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Uncertainty halts global M&A activity in the first half of 2024
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  • 02/07/24

High interest rates, valuation gaps, worldwide electoral activity, and global tension have been significant hurdles for many deals in the first half of 2024. However, this, at a time, when the strategic imperative for M&A is growing stronger.

PwC’s latest report ‘2024 Mid-Year Outlook: Global M&A Industry Trends’ shows that the M&A landscape is currently being shaped by several challenging factors such as high interest rates, valuation gaps between buyer and seller, worldwide electoral activity, and global tension, causing many deals to stall. On the flipside, the report also finds that if one or more of these uncertainties begin to clear, an uptick in activity could be imminent.

2024 in retrospect

Typically, there are some sector bright spots in any M&A downturn. But the current market hasn’t spared any sector from the decline in deals activity. Even sectors most affected by global megatrends - such as technology and energy - went underwater as M&A deal volume trends inverted across all sectors. 

In the first half of 2024, deal volumes in EMEA decreased by 31% as dealmaking in the region continued to face challenging macroeconomic and geopolitical headwinds. Deal values, however, held steady from a year ago, showing a 1% increase, but remain below 2020-2022 and even pre-COVID-19 levels.

 

“In Denmark, we are seeing deal volumes slightly below the first half of 2023 but with an increase in larger transactions that have otherwise been at a low level for some time - resulting in increasing deal values albeit significantly below the level in 2022.”

Jan Hetland Møller,Head of Deals in PwC Denmark.

Obstacles to clear

Several factors have contributed to the slower M&A market over the past two years, and looking at prior periods of uncertainty can often provide clues as to how things may play out. But this time, some striking anomalies appear to have turned historical convention on its head. Understanding the various forces at play may help dealmakers better assess risks, scenario plan and develop strategies, giving them more confidence to act when the time is right.

Today’s high interest rates continue to squeeze returns. However, the European Central Bank, Switzerland, Sweden, and Canada have recently announced interest rate cuts, which could indicate more cuts are on the way. These long-awaited interest rate cuts will be welcomed by dealmakers seeking to fund acquisitions via debt. 

In the bond market, US Treasury bond yields have been inverted for almost two years, meaning that short-term bonds yield more than longer ones. Historically, an inverted yield curve was considered a predictor of a pending recession, but a recession hasn’t happened yet. Larger economies such as the United States are managing to stay on track, partly because of continued government stimulus and a robust labour market.

The gap between buyers and sellers remains significant in many sectors. This, in part, is because previous transacted assets have traded at good multiples, which has given some owners artificial hope as to the multiples they can expect. PE owners, in particular, have some trepidation that portfolio assets - if transacted - may reveal values below expectations.

This year has already seen a burst of electoral activity, with further elections in the United Kingdom, United States and other countries due to take place in the second half of the year. That’s also when the outcomes of June elections in France, India and the European Parliament will be digested. This has caused dealmakers and markets to be wary because of the political uncertainty that creates. Central banks also tend to be wary of making moves on interest rates if the timing could be construed (rightly or wrongly) as politically motivated. In the United States, that means the Federal Reserve could wait until the end of the year or early 2025 before finally delivering the rate cuts that the market has long hoped for.

No easy or quick resolutions to the war in Ukraine or the conflict in the Middle East seem likely. Indeed, the risk of escalation can’t be ignored. The United States-China relationship also continues to weigh on markets, not least in a US election year. All of this contributes to the uncertain geopolitical climate.

M&A market drivers

While the factors listed above contribute to M&A market hesitation, we are also seeing significant markers that can help guide dealmakers out of the fog. 

The pressure on PE firms by investors to return capital is a major marker. At the beginning of the year, PE firms held over 27,000 portfolio companies globally, with about half owned for four years or more. In this context, many PE firms raising new funds face investor questions about “overdue” investments, increasing the pressure to sell and return capital. 

While IPO markets have been nearly closed for the past two years, there has been a timid return of IPOs in some sectors, notably tech. If this upward trend continues, larger portfolio companies may find the IPO path to be a viable exit strategy once again. However, in the near term, we expect many companies will plan for optionality, with a dual-track approach to exits. While optimism for an IPO recovery remains and the backlog of companies waiting to go public has grown, the window for IPOs in 2024 is narrow because of the upcoming elections.

Financing for M&A is more readily available now than it was over the past two years. The investment-grade debt market, high-yield bond market, and leveraged loan market all showed stronger issuance activity in the first half of 2024 than in the first half of 2023. The onward march of private capital is also something to take into consideration. In the first quarter of 2024, private capital accounted for an estimated 24.1% share of deals, up from 20.6% in 2022, according to data from Preqin. Private capital’s assets under management globally grew at about 8 percent annually over the past five years to about $13.3tn in total in 2023.

The energy transition is expected to create significant M&A opportunities as investors place bets on the role it will play in helping society achieve net-zero goals. Companies will need to take an innovative approach to reconfiguring their business models to achieve this major transformation, and M&A will play an important role.

To accelerate their transformation journeys, corporates are evaluating their portfolios to identify gaps - in capabilities, talent, and technology - and non-core assets to divest.

"We are noticing an increase in deal preparation, and as confidence returns, we anticipate a positive market response. However, with today's uncertain M&A landscape in mind, both buyers and sellers should be open to alternative structures, including partnerships, alliances, rolling part of a seller's equity interest, earnouts, and other forms of capital structuring.”

Jan Hetland Møller,Head of Deals in PwC Denmark

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Jan Hetland Møller

Partner, statsaut. revisor, København, PwC Denmark

4075 6991

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