Publish Date
Dec 18, 2023
Investors have experienced a challenging year in 2023 when M&A activity was hit by concerns about the macroeconomic environment and the impact of higher interest rates. While those challenges haven’t fully abated, 2024 holds the potential for dealmaking to show some improvement.
M&A volumes in EMEA – which had remained somewhat resilient in the first half of the year driven by continuous mid-market activity – slumped in the third quarter of 2023.
According to Mergermarket data[1], transaction volumes in the period fell to the lowest point in three years and value was down on both year-on-year and quarter-on-quarter bases. There was a 33% decline in quarter-on-quarter activity to 2,790 transactions, while deal value dropped 26% to €164 billion, and by 38% versus the corresponding period in 2022. One perhaps promising trend is that Q3 value was as not as low as in Q1 2023, the lowest quarter reading for aggregate M&A value, with more deals in the €2 billion-€5 billion range announced in Q3 vs Q1.
One major positive for the M&A market heading into 2024 is receding uncertainty about the trajectory of interest rates. While inflation in the U.K. and the euro area remains above central banks’ targets of 2%, it has fallen significantly from a peak in 2022. That’s boosting consensus about an apparent peak in interest rates and improving visibility about market conditions in the coming months.
With market participants more confident than they have been in several months , we are already observing a promising inversion of the curve since the end of summer. We are seeing more sell-side activity and therefore expect deal opportunities to launch in early 2024.
There are several factors that are likely to usher a more active start to the year. One is the pricing mismatch that stood in the way of M&A deals in the past 18 months and which is finally starting to ease. Bidders are now progressively factoring inflation and interest rate constraints into their valuation models given greater clarity on the economic outlook. Meanwhile, sellers are recalibrating expectations in response to the new higher-for-longer rate environment, helping narrow the valuation gap between parties.
Secondly, debt financing is more easily available now than six months ago, albeit at an elevated cost. In addition, buyers are increasingly tapping private credit funds for funding. These funds – which typically offer more bespoke, flexible loan structures – have taken centre stage in acquisition financing in the past 18 months as banks withdrew, particularly in the mid-market space. More recently though, direct lending is being used in large-cap transactions, especially in pre-emptive processes. One example is the $950 million loan package reportedly provided by Blackstone to back Permira’s buyout of German insurance broker Gossler, Gobert & Wolters in December. We expect the trend towards private credit to continue as we head into the new year.
In PE M&A, we expect funds to continue to find creative ways to get deals over the line, as they did in 2023, for example by making higher cash contributions, acquiring minority stakes, and buying assets from themselves via continuation funds. A major support for PE dealmaking in particular is that funds still have large amounts of dry powder (global PE dry powder soared to $2.59 trillion in 2023, according to S&P and Preqin estimates) that needs to be deployed.
Although we anticipate activity to rebound 2024, we also expect that bidders will to continue to exercise a high-degree of caution, leading to more thorough due diligence processes and longer execution periods, as observed throughout 2023.
Given the dearth of M&A opportunities in the past year and a half, large corporate and PE funds have been spending more time reviewing their portfolios for potential sales. That has led to an uptick in the sale of non-core assets through carve-out transactions recently, a trend we expect will gather pace in 2024 as more deals are being considered. In addition, cash-rich corporates with robust balance sheets are likely to continue to seize the opportunity to scale up through acquisitions.
In terms of sectors, technology, business services, financial services, healthcare, TMT and infrastructure assets are expected to drive the majority of deal activity going into 2024. In financial services, interest is partly driven by the appetite for asset management and insurance brokerage firms, as well as disruption of the retail banking sector, which is forcing large institutions to consider acquisitions and divestments. The potential sale of Barclays’ German consumer finance unit is one example of this trend.
A&M’s Global Transaction Advisory Group provides investors and lenders the answers needed to get the deal done. We combine our firm’s deep operational, industry and functional resources with Big Four-quality financial accounting and tax expertise to assess key deal drivers and focus on the root cause of any critical deal issues. As the largest transaction advisory practice outside the Big Four, our global integrated teams help private equity, sovereign wealth funds, family offices and hedge funds as well as corporate acquirers unlock value across the investment lifecycle.
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