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Blog — 9 Aug, 2024
By Joseph Toomey
Investors and companies seeking opportunities in the mergers and acquisitions space are facing many challenges in 2024, including persistently high interest rates, economic uncertainty, wide bid-ask spreads, and elections around the world that may affect regulatory approval. What solutions, then, should aspiring dealmakers and investors pursue? Which sectors and regions offer the most opportunity? And what are some alternative strategies in the M&A space that can still create value?
These questions were addressed in S&P Global Market Intelligence's recent webinar, M&A in Focus: Value Creation in a Higher-for-Longer World. During the June 26 session, M&A experts from S&P Global and other financial firms offered views of the M&A landscape as it stands at mid-year and suggested opportunities for value creation.
That interest rates remain stubbornly high has frustrated many investors. But the speakers suggested that this rate stability has now been priced into the M&A market. "The market seems to have its head around where rates are and how deals can still get done," said Joseph Radecki, the Managing Director of Corporate Finance at KPMG Corporate Finance. Chaim Lubin, Managing Director of Mergers and Acquisitions at Lincoln International, agreed, saying that M&A targets with optimistic growth profiles can overcome interest-rate reluctance. "This is really going to come down to believability in future growth from here," Lubin said, "regardless of what rates mean for a level of debt."
It wouldn't take much of an interest-rate drop to prompt a rush of M&A activity, suggested Liz Crego, Deals Clients & Markets Leader at PwC US. "Even when rates are in the 5% to 7.5% range on high-yield bonds, you get M&A volumes increasing about 60% of the time."
Joe Mantone, News Desk Manager covering US financial institutions at S&P Global Market Intelligence, said that global deal volume in the first half of 2024 has been largely flat year over year, and there have been few noteworthy mega-deals. Nonetheless, the panelists agreed the tech industry has remained a leader in deal volume. Radecki said tech deals in Q1 2024 amounted to $125 billion, compared to $92 billion in Q1 2023. He credited the sector's volume to the perceived value of tech businesses with steady recurring revenue from subscribers and companies involved in artificial intelligence. In fact, the speakers said, AI has become part of the deal process itself, with investors using it as a tool to evaluate companies, analyze the quality of earnings, and explore trends in dealmaker behavior.
According to Lubin, strategic investors are still eying international deals, especially European and Asian investment in North American companies. Lubin said that US regulators tend to apply extra scrutiny to foreign investment in American tech firms, but overseas strategic capital remains enthusiastic about US companies beyond tech. "There are certainly pockets of other international focus that would love to do more in North America," he said. "The North American environment is viewed as very positive across almost all industries."
For private equity, Crego said, capital is being tied up for longer, with limited partners now having to wait up to 6.25 years for exits, up from 3.5- to 4-year exit times a few years ago. That, in turn, has slowed deal activity. As a result, she said, PE firms have shifted focus in two ways. "The first is really just going after exceptionally high-quality assets with industries and sub-industries that have the tailwinds to sustain high valuations and great cash flow. So this is like the cloud-based computing, pharma, things that have very, very sticky customer bases where it's clear what the value is," she said. "And the other area we're seeing, a lot of private equity is looking at the landscape and saying, 'Okay, if I can go get a business that is the cash profile that I need at a decent price, let me go down-market.' So we've seen them go lower. Even the bigger funds come a little down on the enterprise value that they're willing to go after."
To put idle capital to work or to free up some of that capital awaiting exit, alternatives to traditional M&A deals are becoming increasingly popular, the speakers agreed. These include private debt, liability management transactions, restructuring, recapitalization, carve-outs and joint ventures. "Many of the deals we're seeing are highly structured," Crego says. "They include requests for preferred equity or even by providing private credit instead of buying a company outright."
Among the trends the speakers said they are monitoring for the rest of the year is the 60 or so national elections being held in the US and worldwide. In America, Crego said, M&A activity tends to slow as an election approaches and apprehension about possible regulatory changes rises. But then deal activity tends to pick up, especially if the election results in a divided government, which is likely to get mired in gridlock that maintains the status quo.
The speakers said they expect to see deals rise over the next four quarters. Lubin and Radecki both cite a pipeline of deals awaiting closure, in both strategic and private equity, that they believe have high quality-of-earnings potential.
And as Crego said, companies sitting on potential deals shouldn't wait too long. Businesses keen on reinvention haven't prioritized M&A enough as a solution, she said. "The longer a company waits after they have that signal that maybe they should sell a division, the lower returns and value that they're going to get," she said. You've got to kind of look in your portfolios and plan to execute."
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