Are mergers and acquisitions rebounding after a couple of down years? Some in the investment industry believe that 2024 will be a comeback year. Last year’s inflation across the globe meant high interest rates and increased borrowing costs. Equity markets also struggled in 2023, resulting in lower valuations. The uptick in regulatory scrutiny created uncertainty and limited deal-making.
Morgan Stanley believes this year should see an improved environment for mergers and acquisitions (M&A). According to Tom Miles, Morgan Stanley’s Head of Americas M&A, “Capital markets were not as open or freewheeling, and 2023 did not happen the way we thought it would, principally because private equity was not as active as anticipated. The market forces are in place that make an eventual return inevitable. It’s not a question of if but when.”
Here are some of the trends Morgan Stanley predicts for the coming year’s mergers and acquisitions market.
Corporate Activity Is Poised to Strengthen
Considering the S&P 500 Index ended 2023 close to record highs, the majority of corporate balance sheets are strong, CEO confidence is improving, and there are expectations of increased profitability, it’s no wonder there is growing optimism for 2024. Morgan Stanley sees three industries in particular that should see more M&A activity.
Energy – According to John Collins, Head of Global M&A at Morgan Stanley, “Energy companies had very strong operating cash flows and balance sheets for a number of years, and they are tactically trying to broaden portfolios incrementally.”
Technology – Miles mentions, “We expect technology to be busier in 2024 as buyers and sellers converge on values that work for both sides. In addition, some sellers will need capital to continue their growth plans and that will lead to more M&A.”
Healthcare – According to Collins, biotech is driving the growth in M&A in the healthcare sector, “It’s a very big industry, and because biotech is so research-intensive, consolidation may need to happen.”
The Return of Financial Sponsors—Both as Buyer and Sellers
With nearly $2 trillion of dry powder ready to be deployed after seven consecutive flat or down quarters, the inventory of aging private equity-owned assets to be monetized keeps growing. The Federal Reserve is indicating an easing of monetary policy. Collins states, “We may see an increase in sponsors monetizing across sectors. Many companies’ debt capital structures are now a year older, which may drive the need to sell if firms need to return capital to investors.”
Activist Campaigns Will Push for M&A Solutions
Last year, activist investors sought out change at undervalued companies. One tactic that could increase is the desire to return underperforming public companies to private ownership.
Corporate Separations Activity Will Drive Clarity
Spinning off one or more company parts can help streamline operations, raise capital, and focus attention on future goals. Corporate separations were one of the few areas in 2023 that didn’t decline significantly. According to Michael Kagan, Head of Separations and Structured Solutions at Morgan Stanley, “We expect ongoing investor support for transactions that have a high certainty of closing and that enhance balance sheet strength, profitability, and earnings stability.”
Regional Economic Woes May Drive Cross-Border M&A
The wars between Ukraine and Russia and Israel and Hamas are impacting Europe’s economy and increasing European companies’ interest in the United States. Additionally, Japanese companies are coming out of a period of deflation and looking to invest capital and increase yields outside of the country.
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