-to-buy-cytokinetics-d1032569?mod=deals_more_article_pos2.
[21] Gregory Daco, Mitch Berlin, M&A outlook points to gradual rebound in deal market in 2024, EY (Jan. 17, 2024), https://www.ey.com/en_us/mergers-acquisitions/m-and-a-outlook.
[22] Jeffrey Goldfarb, Backlogged M&A pipeline will burst in 2024, Reuters (Dec. 20, 2023, 1:56 AM), https://www.reuters.com/breakingviews/backlogged-ma-pipeline-will-burst-2024-2023-12-19/.
[23] Id.
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