What’s ahead for M&A? Navigating the opportunities and challenges
Will there be an M&A reset? This was the question on all dealmakers’ minds after the frenzy of 2021, and turbulence of 2022. Thankfully, 2023 certainly provided more sustainable M&A volumes compared to previous years. Still, tighter financing costs, lengthening timelines and ongoing uncertainty caused activity to decline.
However, the tune is changing, and there is more optimism ahead for M&A in 2024. There are already some signs of recovery.
A positive start to 2024
New global sell-side deals launched on Datasite, which facilitates about 14,000 new deals annually, rose 14% year-over-year in 4Q 2023, suggesting a positive shift in momentum. These figures, representing deals at their inception, rather than announced, offer a glimpse into the potential resurgence of M&A activity in the coming six to nine months.
This activity continues the trend of focusing on quality over quantity. Dealmakers are proceeding with more caution, and completion rates are declining. In fact, completion rates dropped from 49% to 45% in 2023, indicating that there is more deal scrutiny, with longer and more thorough due diligence processes.
Green shoots ahead
When it comes to sectoral activity, a few standout industries are set to the lead the way for M&A. Defence and technology sectors are showing promising signs for growth this year, driven by demands for sustainability, innovation and wartime defence, leading to rapid innovation.
Meanwhile, deal flow in renewables is expected to pull back, despite growing interest. 2023 was a busy year for the energy sector, with deal activity rebounding and global sell-side deals up 17% in the second half, compared to the same time in the prior year. However, with costs and valuations still high, levels are expected to dip in 2024.
Technology, media and telecoms (TMT) deal-kick offs dipped 5% in 4Q 2023. However, a comeback is expected, fuelled by transformational technology-focused deals. Additionally, life sciences and biotech may see increased dealmaking, driven by growing consumer momentum behind solutions for ageing populations, longevity, and health and nutrition innovation.
Following a healthy 7% increase in 4Q 2023 deal kick-offs on Datasite, an industrial sector revival is also anticipated.
Regional M&A trends
Datasite data also shows early indications of the regions set to lead the way for activity in 2024. A year-over-year 2% rise in 4Q 2023 Americas deal kickoffs on Datasite, driven by a spike in energy sector activity, may signal the beginning of a larger comeback in 2024. And on the other side of the pond, EMEA continues to roar forward, posting a 13% year-over year increase in 4Q 2023 deal kick-offs, fuelled by the industrial and consumer sectors.
Economic triggers ahead
While general market sentiment is positive, there are other factors that may pose potential disruption to M&A in 2024, including inflation, employment trends, elections and regulatory changes.
With elections scheduled in both the UK and the US this year, some dealmakers might adopt a more cautious approach.
However, for some in-demand sectors, the show must go on. The increasing demand for digitisation and technological innovation is expected to continue to drive M&A, especially investments in climate tech and cleantech, which totalled over $31 billion between 2019-2021.
The way deals are done is also expected to change. Artificial Intelligence (AI) is not only grabbing dealmakers’ attention as a significant area for investment interest, but also as a technology they can use to manage deals themselves. Generative AI’s ability to streamline various aspects of the dealmaking process is particularly appealing. In fact, when it comes to productivity and speed, AI is a top item on dealmakers’ agendas. Nearly half (42%) of 500 global dealmakers identified productivity as the most significant benefit of using AI, with expectations of accelerating deal timelines by 50%.
Still, dealmakers acknowledge there are challenges for implementing AI in M&A processes. Over 35% of dealmakers cited data security and privacy concerns as the primary obstacle. Nevertheless, collaboration between industry players and governments is likely to facilitate greater AI adoption, making it a focal point throughout 2024.
Staying deal-ready
With several major factors at play, M&A deal preparedness and readiness will be crucial. Dealmakers who take calculated risks, supported by stronger preparation time and precise due diligence processes are more likely to succeed.
