Corporate M&A 2024

Introduction

Global M&A activity slowed down to a decade low in 2023, as recession and inflation threats loomed, central banks sharply increased interest rates, regulators’ scrutiny of mergers intensified and the world grappled with manifest geopolitical tensions. In particular, steep policy rate increases averaging 400 basis points across advanced economies and 650 basis points across emerging market economies from late 2021 to October 2023 kept inflation under control but sidelined would-be deal makers facing economic uncertainty and high financing costs.

Stabilised rates and the expected loosening of monetary policy later this year will help support a recovery in M&A, although expectations of low growth, increased merger control and ongoing geopolitical conflicts will continue to dampen M&A activity in 2024. Other factors supporting M&A include record levels of private equity dry powder and a backlog of unsold investments, a mix of energy consolidation and transition opportunities, companies’ use of M&A to realise their business plan in spite of overall low growth, and cross-border M&A opportunities. Preliminary data on M&A in January and February 2024 shows a strong start, with approximately USD520 billion of announced deals, up 52% from the same period in 2023.

M&A Activity Trends in 2023

Approximately USD2.9 trillion in deals were announced in 2023, representing a 17% decrease from 2022, a 51% decrease from 2021’s record level of M&A, and the slowest year for global M&A since 2013, as measured by the value of announced deals. The total volume of M&A deals ticked down 6% year-over-year, but remained at a historically high level with a total of 55,200 deals announced during the year.

Macroeconomic and regulatory headwinds for M&A generally also affected large deals, with activity in mega deals valued at over USD10 billion declining 13% relative to 2022 levels. In 2023, 32 mega deals were announced for an aggregate transaction value of USD647 billion. US domestic M&A accounted for the top five largest announced deals (by enterprise value): the ExxonMobil/Pioneer Natural Resources (USD65 billion), Chevron/Hess (USD60 billion), Pfizer/Seagen (USD43 billion) and Cisco/Splunk (USD30 billion) acquisitions, and Johnson & Johnson’s spinoff of Kenvue. Meanwhile, cross-border M&A activity slowed down to the lowest level in a decade, decreasing 12% year-over-year to USD954 billion.

The top five industries for M&A globally last year were the same as in 2022, but we saw relative shifts in ranking including energy and power supplanting technology as the industry with the highest transaction value. In part due to the aforementioned mega deals, M&A activity increased in the energy and power sector by 11% to USD502 billion and in the healthcare sector by 8% to USD369 billion. Total deal value in the technology sector decreased by 47% to USD371 billion, but technology continued to lead by volume, with 12,683 deals announced in 2023.

Aggregate deal value in the USA, Europe and Asia

Relatively favourable macroeconomic and market conditions supported US M&A activity in slowing to a lesser extent than M&A overall. In 2023, aggregate M&A deal value for US targets decreased by 5% to USD1.4 trillion, and accounted for approximately 47% of overall worldwide M&A, up from roughly 42% in 2022.

Outside the USA, M&A deals for European and Asia Pacific targets reached decade lows in 2023, as transaction values declined year-over-year by 28% to USD598 billion in Europe and 26% to USD602 billion in the Asia Pacific. While the UK continued to lead EMEA M&A activity, total deal value for UK targets decreased by 43% to USD124 billion. Japan was a bright spot for global M&A, with approximately USD173 billion in announced M&A in 2023.

Inflation and interest rates

For most of 2023, central banks around the world generally continued to sharply increase their policy rates to fight inflation, which had reached a decades high in mid-2022 as demand rebounded post-COVID-19 and oil prices jumped in the wake of Russia’s invasion of Ukraine. Among others, the US Federal Reserve increased its federal funds rate to 5.25-5.50% by July; the European Central Bank hiked its key interest rate ten consecutive times to 4.00% and the Bank of England raised its rate to 5.25%, all levels not seen since the Global Financial Crisis. These efforts appeared effective: global inflation declined from approximately 8.7% in 2022 (7.3% for advanced economies) to an estimated 6.9% in 2023 (4.6% for advanced economies). The steep policy rate hikes also had knock-on effects of dampening M&A deal-making by increasing the cost of capital.

Private equity and private credit

M&A activity backed by private equity funds (PE) was especially impacted by the rise in interest rates, since PE acquirors typically structure their deals with relatively high levels of leverage. PE-backed M&A transaction value decreased by 30% in 2023 to USD566 billion, the lowest level since 2019. In addition to higher central bank policy rates, prospective borrowers faced tightening bank lending standards against a backdrop of uncertain economic conditions and high-profile issues at Credit Suisse, Silicon Valley Bank, Signature Bank and First Republic Bank.

The demand for financing was met in part by private credit, or direct lending by institutions such as private funds, insurance companies and family offices, rather than banks, bank-led syndicates or public markets. Private credit’s nimbleness in working with borrowers and structural features such as variable-rate loans and stickier capital base have contributed to its significant growth, from approximately USD280 billion assets under management in 2007 to over USD1.75 trillion as of 30 September 2023. In the first three quarters of 2023, private credit provided 86% of loans for leveraged buyouts, up from 65% in 2021.

Factors in Favour of M&A in 2024

Private equity dry powder and backlog

Equity commitments available for investment by private equity firms globally (dry powder) reached a further record high of USD2.59 trillion as of 15 December 2023, up approximately 32% during the year and 60% compared to the end of 2021. At the same time, asset sales by PE firms reached a decade low after two years of slowdown in M&A activity, leading to a record USD2.8 trillion in unsold investments. As investor pressure to exit ageing investments and deploy committed capital along with relatively stable and potentially declining rates spur PE firms to come off the sidelines, PE investments and exits can be expected to drive a significant amount of M&A in 2024. Private credit is expected to remain a more flexible financing source supporting PE M&A.

Energy consolidation and transition

The chart-topping proposed acquisitions of Pioneer by Exxon and Hess by Chevron announced in October 2023 illustrate the persistence of traditional oil and gas and offer insights on consolidation in the energy sector and beyond. Exxon said that acquiring Pioneer would more than double its footprint in the Permian basin, the source of more than 40% of US crude oil production, to become the largest producer in the region. Meanwhile, Chevron highlighted that its deal for Hess would allow it to enter an Exxon-led partnership offshore Guyana and add US shale assets, mostly in North Dakota.

The deals face regulatory and other scrutiny. The US Federal Trade Commission (FTC) has submitted second requests for additional information to assess the likely competitive effects of the mergers, while Exxon has sought to enforce a right of first refusal with respect to Hess’ stake in their major Guyana oil project. Nonetheless, they reflect a strategy of securing low-cost oil and gas production through acquisitions that consider the quality of established reserves and geopolitical risk that is likely to inform near-term deal-making in the sector. Notably, in February 2024, Diamondback Energy and Endeavor Energy followed this playbook in announcing their USD26 billion merger to create a premier Permian independent oil company.

Looking forward, the energy transition is also an important driver of M&A activity, as related sectors navigate through recent challenges posed by high inflation and interest rates, as well as geopolitical tensions. Financial sponsors and strategics alike face a broadening range of support for investing in net-zero technologies, renewable energy and critical minerals, in the form of tax credits, project financing and other incentives under legislation such as the US Inflation Reduction Act of 2022, UK Energy Act 2023 and EU Critical Raw Materials Act. Related M&A range from oil and gas companies’ pursuit of targets to facilitate emissions reductions, to significant transactions focused on metals and minerals required for the scaling of renewable energy, such as copper, which is key to electrification, as well as nickel, lithium and cobalt.

Strategic buyers of growth and innovation

As of January 2024, the IMF forecasted global output growth of 3.1% in 2024 and 3.2% in 2025, led by India, China and Sub-Saharan Africa. For advanced economies, the IMF projects output growth of only 1.5% in 2024 and 1.8% in 2025. Given the low overall rates of GDP growth expected, companies seeking to expand will need to pursue focused growth strategies. Corporate decision-makers are well aware of this – 95% of CEOs recently surveyed by EY are planning to maintain or accelerate their business portfolio transformation in 2024, with 58% planning to accelerate.

Rapid technological developments present broad-based implications for businesses across the economy, requiring companies to effectively adapt in order to remain competitive and address evolving threats. Corporate decision-makers evaluating their company’s strategy with respect to headline topics of cybersecurity and artificial intelligence as well as innovation in a more general sense may opt for M&A to efficiently expand their capabilities.

Cross-border opportunities

While cross-border deals declined in line with M&A generally in 2023, they remained a significant part of the M&A landscape, accounting for approximately one-third of worldwide M&A deal value. Geopolitics, regulation, macroeconomics and strategic consideration have guided and will continue to shape the flows of cross-border M&A. Relatively higher projected GDP growth for the US (2.1% in 2024) relative to the Euro Area (0.9%), the UK (0.6%) and Japan (0.9%) may attract US inbound investment.

Japan stands out with potential targets and acquirors for cross-border M&A, boosted in part by corporate governance reforms implemented by the Ministry of Economy, Trade and Industry in August 2023 to facilitate “acquisitions that are favorable for the economy and society”. As Japan pushes to emerge from decades of low growth, low inflation and depressed equity valuations, the Tokyo Stock Exchange has also pressed companies for a plan to increase market value. Globally low interest rates facilitate debt financing in Japan, while a historically low yen is another factor favouring foreign inbound investment.

Headwinds for M&A in 2024

Favourable trends including those described above are expected to support M&A activity through 2024, although it will continue to face certain headwinds this year.

In particular, regulators around the world have continued to increase their scrutiny of mergers on competition and foreign investment grounds. Most deals have been cleared, although review processes are generally more extensive and regulators have litigated deals to a greater extent. Merging parties in many cases must also address evolving regulatory regimes globally. Additional headwinds for M&A in 2024 include: inflation remaining above the 2% target aimed at by major central banks and benchmark interest rates consequently maintained at historically high levels, as well as geopolitical tensions.

Developing antitrust and competition regimes

In the US, the Federal Trade Commission (FTC) and Department of Justice (DoJ) issued a Notice of Proposed Rulemaking in June 2023 setting forth the first major proposed changes to the HSR Form and Instructions since 1978. HSR filings are required for transactions where either party is engaged in US commerce or any activity affecting US commerce and certain size thresholds are met; in 2024, such filings could be required for transactions valued as low as USD119.5 million. The FTC has estimated that the proposed changes would increase the time required to prepare an HSR filing by 290% on average.

The DoJ and FTC further issued Draft Merger Guidelines in July 2023 and Final Merger Guidelines in December 2023 that state a policy more adverse to mergers than the agencies’ policies over the prior four decades, consistent with President Biden’s July 2021 “Executive Order on Promoting Competition in the American Economy”. Changes reflected in the guidelines include greater scrutiny of allegedly “dominant” firms with at least a 30% market share, vertical mergers and mergers involving technology companies. US courts’ approach to analysing antitrust cases relative to the Final Guidelines remains to be seen, considering their deviation from prior agency policies and case law and lack of binding legal effect.

The importance of antitrust/competition review of M&A as well as the uncertainty of ongoing developments in regulation is illustrated by the case of Illumina’s USD7.1 billion acquisition of cancer test developer GRAIL, which it closed in 2021 while the merger was still under review by the European Commission and the FTC. During its review of the case, the EC imposed its first interim measures against integration in 2021, the first prohibition of an acquisition that fell below the notification thresholds under the EU Merger Regulation or in any member state in 2022, and a record-breaking gun-jumping fine of EUR432 million imposed on Illumina as well as a symbolic first-time fine of GRAIL in 2023. Illumina ultimately announced in December 2023 that it would divest GRAIL, after being ordered to do so by the FTC and the EC.

Foreign investment regulation

Deal makers will also have to contend with intensified foreign investment scrutiny. Recent developments in the US include the Biden administration’s August 2023 order authorising the Treasury Secretary to regulate certain US investments into China in entities engaged in sensitive technologies in the semiconductors and microelectronics, quantum information technologies and AI sectors. In March 2024, Biden opposed the proposed USD15 billion sale of US Steel to Japanese steelmaker Nippon Steel, advocating for “strong American steel companies powered by American steel workers”.

In the EU, the Foreign Subsidies Regulation (FSR) went into effect in July 2023 and requires notice filing for acquisitions of control of targets with at least EUR500 million in EU turnover, where the parties received over EUR50 million in financial contributions from non-EU countries in the three years prior to signing. After receiving notice of a deal, the EU may conduct an investigation and may prohibit or clear the transaction, with or without conditions. Merging parties now need to check for FSR’s applicability in diligence and account for it as an additional source of filing and timing requirements.

The EU’s foreign direct investment (FDI) Screening Regulation, effective as of October 2020, calls on members without comprehensive FDI screening mechanisms to urgently set them up. Consistent with this, EU member states have continued to adopt and revise their FDI screening mechanisms, with Belgium, Estonia, Luxembourg and Slovakia among the countries adopting new regimes in 2023. In January 2024, the EC proposed revised FDI screening regulation that would require member states to adopt screening mechanisms within 15 months of the regulation’s entry into force, towards a higher degree of harmonisation within the EU.

Concluding Remarks

After a blockbuster 2021, M&A slowed in 2022 and 2023 by a total of 51%. However, several factors now point to the likely rebound for M&A markets in 2024: a staggering USD2.59 trillion of PE dry powder and over USD2.8 trillion of unsold investments as well as continued strategic rationale for M&A – from securing high-quality, low-risk energy assets to adapting to the fast pace of innovation across the board. A complicated and continuously evolving regulatory landscape for M&A appears to be the most significant headwind for deals this year, presenting constraints, costs and risks for many significant M&A deals. Strategic planning, risk management and thoughtful execution will be needed in order to navigate through such regulatory requirements. Headwinds also include macroeconomic factors, including continued inflation, high interest rates and low GDP growth, as well as geopolitical conflicts related to Russia’s invasion of Ukraine, the Middle East, China-US relations and de-globalisation. Overall, factors in favour of M&A appear to outweigh the headwinds for an expected active year for M&A spanning PE, strategic, domestic and cross-border deals.