NEW YORK, NY, November 21, 2023 — Historic levels of inflation, rising interest rates and geopolitical instability contributed to a slump in deal activity that bottomed out in the second quarter of 2023. Since then more dealmakers have returned to the negotiation table, with global deal completions increasing by 16% during July to September, according to research from WTW’s Quarterly Deal Performance Monitor (QDPM), in partnership with Bayes Business School.
With high borrowing costs, geopolitical conflict, and a packed election calendar around the world, the potential for disruption in 2024 remains considerable and the outlook for the M&A market hard to predict.
Nevertheless, current conditions provide an opportunity to pursue strategic deals that may not be available when competition for assets intensifies during the next upturn in the M&A cycle. With fundamental drivers of M&A activity remaining intact, David Dean, Managing Director, Mergers & Acquisitions, at WTW, shares his top trends for the year ahead:
“A seismic shift in investment focus towards artificial intelligence (AI) is expected in 2024. Although dealmakers have expressed reservations about AI, companies are increasingly directing their attention and resources toward AI-based businesses. This breakthrough technology and the technical talent within AI start-ups are also being seen as a potential boon for improving M&A processes and value creation.
“From enhancing efficiency through automation to fostering innovation, AI’s potential is vast. Deal success, however, will also depend on the buyer’s ability to build a culture that supports innovation with AI and its power to enhance the employee experience.”
“Large deals (valued over $1 billion) have continued to see a steady decline in volume since 2020, according to our M&A analysis. The prevailing high interest rate environment has sparked a distinct trend in M&A to continue into 2024, as dealmakers increasingly target smaller mid-market transactions that are easier to execute, less risky to finance, and offer a unique and strategic fit within an acquirer’s portfolio.”
“With a higher cost of capital and greater regulatory scrutiny further complicating the M&A landscape, we expect joint ventures, strategic alliances and minority investments to gather pace in 2024 as companies respond to market disruption by sharing and mitigating risk.
“When investing cross-borders, protectionism and foreign ownership policies will also be additional factors at play in this trend towards greater risk sharing.”
“As the valuation gap between buyer and seller continues to narrow, targets will become increasingly attractive and help to drive a recovery in deal flow in 2024. This will be especially welcome news to private equity firms, who have been under mounting pressure to deploy over US$2 trillion in dry powder and are expected to dominate the M&A market in 2024.”
“Dealmaking has become more complex and competitive. Traditional strategies are struggling to be effective in delivering a competitive edge. Improving the odds of success in 2024 will depend not only on a laser-like focus when searching for ‘best-fit’ deals, robust due diligence and ESG integration, but also the ability to manage talent risks in a tight labor market, which if left unchecked can quickly undermine deal value.
“In the fast-paced M&A world, AI is also rapidly emerging as a game-changer and has the potential to significantly speed up M&A deals, from due diligence to post-merger integration. Deployed correctly, AI capabilities may be the key to unlocking greater value through M&A.”
In summary, Dean said: “As we move into 2024, macroeconomic uncertainty and regulatory challenges are likely to weigh heavily on overall deal activity. A renewed focus on technology, particularly AI, should however provide its own impetus for mid-market deals and bolt-on acquisitions that help boost overall activity levels as strategic and financial buyers take advantage of better-priced opportunities for growth.”
WTW’s M&A practice combines our expertise in risk and human capital to offer a full range of M&A services and solutions covering all stages of the M&A process. We have particular expertise in the areas of planning, due diligence, risk transfer and post transaction integration, areas that define the success of any transaction.
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