A brighter view of the likely path of monetary policy in the US, UK and eurozone this year supports a positive outlook for M&A and initial public offerings activity.

Market observers see recent central bank statements as boosting confidence for an uptick in M&A and IPO activity from prior-year lows, even with fewer cuts to benchmark interest rates on the horizon. Rising interest rates were a key drag on activity in the last two years with soaring transaction financing costs and depressed stock valuations keeping many dealmakers on the sidelines. With monetary tightening across the US, the UK and the eurozone largely over by the fall of 2023, rates have since stabilized and are expected to come down at some point in 2024.

"Interest rates have stayed higher, but at least there is now a clearer runway as to where they're heading to," Inigo Esteve, a partner in White & Case's capital markets group in London, said in an interview. That visibility makes it easier for companies to decide on issuance and listings, Esteve said.

The sentiment is similar on the M&A side, where more certainty on the trajectory of rates is expected to support deal activity, with the gap between bid- and target-price expectations also narrowing and indications that private equity players are coming back to the market, said Patrick Sarch, a partner in White & Case's global M&A and corporate practice team.

Central bank watch

As the European Central Bank (ECB) has "all but promised" a rate cut at its next meeting on June 6, current expectations overwhelmingly point to a key rate cut by 25 basis points to 3.75% at that time, Reuters reported May 29, citing a poll among 82 economists, all of whom projected the cut. Expectations for the number of ECB cuts have dropped to three or less in 2024, down from up to six projected cuts at the start of this year, the news agency said, citing economist and financial market forecasts.

In the US, most economists see a first cut in September at the earliest with the Federal Reserve sending a clear signal of higher-for-longer rates at its latest policy meeting on May 1, while markets are pricing in the first cut for November, according to Reuters.

The latest market expectations suggest the Bank of England (BoE) will not cut rates at its next policy meeting on June 20 given "disappointing" inflation data, UK-based private bank Arbuthnot Latham said in a May 31 note.

More conviction on the path of rates from the central banks in both Europe and the US bodes well for new listings activity in 2024, with investors "increasingly looking at IPOs as a source of alpha," Tom Swerling, global head of equity capital markets at Barclays, told Bloomberg in a May 30 interview.

The same goes for the M&A market.

"It's less about the interest rates stabilizing and maybe not going down as quick as we want, but it's more about the predictability around when is that going to happen," Jana Mercereau, head of corporate M&A consulting Great Britain at Willis Towers Watson, told S&P Global Market Intelligence in an interview.

By the numbers

Global M&A and IPO activity figures so far in 2024 are mixed, Market Intelligence data shows. At 9,560, the number of M&A deals announced in the first quarter was lower than a year ago and the lowest recorded in the last two years, yet the total value of deals improved year over year, to $599.13 billion.

The number of global IPOs in the first quarter, 296, was below the prior-year figure, while the total IPO value of $23.33 billion was closer to the $24.16 billion booked in the first three months of 2023.

Overall equity and debt capital market issuance activity in the first quarter was stronger than a year ago in terms of both the number and value of transactions. Looking at second-quarter results so far, April was a stronger month for activity across markets than May.

Market observers point to large deals booked over the first quarter — including the US listings of Reddit Inc., ZEEKR Intelligent Technology Holding Ltd. and Rubrik Inc. — as a precursor to a wider rebound.

A comeback

Increased visibility into interest rates and expectations for a further narrowing of the valuation gap has boosted sentiment among private equity dealmakers, with more firms saying they are looking to divest assets in the first quarter of 2024, EY's latest sector survey shows. The return of private equity firms after their retrenchment from markets in the last two years is seen as essential to reviving M&A and IPO activity.

A comeback is bound to happen in the coming quarters given the amount of dry powder and "aging assets" private equity firms have been sitting on, Kiran Kumar, director at financial advisory firm Acuity Knowledge Partners, said in an interview. There is also a large need among corporate sellers to offload assets, which would be another driver for activity.

While private equity involvement is still subdued, there are signs of increasing financial sponsor activity so far in 2024, White & Case's Sarch said. Earlier this year, Goldman Sachs Group Inc. CEO David Solomon said there was a pickup in sponsor activity in the first quarter that would drive M&A advisory revenues in 2024 as peer global investment banks were also more optimistic in their M&A and underwriting outlook after a good start to the year.

The outlook for the rest of 2024 is for "a steady increase in IPO activity across Europe with the UK lagging a little" with market expectations suggesting that growth curve would continue and increase in 2025, White & Case's Esteve said.

Compared to 2023, large M&A deals in the US, the UK and internationally have all increased so far in 2024, Sarch said. Looking at the UK for the year to the end of April, firm takeover offers have increased 24% and deal value has risen to nearly £1 billion from £230 million, he said. The price expectations gap has also improved with the average number of price bumps between the first offer and the agreement on the deal falling from the recent level of 4 or 5 bumps, and premiums on deals, especially from strategic buyers, increasing, Sarch said.

"We have very strong expectations for the pipeline for the rest of the year," Sarch said.