Initial hopes for an increase in dealmaking activity at the start of the year, bolstered by the potential for five to six rate cuts, have waned. However, the landscape is changing as buyers pursue larger deals despite high interest rates. This, combined with the imperatives to revive merger and acquisition (M&A) activities, suggests a gradual thawing of the dealmaking environment.
The total value of M&A deals in the US for the 1H24 reached around $802 billion, representing nearly a 20% increase from the $665 billion recorded in the 1H23, according to SG Analytics research. This rise in deal value occurred despite an 8% year-over-year decline in deal count, largely due to a resurgence in megadeal activity in specific sectors.
The US witnessed 15 deals exceeding $10 billion in the 1H24, a significant jump from the 4 such deals in the same period last year, according to SG Analytics research. Technology, financial services, and energy have been central to this surge in megadeals, driven by the ongoing focus on AI advancements and the energy transition prompting consolidation in the oil and gas sector. Notable examples include Capital One’s $35.3 billion acquisition of Discover Financial Services, Synopsys’s $35 billion acquisition of Ansys, and Diamondback’s $25.8 billion acquisition of Endeavor Energy Resources.
Transactions in the industrial and information technology sectors remained dominant, accounting for roughly 22% and 15% of all transactions, respectively. The energy sector saw a substantial rise in dealmaking activity by 35%, from 102 deals in 1H23 to 138 deals in 1H24. Conversely, the consumer discretionary and healthcare sectors experienced a 9% drop in the number of deals.
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Figure 1: M&A Transaction Summary 1H20-1H24*
Table 1: Most Active Buyers 1H24 by Number of Transactions
Table 2: M&A Valuation Summary 1H24
*As of 01/07/2024
Source: SG Analytics Research
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The decrease in deals over the past two and a half years has been due to the challenging mix of high interest rates, current valuations, and political uncertainty.
The year began with expectations of five to six rate cuts, but those hopes have diminished, with just one rate cut now anticipated. Year-over-year, prices have increased by 3.3%, with core inflation rising by 3.4%, both surpassing the Fed's annual target of 2%. However, month-on-month prices remained unchanged in May, raising hopes for interest rate cuts. Despite the measure still being too high for immediate rate cuts, the cooling inflation has been a welcome sign.
Additionally, political uncertainty in the US and globally is delaying major corporate decisions. 2024 is the biggest election year, with at least 64 countries slated to hold national elections. The US Presidential elections in November are expected to introduce market volatility, potentially dampening the enthusiasm of dealmakers hoping for a strong rebound in M&A. However, a study by Harris Williams concludes that the impact of the election cycle on M&A markets will be short-lived.
Despite the challenges, the strategic demand for M&As continues to strengthen, driven by pent-up demand and supply. A PwC survey revealed that 64% of chief executives had not made a major acquisition in the past three years, but 60% planned to do so in the next three years.
Corporations are concentrating on transactions to drive growth and achieve business transformation, particularly as economic headwinds stymie organic growth. According to the PwC survey, 82% of US CEOs believe the average company in their industry won't survive the next decade without updating its business model. Among these upgrades, AI remains the top priority and a key catalyst for various transactions.
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Additionally, PE portfolios are ready for sale. According to Pitchbook, as reported by PwC, PE firms held over 27,000 portfolio companies globally at the beginning of the year. About half of these companies have been held for at least four years, typically when they are primed for exits.
In conclusion, while the initial hopes for increased dealmaking in 2024 have subdued, the M&A landscape is evolving as buyers pursue larger deals despite high interest rates. The total value of M&A deals in the US in 1H24 increased despite a decrease in deal count, driven by a resurgence in megadeal activity in sectors like technology, financial services, and energy. Political uncertainty and high interest rates pose challenges, but the strategic need for M&A remains strong, with corporations focusing on transactions to drive growth and transformation amid economic headwinds. The M&A market, though facing obstacles, is showing signs of resilience and potential for future growth.
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