Christopher S. Connell

Over much of the last year, M&A activity saw a significant slowdown globally — one not seen for a decade. Economic uncertainties, interest rate increases, market volatility and geopolitical instability all converged to create an adverse environment for both buyers and sellers. Given that several of these factors will extend into the next year, what can we expect for the industry in 2024? Expect a potential bounce-back in deal volume thanks to a probable end in Federal Reserve rate hikes and trends such as AI; increased regulatory scrutiny; and environmental, social and governance (ESG) factors to come into play this year.

What Happened in 2023?

The total volume of global M&A deals through the third quarter of 2023 was approximately $1 trillion lower than the same time period in 2022, Bloomberg Law reported, and the lowest three-quarter deal volume since 2013. A variety of macro-level issues contributed to the historic slowdown.

Recession Fears Amid Market Volatility

Widespread concern of a recession persisted throughout much of 2023, tempering the appetite for buyers to engage in dealmaking. As the year drew to a close, there seemed to be greater optimism about the health and resiliency of the U.S. economy, bolstered by a pause in the Federal Reserve’s interest rate hikes.

Rising Interest Rates Lead to Historic Bank Failures

When Silicon Valley Bank collapsed in March, it represented the largest bank failure since the 2008 financial crisis. When the second largest arrived two days later with the closing of Signature Bank, the events sent ripples throughout Wall Street, creating a volatile stock market and banking concerns globally. Rising interest rates put in place by the Federal Reserve to curb inflation, combined with both banks’ high-net-worth customer base rooted in the tech and cryptocurrency industries, ignited the firestorm that led to their collapses and, in turn, left buyers and sellers in a prolonged period of uncertainty, with a particularly acute impact on the venture capital and emerging technology asset classes. As a result, transactions that required bank financing were particularly challenging, and cash buyers had a distinct advantage over less liquid competitors in pursuit of acquisitions.

Geopolitical Tensions Put Increased Focus on Risk Management

Large-scale conflicts involving several major global powers did nothing to ease the minds of potential dealmakers. In a survey conducted by Oxford Economics in August, more than 125 companies identified geopolitical tensions as the top risk to the global economy over the next two years. Persistent supply-chain disruptions, trade restrictions and an increased focus on risk management and predictability led to a decreased appetite for cross-border transactions.

Aggressive Antitrust Enforcement Results in More Merger Challenges

The U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) filed 10 lawsuits in 2022 to block deals they considered anti-competitive — a significant increase over previous years. This heightened scrutiny of M&A transactions has caused some market participants to sit on the sidelines or, at a minimum, be more thoughtful and creative about potential business combinations.

What Trends Can We Expect to See in 2024?

In mid-December, the Federal Reserve left its interest rate unchanged for the third-straight time. The Fed went a step further in a recent news conference, indicating that it was done with rate hikes and expects to lower its benchmark rate by three-quarters of a percentage point this year. The announcement led to a rebound for the S&P 500, which was up around 23 percent as of December 15, CNBC reported. Globally, the International Monetary Fund forecasts a steady decline in global inflation, from 6.9 percent in 2023 to 5.8 percent in 2024, according to its latest World Economic Outlook report.

These more favorable macroeconomic conditions could potentially pave the way for a more favorable borrowing environment, a decrease in the cost of capital and increased deal volume in 2024. AI and ESG will continue to factor into transactions from the tech to energy industries significantly. However, the final merger guidelines recently released by the DOJ and FTC will significantly impact the number of transactions that will come under regulatory review.

Dealmakers to Cautiously Leverage AI Technology

Artificial intelligence has infiltrated most every industry sector, and its widespread adoption and increasing usage will undoubtedly be a prominent focus in upcoming transactions. In the tech industry, the highest-profile deals involving generative AI startups were announced in June: Databricks’ agreement to acquire MosaicML for $1.3 billion and Thomson Reuters' $650 million acquisition of Casetext. Transactions to acquire generative AI capabilities will likely dominate much of 2024, particularly for Big Tech companies.

Generative AI will also increasingly feature in M&A strategies, with potential utilization in conducting due diligence, identifying targets and executing deals. Leveraging the tools for integration post-merger could also lead to a more streamlined process for involved entities.

ESG Considerations to Factor into Transactions

Similarly to AI, companies will continue to target ESG assets and capabilities to meet their sustainability goals and socially conscious initiatives. Transactions related to ESG and environmental considerations have steadily increased over the last two decades, according to Boston Consulting Group’s 2023 M&A Report — and that growth is expected to continue into 2024.

Increased Regulatory Scrutiny to Continue

The DOJ and FTC released their 2023 merger guidelines in December, modifying the draft merger guidelines in July, which responded to public comment and feedback that criticized the agencies’ aggressive merger enforcement stance. In addition, as of January 1, 2024, domestic and foreign entities registered to do business in the United States will now need to comply with new beneficial ownership reporting requirements imposed under the Corporate Transparency Act (CTA).

Looking Forward

While 2023 presented several challenges to M&A dealmaking activity, a reversal of some of those trends, including a predicted drop in inflation and the cost of capital, may lead to an increased pace of M&A activity in 2024. However, a close eye will need to be kept on the expected rebound in view of the continuing geopolitical climate and regulatory landscape, particularly in the backdrop of the 2024 presidential election.