Discover the key trends, challenges, and opportunities shaping the 2024 merger and acquisition landscape and how they impact dealmaking strategies for the year ahead.
While the U.S. has shown increased deal activity over the prior year, the rebound from 2023 has not been as robust as many initially anticipated. Thus far, 2024 has been characterized by a mixture of optimism, caution and a persistent degree of uncertainty. With 2025 fast approaching, this is the perfect time to reflect on the trends and milestones that have shaped the past eight months of the M&A marketplace.
ECONOMIC DRIVERS SHAPING THE MARKET
After enduring inflationary pressures and a historically aggressive rate-hiking cycle by central banks, dealmakers began 2024 with hopeful expectations of declining rates. However, until mid-September, the Federal Reserve had maintained a 23-year-high federal funds rate of 5.25 to 5.5 percent throughout this year. Top Federal Reserve officials have recently signaled that they are ready to implement a series of rate cuts due to a softening U.S. labor market and decreased inflation in Q2 and Q3. As a result, the recovery from the 2023 M&A bear market has been gradual at best.
Despite the delays in rate cuts, the market has displayed some positive economic indicators to support an optimistic outlook for the remainder of the year. The record-high level of private equity (PE) dry powder ($2.62 trillion as of July according to S&P Global Market Intelligence) bodes well for expected market direction and investor sentiment. This capital can only remain parked for so long before limited partners (LPs) grow impatient with regard to their return on capital expectations.
GHJ, along with other market commentators, has also seen a recent increase in sell-side due diligence in anticipation of sales later this year or in early 2025. While anecdotal, this is nonetheless a positive indication and should complement the mountain of PE funds currently sitting on the sidelines.
POLITICAL UNCERTAINTY AFFECTS DEALS
Apart from economic drivers, the looming U.S. presidential election has affected markets due to the uncertainty of policy direction. Dealmakers and corporations tend to approach election years more cautiously and may wait until the results provide the clarity needed to move forward with a transaction. The candidates’ different approaches to antitrust, taxation, national security and sector-specific nuances could have notable effects on the various stakeholders within the M&A community over the next four years.
If history is any indication, elections primarily impact the timing of deals and do not typically create significant disruptions. According to an analysis performed by Harris Williams, Q3 of U.S. election years have had lower relative deal volume when compared to Q3 of non-election years. Volumes then tend to spike in Q4 and Q1 once election results are known. This suggests that the market should anticipate a near-term temporary slowdown.
VALUATIONS AND DEAL STRUCTURES
Middle-market valuations have generally remained strong in 2024, which have been driven by high demand and competition for attractive assets. However, there has been a trend toward more inventive deal structures as buyers and sellers negotiate terms to bridge valuation gaps and navigate the interest rate environment. This may be alleviated by the higher-than-expected cut of 50 basis points announced in September. Earn-outs, contingent payments and performance-based incentives are becoming increasingly common, which allow parties to address uncertainties and align interests.
TECHNOLOGY AND INNOVATION
One prominent trend in 2024 has been the heightened focus on technology and innovation within the U.S. Companies are increasingly leveraging M&A as a strategy to acquire new technologies and digital capabilities. The tech sector has proven to be one of the most active M&A spaces in 2024, after a challenging 2023. Tech deal volume and valuation are both trending higher than the previous year, according to S&P Global Market Intelligence. This trend reflects the broader emphasis on digital transformation and the need for businesses to stay competitive in an increasingly tech-driven world.
2024 so far has been a complex year for the M&A community. Early optimism for interest rate cuts was dashed by the Federal Reserve remaining cautious with its monetary policy for longer than expected. Interest rates were then reduced by 50 basis points in September — a higher reduction than many had anticipated, and although this came with the commentary that it is not the start of a trend, it will be welcomed by many investors. The U.S. presidential election has also contributed to uncertainty among buyers and sellers. However, the demand for attractive assets, technological innovation and creative deal structuring have propelled the market upward. As the end of the year approaches, there appear to be signs of economic improvement, helped by the September interest rate cut and a backlog of transactions which should provide for a more favorable M&A landscape.
To learn more about the changing deal landscape and how buyers and sellers are executing successful transactions, please reach out to GHJ’s Transaction Advisory Services Practice.
