2023 was a rough year for corporate mergers and acquisitions (M&A). To provide a brief definition, M&A is the consolidation of companies or their assets through financial transactions. In 2023, global deal volume was down by 18% while global deal value plummeted by 33% too. Various factors fed into these subdued figures such as monetary tightening from central banks, which increased the cost of borrowing. However, commercial law firms should be cautiously optimistic that 2024 could witness increased levels of M&A activity.
The macroeconomic climate is beginning to stabilise as inflationary pressures start to recede. This is supplemented by the fact October 2023 hinted at an M&A rebound. It was the biggest month for M&A, by value and volume of deals, since May 2022. Hence, creating a positive environment to forecast a continuation of this uptick in M&A deals. Although, geopolitical uncertainty and forthcoming elections in the UK and US make the extent of this increase in M&A difficult to predict.
This article can be split into two sections: the global trends which will drive deal-making and the hurdles which add complexity and uncertainty. In regard to the former, the anticipated intensification of the energy transition, the pursuit of inorganic growth in the life sciences sector as drug portfolios go off-patent, the surging investment into generative A.I. technologies and urgency to secure supply chains will drive the majority of M&A activity in 2024. This is coupled with the fact debt will become more widely accessible as interest rates and inflation levels stabilise.
In spite of this, it would be naïve to neglect the potential deterrent of regulatory interventionism, particularly in the tech sector, and the insecure geopolitical situation in regards to the potential escalation of sanctions and export controls in China and war between Israel and Hamas in the Middle East too.
Global Trends Which Will Drive Deal-Making:
This article has already touched on the stabilising macroeconomic climate in comparison to the majority of 2023. This is expected to lead to an uptick in distressed M&A as companies are forced to raise funds for operational capital by selling underperforming non-core assets. High interest rates are expected to stay, for at least the first six months of 2024, which could have a particular impact on thinly capitalised growth companies and have a subsequent effect on corporates who depend on them for outsourced services. The buyer-side is set to witness an increase in activity too. This evaluation is reinforced by the fact PwC recently conducted a survey of 500 asset managers and institutional investors, of whom 73% responded saying they were considering a merger or acquisition in 2024. Thus, asserting the belief that distressed companies can represent attractive acquisition targets to asset management firms experiencing a fall in fee income.
Moving away from the state of the economy, government policies towards the energy transition and patent cliffs, a term which refers to patent expiration dates and the subsequent reduction in sales, in the life sciences industry have created an intensified landscape for M&A. There is a growing trend of governments across the globe attempting to stimulate investment in clean energy and decarbonisation projects. Analysis from Jordan Mack, associate at Clifford Chance’s Houston office, illustrates how the first year of the Inflation Reduction Act expanded the capital pool for clean energy and drove publicly announced foreign investment into the USA by over $280bn USD in its first year. Similar trends are being experienced in the Middle East as well. Following COP28, the ‘UAE Consensus’ is set to accelerate the gradual phasing out of fossil fuels. As major players in the energy industry reposition their portfolios, there can be an anticipated increase in asset sales and spin-offs. In turn, this opens up a sizable opportunity for investors, with differing views on the speed of energy transition, to acquire proven global fossil fuel reserves in the US, Middle East and Central Asia.
From a commercial aspect, the life sciences industry is staring at its biggest patent cliff in about a decade. Protections on drugs which generate over $200bn USD in sales are due to expire between 2024 and 2023, encouraging the pursuit of inorganic growth. A brief look at recent history would endorse this perspective. Data provided by Allen & Overy demonstrates how “average M&A values rose by 62% between 2015-2019 compared to the previous 5-year period”. Between 2010-2014, the average annual deal value was $243.2bn USD compared to $394.6bn USD between 2015-2019. However, with a dearth of potential candidates for life sciences firms to attempt a revenue-protecting merger with, prospective deal activity is more likely to focus on innovative biotechs instead. Thus, although M&A activity is expected to increase, there is minimal likelihood for an industry mega-merger.
Research from KPMG indicates an evident trend in firms investing in generative AI. Private capital is flooding into the technology sector, with A.I. rapidly becoming the biggest investment priority for global businesses. Over 70% of respondents in a recent KPMG CEO survey said “they were investing heavily in generative A.I. as a source of future competitive advantage”. This surging investment in A.I. has created a consensus among antitrust authorities that increased regulatory hurdles are required to deter competition concerns. As companies across almost every industry consider implementing A.I. to digitalise their offerings, A.I. is likely to be a key driver of M&A activity across 2024.
Geopolitical uncertainty has pushed firms to strengthen their supply chain security. To ensure stability in supply chains, there is an expectation that firms will undergo vertical acquisitions, strategic alliances and joint ventures. The potential escalation of sanctions and export controls on China has prompted much of this, leading to companies to adopt new regionalisation strategies. As a result, M&A in countries that bridge trading blocs and are not restrictive on friend-shoring.
Challenges to the M&A Landscape
Equally, geopolitical uncertainty has the potential to dampen M&A activity too. Potential for further sanctions on foreign countries, uncertainty in the Middle East and upcoming elections in the world’s largest economies are all factors which may affect levels of M&A activity. Thus, it is near impossible to fully predict the upcoming M&A landscape. Moreover, the new ‘Foreign Subsidies Regulation’ [FSR] in the EU provides an additional challenge to the investment environment. It is aimed at eliminating the distortive effects of non-EU subsidies in EU markets. Thus, adding a further hurdle to M&A transactions. The FSR’s requirement for companies to disclose a broad range of financial contributions from non-EU governments will extend the transaction timeline, especially for transactions which involve ‘high risk’ financial contributions.
Regulatory hurdles extend into the tech sector, particularly A.I., as a new and influential field. The additional interventionism by competition authorities has been driven by concerns around previous under-enforcement in this sector. Brian Harley, Counsel and Tech M&A Leader at Clifford Chance in Hong Kong, outlines the broad consensus on the need to regulate this new technology but such little agreement on how to regulate it. The fear is that possible divergent approaches to A.I. will generate a fragmentary regulatory landscape. The consequences of which involve the growth of A.I. to adopt targeted M&A strategies, pursuing deals aligned with different regulations in different markets.
Evaluation of the 2024 M&A Landscape:
Overall, 2024 looks to be an attractive year for M&A compared to 2023. Although a return to 2021 levels is unexpected, there will likely be a flurry of strategic acquisitions and divestments. As companies seek to synergise and reduce costs in the current economic climate, there is an expectation of increased bolt-on transactions, spin-offs and peer-to-peer M&A too. These transactions will allow for corporates to exit non-core businesses and create opportunities for private equity sponsors to acquire smaller firms and offset the loss of income from underperforming assets.