Navigating the M&A Landscape: A 2023 Recap and Optimistic Outlook for 2024
2023 wasn’t the year that many in the mergers and acquisitions (M&A) industry were hoping for. The value of global M&A deals was only $3 trillion, the lowest total since 2013. It was an 18% decrease from 2022 that saw a value of $3.7 trillion and far lower than the 2021 record of $5.8 trillion. Within North America, although the overall value of deals were down to $1.46 trillion, it was only a decrease of 12% from the previous year, not as significant a percentage as the rest of the world.
Since early 2022, M&A activity has been trending down, due in large part to eleven interest rate hikes. The Fed’s aggressive rate increases over the past two years has changed the math around what acquirers are willing to pay. Higher rates made debt financing more expensive, especially for non-investment-grade companies. Most companies are acquired with at least some portion of debt, so buyers would rather wait for the interest rates on their debt to come down. The advantage of waiting is a higher return on equity (ROE) for the company making the acquisition as they would then be able to keep a larger portion of the Cash Flow generated by the company acquired. The good news for those waiting for the M&A market to pick up is that it doesn’t seem like rate decreases are too far away.
One reason for optimism around potential rate cuts has been the decrease seen in inflation from the beginning of the year to the end. After beginning 2023 with inflation measured at 6.4% year-over-year (YOY), the number dropped to 3.4% by the end of the year. One of the main reasons behind the slowdown in increasing inflation is that overall, gas prices were down 9.8% YOY. This is largely attributed to the fact that the end of 2023 saw domestic oil production hit a new record high. Reasons for the continued rise in inflation throughout the year were largely driven by housing and food prices. By the end of 2023, housing prices had risen by 6.5% YOY and food prices by 2.9% YOY.
Another reason for optimism around interest rates going down, and therefore hope for M&A activity picking up, is because the Fed expects unemployment to rise. Although this might be received by the American public as bad news, for the Fed, it’s a welcome sign. Higher unemployment gives the Fed the ammunition to start cutting interest rates because the Fed claims that since 2022, the labor market has been too tight. Too many people have had jobs and too many people have been seeing wage growth. This resulted in an increase in demand for goods and services in the economy. Prices were already inflated due to supply chain constraints and the more confident and wealthier consumer is further exacerbating these prices.
The Fed’s goal in 2024 is to prevent the economy from falling into a recession, so they are expecting to lower interest rates and target a “soft landing” for the economy to resume to pre-COVID-19 pandemic levels with as few speed bumps as possible. They hope to have inflation down to 2% - their long run inflation target.
To tie this all back to the outlook on M&A deals in 2024, the year looks bright. We’ve already seen one blockbuster deal with Blackrock’s acquisition of Global Infrastructure Partners for an enterprise value of $12.5 billion. Both economists and bankers expect that their clients will be looking to do more deals with lower interest rates coming as early as March, a slowdown in inflation and a strengthening economy.
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