M&A landscape: The years 2014 to 2023 and expectations for 2024
From 2014 to 2019, the worldwide volume of M&A transactions increased by USD 3 billion per year. These years represented an absolute boom phase for the M&A market, which reached its peak in 2018 with more than 56,000 transactions.
The COVID-19 pandemic abruptly interrupted this trend at the end of 2019 and beginning of 2020. Potential buyers held back on company acquisitions due to economic uncertainties, while banks became much more selective when it came to financing.
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However, 2021 looked very different: the strong demand for technology sparked by the pandemic and the postponed transactions from 2020 led to an upswing in deal activity, making 2021 a new record year. Central banks played a large part in this record, flooding the market with money through low interest rates and bailouts to combat the pandemic.
With Russia's invasion of Ukraine in February 2022 and inflation going up in many countries around the world, the situation changed dramatically. The central banks responded to ever-increasing consumer prices quickly with sharp interest rate hikes on a record-breaking scale. Following the expansionary monetary policy of previous years, these interest rate hikes were comparable to a macroeconomic abrupt stop.
The mixture of increasingly expensive money in the form of high interest rates and a general withdrawal of liquidity (quantitative tightening) hit the M&A market hard in 2022 and 2023.
In particular, 2023 was characterized by the economic slowdown, high interest rates and a strict regulatory environment. M&A activity fell to its lowest level in a decade, with total volume falling by 18% to around USD 3 trillion - the lowest level since 2013.
Source: Statista
The current M&A environment
Despite an improving economic situation at the start of 2024, the M&A landscape remains manageable. Geopolitical uncertainties and the historically high interest rate environment continue to create a difficult environment for transactions.
The expected increase in M&A activity in the first quarter of 2024 only materialised slightly. In addition to high inflation and persistently high interest rates, so-called "value gaps" are also contributing to this situation: Buyers continue to be cautious and pay lower prices, while sellers are often still hoping for prices similar to those in 2021, which unfortunately no longer match current market conditions.
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Results from Aon's "Risk in Review" study, which surveyed senior executives from corporate development teams, private equity firms and investment banks, show adapted approaches in the M&A environment:
Geographical Focus: "Dealmakers" are currently concentrating primarily on core sectors and regions. 64% of respondents identify North America as a key region for deals.
Change in Mentality: Shifting M&A strategies to alternative investments: 34% of respondents are increasingly focusing on alternative investments, 32% on minority shareholdings and joint ventures.
Alternative Financing: In addition to traditional bank financing, private equity (+64%) and non-bank loans (+38%) can also represent alternative sources of financing.
Risk Management: Risks will be analysed more closely. 96% of respondents expect companies to carry out more ESG checks. 86% area also prepared to abandon business due to significant cybersecurity risks.
Despite the difficulties, the majority of study participants expect an increase in M&A activity over the next 12 months. Long-term trends such as digital transformation and ESG factors are expected to drive this development, as companies that meet these criteria are considered more stable and future-proof for investors in the long term. Depending on the geography, age succession is also very relevant, for example in Europe.
Positive business prospects are anticipated in various sectors, such as telecommunications, digital technologies (e-commerce, SaaS, etc.), industry, chemicals, and renewable energies.
Advices for entrepreneurs
Especially in the current market environment, it is important to understand how companies can increase their chances of successful transactions.
Preparation and an adapted strategy are essential for a successful transaction.
The quality of the financial numbers and a transparent insight into the company's overall figures are important. Many investors now prioritise cash flow over growth. Entrepreneurs should therefore currently focus on their financial stability and a good margin profile.
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In addition, buyers are now conducting much more thorough checks before submitting an indicative offer. Therefore, the final financial figures and documents should already be available before the due diligence phase.
Summary and Outlook
The years 2022 and 2023 were characterised by economic challenges and regulatory hurdles. Despite signs of economic recovery, conditions in 2024 remain challenging.
However, ongoing initiatives such as digitalisation and sustainability are forcing companies to transform in order to remain relevant and profitable. M&A activities remain an essential part of this, as organic growth opportunities are often limited.
In order to be optimally prepared for M&A transactions, companies should ensure the quality of their figures and documents and prepare themselves for an intensive due diligence process in terms of length and emotion.
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Sources:
DIRO, Fintech Nexus, Reuters, Statista, Taylor Wessing
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