Opportunities in the M&A market

As it has been widely reported, 2023 saw a fall in merger and acquisition (M&A) transactions compared to 2022.

A vast array of headwinds all led to a reduction in deal activity, including high inflation, rising interest rates and lower economic growth. The average length of time taken to get deals over the line became more sluggish, with businesses struggling to refinance their debt ahead of sales. These uncertainties were further heightened by challenging geopolitical tensions. 

Many are predicting greater dealmaking in 2024, although we suspect that will be weighted towards the second half of the year.

Trends

Interestingly, on look-back, Investec have reported that there have been 11 deals so far in 2024 over $10bn in M&A, compared to last year’s figure of only three deals over that size for the same period in 2023 (January and February). However, in terms of volumes of deals comparing the same period 2024 with 2023, volumes have actually decreased by over 50% (1,991 deals reported to date in 2024 and 4,013 deals reported in 2023 for the same period). These are early days however and, while momentum is expected to be slower for the first two quarters of 2024, it is expected to ramp up in the latter half of 2024.

Why are volumes expected to increase? Many reasons are given, not least that inflation should reduce globally - and hopes that interest rates may stabilise. This will make financing cheaper, with the expectation that private equity buyers who still have lots of dry powder will come back into the equation, where they have been fairly quiet in 2023. It is also noteworthy that over 50% of the world will have elections this year, so it is inevitable that both sellers and buyers may be cautious to act until political outcomes are known.

For many years it has been a seller’s market but that is slowly beginning to change, and this is reflected in EBITDA multiples generally falling, of course with exceptions in some sectors.  Statistics¹ show that EBITDA multiples went down on average to 9x in Q4 of 2023 and (ignoring deals of over $10bn) is expected to fall further so that there is an average multiple across sectors below the 10x EBITDA level. As the expectation pricing gap narrows and sellers become more familiar with lower pricing, it is expected that more deals will come onto the market, but this may still take time to come through throughout 2024 and maybe even into early 2025.

In terms of buyers in 2023, statistics show that there have been more strategic acquisitions from trade rather than Institutional buyers who have been happy to hold on throughout 2023. As we head towards the latter half of 2024, we expect institutional buyers to become more active and may even see flurry of deals including IPOs, which has been flat throughout 2023 and this part of 2024.

In terms of sectors, the biggest deals in 2024 to date have been in financial services, technology, healthcare and the energy and infrastructure space. These sectors are expected to grow throughout 2024.

Technology 

As with recent years, the tech sector will drive M&A activity forward in 2024 - albeit in a more heavily regulated environment. However, only certain sub-sectors are expected to grow, with data centres and AI for example being very attractive to financial investors and trade buyers alike, compared with the FTH (fibres to home) market which is seen as saturated.

Companies are increasingly leveraging digital tools like AI automated to improve efficiency and drive growth. Bloomberg reported² last year that Apple alone is looking to invest $1 billion annually in AI, as it looks to integrate generative AI into its products and services. However, across the globe active dealmakers in the AI space will face scrutiny from regulators targeting anticompetitive deals and transactions considered to pose a threat to security.

Healthcare

Another sector that remained resilient in 2023 and is set for further interest is the healthcare and life sciences market. Rising demand is powered by innovation, propelled by evolving customer expectations and rising demand on global healthcare systems.

The tech healthcare space remains attractive to domestic and international investors specifically.  Healthcare companies are increasingly looking to acquire digital health businesses in order to improve their offerings and stay ahead of the competition – with online services vital for easing pressures on public and private healthcare providers. Shoosmiths recently worked with tech healthcare firm Verici Dx, advising them on an exciting fundraise to accelerate market development, as they develop tests to understand how patients respond to organ transplants.

Energy and infrastructure

Despite the continued backdrop of general economic uncertainty, the energy sector, particularly renewables and digital infrastructure, is looking to attract further investor interest in 2024. The primary focus for 2024 in a year of worldwide elections is to accelerate momentum towards a net zero energy and infrastructure system, irrespective of geo-political upheaval. This is not without challenges, but investor appetite for clean energy and EV projects remains keen. Capital looks likely to continue to flow primarily to renewable energy projects and related assets, with solar and batteries topping the list of attractive subsectors.

As we look ahead

The M&A sector is constantly evolving, and providing forecasts can be tricky against an ever-evolving market backdrop. However, the above pockets of market interest will increase deal-making appetite and M&A will remain an important tool for companies to expand and evolve their strategy. Shoosmiths has recently been named as the most active M&A law firm in the UK in 2023 (according to Experian MarketIQ rankings) and with specialist industry sector knowledge, the firm looks forward to driving further growth for the remainder of 2024 for its clients.

¹ Investec: The future of Dealmaking EMEA 21 February 2024
² What Is Apple Doing in AI? Revamping Siri, Search, Apple Music and other Apps - Bloomberg