Despite a slower-than-expected start in the first quarter, 2024 holds promise for a rebound in merger and acquisition (M&A) activities. The anticipation of upcoming Federal Reserve rate cuts and a gradual increase in deal volumes fuel optimism for a robust recovery as the year progresses.

Q1 2024 IN REVIEW

Despite the consensus that 2024 will see a rebound in M&A activity, many M&A advisors reported that Q1 was slower than expected. However, each month of the year has presented a gradual increase in deal activity and there remains optimism that this trend will continue as companies finalize their Q1 financials. A key driver of the slower-than-expected start of the year is the Federal Reserve signaling rate cuts in the near future. This has contributed to optimism amongst buyers that cheaper borrowing costs will be available at a later point in the year. This has also prompted sellers to wait until interest rates drop and valuations increase as a result.

In 2023 and continued into the first quarter of 2024, there was also a trend of transactions taking longer than historically normal. One of the common themes is the idea of “analysis paralysis” being one of the causes for extended transaction timelines. Buyers this year are more interested in seeing the continued performance during the deal and investigating every aspect of the business and growth model.

The private equity (PE) sector has been set up for recovery in 2024. According to McKinsey and Company, $2 trillion of undeployed capital was reported at the end of 2023 in the equity market, which is expected to roll over and fuel deal activity for the remainder of 2024. According to S&P Global, deal value increased by 5.1 percent in Q1 2024 compared to Q1 2023.

Q2-Q4 2024 OUTLOOK

As noted above, there is still overall optimism for a rebound of the M&A market in 2024. For the first time since the COVID-19 pandemic, there is a sense of confidence in the economy. Additionally, the anticipation of one or multiple Federal Reserve rate cuts this year is expected to increase deal volume if it materializes.

Several factors may drive deal activity this year, including broader economic conditions, the technology sector, ESG, the upcoming presidential election and data analytics and AI.

Economic Conditions

Dealmakers have faced a volatile environment over the past few months that has directly impacted deal timing and strategy. Consistent with Q1, there is still a level of hesitation and uncertainty around the timing of interest rate cuts.

There are a few potential scenarios related to this topic that will impact deal flow and volume:

• Scenario 1: The Federal Reserve maintains its original plan and pushes three rate cuts before the end of the year. This is becoming less likely as the year unfolds, with inflation in Q1 steadily increasing from 3.1 to 3.5 percent, significantly higher than the targeted 2 percent.
• Scenario 2: Cuts will occur, but they will be fewer than previously communicated towards the second half of the year. As previously mentioned, this may happen if inflation does not decrease at the predicted rate.
• Scenario 3: The Federal Reserve keeps rates unchanged in an effort to bring inflation down. Although this may sound unfavorable for the M&A environment, if communicated, this would stop investors from trying to time the market and would cause a spike in deal flow from the pent-up demand. This would provide more assurance for both buyers and sellers with a predictable and stable environment.
• Scenario 4: Inflation continues to be rampant and the Federal Reserve decides to change course and increase rates. This would be the worst-case scenario as it puts all involved parties at a disadvantage and would heavily decrease deal activity.

Technology Sector

There has been increased PE interest in investing and consolidating smaller technology companies, especially software-as-a-service (SaaS) companies. This increased interest level is due to the prevalence of technology and software in day-to-day personal and professional life. Technology has been evolving to solve issues, increase efficiencies and save costs. Investors are recognizing this to be an area of leverage to generate growth.

Another reason for the increase in PE interest is due to a slowdown in tech IPOs. IPOs are reportedly at the lowest level since Q2 2020, per S&P Global. This slowdown can be attributed to high interest rates. Because of this, many companies are delaying going public until the market recovers and, in turn, PE investments are now more appealing to tech companies.

ESG, Company Values and the 2024 Presidential Election

In 2024, the emphasis on Environmental, Social, and Governance (ESG) is anticipated to pick up. Though private companies are subject to different government regulations than public companies, there is still pressure from investors and shareholders to comply with ESG principles. Therefore, companies with robust ESG compliance are potentially more attractive to buyers and investors. Companies with higher ESG scores also reportedly trade at elevated EBITDA multiples. As such, there is an anticipation that 2024 will show a major pickup in companies with low carbon footprints and strong ESG profiles.

The 2024 presidential election will also affect how the market moves. The winning candidate may have policies that support or go against ESG regulations, which may drive the M&A market accordingly. GHJ will report as and when the election is announced and the economic implications on the M&A market.

AI

Following the introduction of ChatGPT, many more AI platforms have been released specifically targeting the needs of professionals across various industries. M&A professionals have already begun implementing some of these tools in an effort to further automate processes and increase overall efficiency. For example, it might not be unusual to see an AI notetaker on a virtual meeting. Though it is promising for M&A professionals to identify and implement efficiencies, 2024 is anticipated to be the year of new policies and finding flaws in the software as rapid adoption on a broad scale tests the limits of what is capable and acceptable.

A major area of concern is two-party consent, which is still relevant and applicable. There are also potential data security concerns if a data breach leads to the release of confidential information or conversations. It will be critical to research the authenticity and IT security of potential vendors before adopting the software. There is also some uncertainty around whether the data funneled to AI is being used for analysis or education of future and other models outside of the organization. Lastly, there is a risk of inaccurate documentation of conversations or data interpretations. Similar to Siri and text-to-speech functions, these new technologies may misinterpret what is said, which may lead to confusion or larger legal complications if taken out of context.

Click here to read further on the impact of data analytics and AI on deals.

Overall, despite the slow start in Q1, there is still optimism for 2024 to be a rebound year for the M&A market. Although the M&A market is difficult to predict with any degree of certainty, there are several telling trends that indicate that the remainder of 2024 will be strong for deal activity.

To learn more about these trends and other factors driving the M&A market, please contact GHJ’s Transaction Advisory Services Practice.