Last year, global M&A fell to its lowest point in a decade, with announced deal values of $2.9 trillion, down 17% from 2022.Dealmakers are mostly staying on the sidelines as they contend with rising inflation, rising interest rates, increased regulatory scrutiny and market uncertainty, while would-be sellers Still anchored at its previous, more generous valuation.
Activity from private equity (PE) buyers fell last year after accounting for nearly 25% of all acquisitions in the previous two years, as tighter financing conditions and rising interest rates made it more difficult to complete leveraged buyouts. In Canada, the majority of the 441 deals completed last year were additions to existing companies in private equity portfolios.
Private equity firms have found ways to continue trading in a higher interest rate environment by buying minority stakes in companies.They preserve capital by writing smaller checks but allow targets If valuations recover, the company’s shareholders will maintain their interest in the company.
There are some highlights. Corporate activity in the commodities and industrials sectors picked up as inflation benefited many companies and companies looked to expand operations to become more efficient. The energy industry leads M&A activity, with several large M&A deals announced in the second half of the year, including more than $100 billion in activity in the U.S. Permian shale region. While mergers and acquisitions in the tech industry were down overall, two large deals – Microsoft’s ( MSFT ) $69 billion acquisition of Activision Blizzard and Broadcom’s ( AVGO ) $61 billion acquisition of VMware – were successfully completed. In healthcare, activity has also increased with dozens of biotech and pharmaceutical merger announcements, while many large drugmakers face a steep patent cliff over the next decade and are looking to update and expand their patented drug portfolios.
Despite the challenges ahead in 2023, last quarter’s rebound gave investors hope of better days ahead. In 2024, dealmakers are already battle-hardened and adapting to the new regime by adopting more structured deals to balance risk. These include proceeds of use, contingent value rights, divestitures and carve-outs. Dealmakers also structure deals with all or part of the stock consideration rather than all cash. An all-cash deal is typically made when the acquirer has sufficient cash or access to financing and is confident enough to assume all the risk. As financing conditions tighten in general, especially for deals in capital-intensive industries, sharing risks and rewards with shareholders is becoming increasingly common.
Last year’s headwinds may become this year’s tailwinds, and we are optimistic about the prospects for M&A and M&A arbitrage in 2024. Investor confidence is returning as inflation cools, interest rate expectations trend downward and companies adapt to the post-pandemic environment. Despite the uncertain geopolitical and economic backdrop, savvy companies are still looking for opportunities to drive future growth and acquire the technologies and capabilities they need to compete and avoid disruption.
On the deal front, signs from investment banks, advisers and company insiders point to a strong M&A pipeline. Rising stock markets are giving management and boards the confidence to engage in active dialogue with an increasing number of companies to close deals. Shareholder activism is also on the rise as frustrated investors seek to unlock the value of shares trading at deep discounts to intrinsic value. Heading into proxy season, ineffective boards may be targeted, while increased shareholder dissent could bring opportunistic acquirers to the table.
M&A arbitrage may also provide attractive investment opportunities, with the average M&A arbitrage yield on North American M&A transactions exceeding 10%. This is a significant premium relative to historical levels and represents a significant spread compared to high-yield bonds. In a tougher regulatory environment, arbitrage investors now understand which types of transactions may be subject to greater regulatory scrutiny.
Regulators are stretched thin after a string of losses. 2024 could be a strong year for M&A arbitrage due to wider spreads, improved playbooks for assessing deal risk, and the potential for more M&A activity to materialize.
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Editor’s note: Summary highlights for this article were selected by Seeking Alpha editors.