2024 M&A Outlook: Ready for a Rebound

Mergers and acquisitions are due for a comeback in 2024 after a slowdown in 2023, according to Morgan Stanley Investment Banking.

A number of factors contributed to a muted M&A environment last year. Global inflation remained elevated for much of 2023, only receding at the end of the year; as a result, central banks kept interest rates at higher levels to cool inflation, which increased borrowing costs for buyers looking to finance M&A deals. Additionally, equity markets were challenged throughout much of the year, bringing down valuations and creating uncertainty. Finally, large M&A transactions continue to face increased regulatory scrutiny, which impacted the number of megadeals in 2023.

“Capital markets were not as open or freewheeling, and 2023 did not happen the way we thought it would, principally because private equity was not as active as anticipated,” says Tom Miles, Head of Americas M&A at Morgan Stanley. “The market forces are in place that make an eventual return inevitable. It’s not a question of if but when.”

Global M&A Volumes
2024 Deals May Pick Up After 2023 Slowdown

Here are five trends to watch as the M&A market picks up again.

Corporate acquisition activity could increase in 2024. The S&P 500 Index ended the year near record highs not seen since January 2022, corporate balance sheets are strong, financing markets are improving and CEO confidence, which is closely correlated with M&A activity, is climbing. CEOs say they expect higher growth in revenue and profitability in 2024, compared with 2023.¹

Three sectors where Morgan Stanley’s investment bankers expect to see improved activity in 2024 include:

• Energy: Deal making is already picking up where it left off in 2023 and may continue accelerating in 2024. “Energy companies had very strong operating cash flows and balance sheets for a number of years, and they are tactically trying to broaden portfolios incrementally,” says John Collins, Head of Global M&A at Morgan Stanley. Recent examples include Chevron’s acquisition of Hess and ExxonMobil’s takeover of Pioneer Natural Resources in October 2023. Morgan Stanley served as lead adviser to Chevron and adviser to Pioneer.
• Technology: Buyers and sellers of technology companies are still seeking common ground on valuations, but activity should pick up, Miles says: “We expect technology to be busier in 2024 as buyers and sellers converge on values that work for both sides. In addition, some sellers will need capital to continue their growth plans and that will lead to more M&A.”
• Healthcare: Within the sector, biotechnology companies may seek M&A opportunities to drive research efforts. “It’s a very big industry, and because biotech is so research-intensive, consolidation may need to happen,” Collins says.

A number of long-term trends—including the rise of artificial intelligence; the increasing importance of environmental, social and governance (ESG) factors; and the regulatory impact of things like infrastructure spending—are likely to cut across industries and could impact activity across all sectors.

Finally, buyers and sellers may be more willing to embrace complicated structures to get deals done. In the back half of 2023, there were more deals in which sellers were willing to accept stock in place of cash; more sales of minority stakes in place of company sales; and more “earnouts,” in which the buyer and seller bridge the gaps in their valuations by waiting to pay out the full purchase price until the seller has met certain financial or operating milestones after the deal closes. Structured transactions are likely to remain in play as attractive options as the overall M&A market regains strength.

Financial sponsors could see accelerating buying and selling in 2024. In addition to the record $1.9 trillion of dry powder² that needs to be deployed, there is an ever-increasing inventory of aging private equity owned assets that need to be monetized.

The quarterly value of these private equity sales, or “exits,” was flat to down for seven consecutive quarters since the third quarter of 2021 and declined significantly through 2022. By the end of the first quarter of 2023, quarterly exit value had fallen 75% from its peak in the second quarter of 2021.³ A gradual easing of monetary policy in 2024, as indicated by the Federal Reserve in December 2023, could facilitate easier lending and more exits, Collins says. “We may see an increase in sponsors monetizing across sectors. Many companies’ debt capital structures are now a year older, which may drive the need to sell if firms need to return capital to investors.”

Additionally, as sponsor-owned companies remain private for longer,⁴ sponsors may seek alternative paths to partial liquidity. This may lead to more minority stake sales—in which an owner sells a minority equity position in the company—recapitalizations—which involves exchanging one type of financing for another, debt for equity, or vice versa—and continuation fund situations—in which general partners roll assets from an existing fund into a new investment vehicle, to have access to portfolio companies for longer than the primary fund’s term—before sponsor-backed company sales pick up in earnest.

Private Equity Exit Activity

While stock market indexes posted strong gains overall in 2023, there was a significant gap between companies with strong operating performance and quarterly earnings and those that struggled. This discrepancy has created a favorable environment for activist investors to push for changes at undervalued companies, according to David Rosewater, Global Head of Morgan Stanley’s shareholder activism and corporate defense practice. One type of activist campaign that may increase is the push for certain public companies to return to private ownership: “There is pent-up demand for activists to push for sponsor take-private solutions as financing markets become more hospitable,” he says.

Corporate separation activity, with companies spinning off parts of the organization to streamline their business or to raise capital, was resilient in 2023 despite capital market volatility and will likely continue in 2024. "We expect ongoing investor support for transactions that have a high certainty of closing and that enhance balance sheet strength, profitability and earnings stability," says Michael Kagan, Head of Separations and Structured Solutions at Morgan Stanley. "In addition, organizations that are more specialized, efficient and better-capitalized are better positioned to be acquirers and pursue transformative M&A in this environment."

Given Europe’s geographic proximity to the Russia-Ukraine and Israel-Hamas wars, economies in the region have underperformed the U.S. economy, which is driving European companies’ interest in increasing their exposure to U.S. markets. “Large European corporates are showing interest in acquiring U.S. businesses,” says Jan Weber, Head of EMEA M&A at Morgan Stanley.

Other potential cross-border M&A may include Japanese companies seeking to invest capital and increase yields outside of the country, as it continues to emerge from deflation.