‘There is hope that 2024 will be a year of recovery for the M&A market,’ says Gavin Davies, head of Herbert Smith Freehills’ global M&A practice.
Over at FTSE adviser stalwart Slaughter and May, the firm’s co-head of corporate and M&A, Richard Smith, agrees that the firm is ‘happy’ with the way 2024 has started but admits that things are ‘still quite fragile’.
As the dust settles on a dismal period for M&A, with 2023’s severely subdued deal activity making the year notable for all the wrong reasons, city corporate partners suggest there are glimmers of optimism that markets are picking up.
And any signs of positivity are being welcomed with open arms. In 2023, the global M&A market dropped 17% to a total deal value of $2.9tn, the lowest in a decade according to the LSEG global M&A review. The total decline masks significant disparities between regions; while US target M&A fell only 5%, it accounted for almost half of all dealmaking, meaning European target M&A plummeted by 28% year-on-year, with Asia Pacific seeing a similar drop.
Looking at worldwide volume, total deals fell 6% to more than 55,200 – a three-year low and a sobering contrast with the highs of the post-pandemic deal boom in 2021.
Private equity backed buyouts in particular saw a hard decline, with global PE deal values falling by 30% to $566bn, according to the LSEG report – the slowest full year for PE since 2019, but still the sixth highest since records began in 1980.
‘It was yet another bad year for capital markets and for equity markets in general – so it was a pretty down year,’ says Lorenzo Corte, London-based global head of transactions at Skadden, Arps, Slate, Meagher & Flom (Skadden).
Throughout the year, the same issues that weighed heavily on the second half of 2022 persisted. High inflation, rising interest rates, and the ongoing conflict in Ukraine remained pervasive, casting a continued shadow over the economic landscape. Navigating these challenges proved daunting for buyers, who grappled with high funding costs and a mismatch with sellers’ lofty valuation expectations.
‘Creativity has been there as people try to work out something that works for everybody that means a deal can happen today.’
Sam Newhouse, Latham & Watkins
Megadeals – those valued at $10bn or more – fell 13%, with 32 worth a total of $646.6bn – the lowest period for mega-deals since 2017. ‘The big mega-deals were very few and far between,’ says Simon Branigan, global corporate head at Linklaters.
Emma Danks, co-head of Taylor Wessing’s global corporate and M&A group, describes it as an uneven M&A landscape: ‘It’s been a market of extremes; by that I mean we have found that either transactions are moving quickly and they’re very competitive, or they are being slow, and/or they are taking a different course to what was originally anticipate. So, there doesn’t seem to be much in the middle that follows a nice regular pattern.’
However, some partners are now showing a healthy dose of optimism when asked about prospects of recovery for the year ahead.
As Simon Nicholls, co-head of corporate at Slaughter and May, comments: ‘We expect a material uptick in deal activity from last year.’
Early data suggests the optimism is based on solid foundations – at least when deal values are the focus. Data from LSEG shows Q1 2024 deal values climbed 38% globally to $797.6bn.
This was underpinned by a notable uptick in mega-deals, with the number of transactions worth more than $10bn more than doubling to 14 globally worth $278bn – the strongest opening period for mega-deals by value since 2019.
‘With interest rates coming down in most jurisdictions and those finance conditions becoming a lot more benign and positive, we’re currently seeing an uptick in M&A activity as compared to last year. That’s coming through in our numbers,’ remarks Branigan.
But, while there have been some positive developments, global mid-market M&A worth under $500m fell in value year-on-year in Q1, with total deal volumes globally also falling.
So, against this turbulent backdrop and with the road ahead remaining fraught with economic and geopolitical uncertainties, are dealmakers clear for take off?
Tackling market turbulence
Even amid 2023’s record low activity levels, there were still some positive deal outliers.
Successful transactions include Danaher’s spin-off from its environmental and applied solutions business to form Veralto, a $21.3bn demerger which generated roles for Latham & Watkins (Latham) and Skadden. Meanwhile Gibson, Dunn & Crutcher and Davis Polk advised on ExxonMobil’s $60bn acquisition of Pioneer Natural Resources Co, while Cisco Systems’ $28bn acquisition of Splunk generated roles for firms including Clifford Chance, Skadden, Kirkland & Ellis, and Cravath, Swaine & Moore.
Economic headwinds and geopolitical instability are far from novel challenges – dealmakers have been grappling with them for years. Amid this adversity, the ability of those involved to find creative and complex solutions to steer transactions across the line becomes particularly important. As Latham’s global vice chair of M&A Sam Newhouse comments: ‘Creativity has been there as people try to work out something that works for everybody that means a deal can happen today.’
‘Sellers and buyers have had to work hard to get deals done and we have seen some more complexity in deals,’ says Nigel Wellings, joint head of London corporate at Clifford Chance. ‘The deal structures are a bit more innovative; there’s more structured deals, such as corporates doing spinouts and carveouts,’ adds Danks.
In the face of tough financing markets, companies have been turning to carveouts and joint ventures to monetise non-core assets. This strategy serves a dual purpose – deleveraging while also delivering shareholder value – which ultimately unlocks value against the backdrop of market challenges.
‘We’re going to continue to see a large number of carve-out transactions where our corporate clients are going to try to focus on their core businesses and take action to dispose of things that are less core,’ notes Melissa Fogarty, Wellings’ fellow joint head of London corporate at Clifford Chance. This trend for carve-out transactions is demonstrated by deals such as buyout firm GTCR’s $11.7bn carve-out acquisition of Worldpay, from US fintech company FIS.
Given one of the biggest obstacles to M&A has been the valuation gap, partners point out that more time is spent discussing the mismatch between buyers’ and sellers’ expectations.
‘You spend more time up front on meeting people on valuation than you did before’, notes Newhouse. ‘We’re seeing a variety of techniques coming into the fray to help reconcile differing price perspectives between sellers and buyers.’
In an attempt to bridge this gap, Contingent Value Right (CVR) securities that offer additional compensation to investors in the event that certain conditions are met, such as hitting a specified sales/earnings target, have become a popular choice on deals.
‘CVRs of some sort or another are much more present in deals than they have been for a long time’ says Jennifer Bethlehem, head of the consumer and healthcare group at Freshfields Bruckhaus Deringer (Freshfields). Julian Pritchard, head of global transactions at Freshfields, adds: ‘we are seeing more structured investments, with downside protection for investors as one technique to bridge value.’
‘I suspect that some deals are left on the table because of the heightened focus by regulators. People tend to go into them much more hesitantly.’
Lorenzo Corte, Skadden, Arps, Slate, Meagher & Flom
Despite these tactics, numerous deals were stalled or abandoned last year. For example, a consortium led by Brookfield and EIG on its $18.7bn acquisition of Origin Energy fell through, while Credit Suisse Group’s $175m acquisition of The Klein Group was withdrawn. As Nicholls succinctly puts it: ‘If the gap is too far apart, you’re just not going to be able to bridge it with structures.’
According to Branigan there are signs that the gap is now closing. ‘The general economic and financial conditions are much more benign, and lot of sellers and boards are a lot more realistic in terms of valuations,’ he observes.
A spotlight on regulators
Adding significantly to the complexity around dealmaking is heightened regulatory scrutiny, with regulators around the world adopting a more expansive approach to merger control and foreign direct investment (FDI).
‘Deals are taking longer to close and becoming increasingly more complex due to, in part, antitrust regulators, both at home and abroad, becoming much more interventionist and less predictable’ says Branigan. ‘Antitrust authorities are closely scrutinising transactions and intervening more frequently, which slows down the dealmaking process,’ agrees Corte at Skadden.
Across 2022 and 2023, a total of $361bn in announced deals have been challenged by regulators worldwide, and many of the deals that went on to close required some form of remedy, according to data from Bain & Co.
Most notably, Microsoft’s $69bn acquisition of Activision Blizzard underwent restructuring due to concerns raised by both the UK’s Competition and Markets Authority (CMA) and the European Commission (EC). The deal closed in October 2023, but has since faced challenges from the Federal Trade Commission (FTC). Partners point out that regulators have considerable resources to pursue their causes, resulting in an uphill battle for some companies in the spotlight.
Newhouse notes that it is now ‘very seldom that you don’t get regulators using the full amount of their time and questions as they go through even a simple process’, a shift that inevitably adds significant pressure on more complex mega deals.
This uncertainty around the actions of the regulators has left many wary, and prompted a number of companies to abandon deals. ‘I suspect that some deals are left on the table because of the heightened focus by regulators. People tend to go into them much more hesitantly’, says Corte. This hesitancy was demonstrated recently in December last year, when Adobe abandoned its planned $20bn acquisition of Figma after pressure from the CMA and EC.
Across the Atlantic, the FTC and Department of Justice (DOJ) have increasingly resorted to litigation as a tool to challenge deals. For example, the FTC’s challenge to Amgen’s $27.8bn purchase of Horizon Therapeutics was resolved via a consent order. It’s a trend that prompts Pritchard to warn that ‘you have to be willing to litigate, and if you’re not willing to litigate, you won’t get the best outcome in your transaction; you may not even get your transaction done.’
Antitrust regulators are not the only regulatory bodies putting the brakes on M&A deals. In a global landscape marked by escalating geopolitical tensions, those seeking to complete M&A deals must also navigate rules regarding FDI and the Foreign Subsidies Regulation (FSR), as countries embrace policies that prioritise protectionism.
‘The landscape is constantly evolving; Foreign Direct Investment regimes continue to grow in number and complexity – which ten years ago was not something you had to consider,’ notes Corte. Philip Cheveley, a partner in Sidley Austin’s London M&A team, adds: ‘The various regulators increasingly talk to each other, so we’ve seen instances of clients concluding that an antitrust filing is not required, but a National Security & Investment Act (NSI) filing is needed. Then the antitrust regulators intervene because they’ve been alerted by the NSI regulator.’
While corporates are keenly aware of the vigorous scrutiny from regulators, it isn’t deterring everyone. ‘Those high-value transactions are beginning to come back and demonstrate an increasing confidence in the market’ says Danks. She continues: ‘The high-value deals are the ones where there is more likely a need to work with regulators to progress a deal, so this is indicative of regulators being willing to work together with those involved to achieve completion. M&A-doers now anticipate what it’s like to work with the regulators and it’s being baked into the deal process in a manner that was not the same 12 months ago.’
PE’s creative take-off
But what about the buyout market, where LSEG data shows PE-backed buyouts accounted for 19% of Q1 2024 M&A activity, down from 24% last year, albeit overall value grew year-on-year?
‘Private equity firms are holding onto their assets for a bit longer because of the continued market uncertainty and the challenges of taking assets into successful sale processes which match their valuation goals. The result of that is that there has been a slowdown in returning capital to investors,’ says Freshfields’ Pritchard. ‘Funds have amassed investor commitments that are well into their typical five-year investment period, so there’s growing pressure to deploy that capital from investors,’ adds Linklaters’ Branigan. As a result, PE firms have amassed a record amount of dry powder/cash to spend on buyouts.
TOP GLOBAL M&A DEALS 2023
| Rank | Target | Target nation | Value ($bn) | Acquirer |
|---|---|---|---|---|
| 1 | Pioneer Natural Resources Co | US | 64.9 | Exxon Mobil |
| 2 | Hess Corp | US | 59.6 | Chevron Corp |
| 3 | Seagen Inc | US | 42.1 | Pfizer |
| 4 | Johnson & Johnson | US | 32.5 | Kenvue demerger |
| 5 | Splunk | US | 29.6 | Cisco Systems |
TOP FIVE EMEA M&A DEALS 2023
| Rank | Target | Target nation | Value ($bn) | Acquirer |
|---|---|---|---|---|
| 1 | Telecom Italia’s fixed-line network | Italy | 23.6 | KKR-led consortium |
| 2 | WestRock | US | 20.2 | Smurfit Kappa |
| 3 | Viterra | Netherlands | 18.0 | Bunge |
| 4 | Adevinta | Norway | 14.4 | Aurelia Bidco Norway |
| 5 | Viessmann Climate Solutions | Germany | 13.2 | Carrier Global |
With mounting capital piles at their disposal, PE houses are feeling under pressure to make their moves count in 2024. ‘As conditions stabilise, private equity is hoping for a busy year when the window for M&A activity optimises, with portfolio companies prepped for sale, and lender support lined up for buying,’ comments Davies.
PE dealmaking has not yet completely stalled though. Instead, carrying on the theme of creative thinking, PE dealmakers have resorted to innovative approaches such as performance-based earnouts to sidestep the mismatch in sell-side and buy-side expectations. ‘There’s still quite a lot of work in the PE space, with fewer plain vanilla processes, and an enhanced trend towards continuation funds and secondaries transactions,’ says Freshfields’ Pritchard. Sidley’s Cheveley adds, ‘there’s been a lot more sharing of pricing risk, with more contingent pricing through earn-out mechanisms.’
In March 2024, Blackstone’s life sciences arm announced that it would invest $750m in Moderna to develop flu shots. Commenting on the transaction, Freshfields’ Bethlehem notes: ‘They are potentially taking a big risk because pharma pipelines are not certain, but the reward is incredibly high. That kind of novel deal structure is being driven by the fact that people are more prepared to be creative about the structures they are prepared to entertain in order to collaborate. The fact that PE has so much dry powder and needs to put it to work is actually triggering novel ways of thinking about these things.’
Bright spots
Looking at it by sector, energy has been bucking the trend for sluggish M&A activity, with total deal values soaring to their highest levels in recent years. In total, the sector saw 3,559 energy deals worth $704bn in 2023, making it the top-performing sector in terms of deal value. It is expected that energy will continue to perform well in 2024, buoyed by the flurry of mega-deals observed in Q4 2023. This includes ExxonMobil’s $65bn acquisition of Pioneer Natural Resources and Chevron’s $60bn acquisition of Hess.
Energy transition in particular remains popular. ‘There’s a huge opportunity in energy transition,’ says Pritchard. ‘Energy transition is going to continue to be a mega-trend’. Taylor Wessing’s Danks echoes this sentiment, noting, ‘the transition from fossil fuels to clean energy and anything adjacent to that, eg EV charging vehicles and technology around that is very attractive to acquirers.’ The International Energy Agency predicted that $1.7tn would be invested in energy transition assets. Noteworthy transactions from 2023 include Brookfield’s $1bn acquisition of Banks Renewables and KKR’s £600m investment in UK battery storage developer Zenobe – both deals generated roles for Clifford Chance.
Infrastructure also had a strong year and is poised for continued success in 2024. Digital infrastructure specifically continues its upwards trajectory, driven by significant investment by private equity houses; ‘[private equity houses] are more involved in infrastructure, particularly digital infrastructure – a sector that is incredibly busy at the moment and will continue to be busy throughout the next year’ observes Branigan.
Clifford Chance’s Wellings sheds light on why these sectors have performed so well in a down market, commenting: ‘These assets tend to have long-term contracted revenue so they’re less susceptible to this valuation gap than operational assets as buyers are taking a longer-term view of value.’
The impact of ESG considerations cannot be overlooked in driving activity within these sectors, with Latham’s Newhouse adding: ‘ESG consideration is one of the multiple drivers for increased activity in the infrastructure and energy space’. But he stresses that ESG is not the only factor driving activity in these sectors: ‘Another vital component is security of supply. How do we ensure we get energy in a sustainable manner in a way that still ensures that we still have security of energy supply and how do we do it in a cost-effective manner? Trying to find the optimum balance of these factors means people are buying and selling and operating creatively which is always interesting for M&A.’ Indeed, with increased geopolitical tensions, this will undoubtedly remain a top priority for boardrooms.
Elsewhere, pharmaceutical and life sciences are predicted to be busy, particularly after a notable uptick in the second half of 2023. ‘Major life sciences companies are not short of money; they are pretty impervious to a lot of the other headwinds that impact other companies,’ says Freshfields’ Bethlehem. Highlight deals in the sector include Bristol Myers Squibb’s $14bn acquisition of Karuna Therapeutics and Pfizer completing its $43bn acquisition of Seagen – the largest biopharma deal in recent years.
In contrast, tech deals dragged last year, with overall value down from 2022. However, partners remain optimistic about its resurgence in 2024. ‘Tech has had a challenging year last year, but it’s such an unstoppable trend,’ notes Pritchard. He adds: ‘We still saw very high levels of activity, including PE investments in tech. Examples in our US business include Coupa Software being acquired for $8bn by Thoma Bravo and Qualtrics being acquired for $12.5bn by private equity firm Silver Lake and CPPIB – both significant public company transactions.’ And despite values being down, total deals were up slightly. Key highlights include Cisco’s $28bn acquisition of Splunk and Broadcom finally closing its $83bn acquisition of VMware.
Artificial intelligence (AI) is set to be a major trend in the tech sector. ‘While tech has had its valuation challenges, it is undeniably one of the key secular themes driving M&A across all sectors. The transformational potential of AI across all areas of work and play is the current most obvious manifestation,’ says Davies. However, Danks notes that significant AI-related activity is still a few years away: ‘We’re not seeing a lot of M&A involving AI businesses per se because they are generally at an early stage. The businesses are not mature enough at present for M&A but given the rate of fundraising that they’re doing, you can see that pipeline of M&A activity lining up for 2025-26.’
‘High-value transactions are beginning to come back and demonstrate an increasing confidence in the market.’
Emma Danks, Taylor Wessing
Clear skies ahead
It’s undeniably been a challenging year for the M&A landscape. However, despite the hurdles, partners remain optimistic about what lies ahead. There’s a palpable sense of pent-up M&A demand, with dealmakers eagerly poised to push transactions through.
While the anticipated surge may not mirror the rapid pace witnessed post pandemic, cautious optimism prevails. As Wellings notes: ‘The trigger is not quite the same as post-pandemic – that was incredible – we went from nought to 60 in five days and I’m not expecting that. Although there is that pent-up need, there are still some macroeconomic, geopolitical uncertainties.’
Pritchard adds: ‘A lot of our clients have got transactions that they have been wanting to do and have been waiting for the right deal environment. I suspect that when the stars align again in terms of the macroeconomic situation, boards will have that conviction to complete deals, and we will see more robust activity returning.’
Geopolitical tensions persist, with the ongoing conflicts in Ukraine and the Middle East. As more than half of the world’s population enters elections this year, including the US and UK, a sense of uncertainty lingers. Davies cautions, ‘a recovering M&A market will need to brace for, and adapt to, more shocks.’
As Bethlehem aptly puts it, ‘once people absorb the fact of prolonged uncertainty, it doesn’t actually paralyse human endeavour forever; people psychologically adjust to the new normal.’
TOP ADVISERS FOR UK M&A: 2024 YEAR TO DATE
| Rank | Firm | Total value ($bn) | Total volume |
|---|---|---|---|
| 1 | Slaughter and May | 31.9 | 10 |
| 2 | Ashurst | 22.0 | 27 |
| 3 | Skadden, Arps, Slate, Meagher & Flom | 21.5 | 11 |
| 4 | Latham & Watkins | 21.0 | 26 |
| 5 | Sullivan & Cromwell | 19.1 | 6 |
| 6 | White & Case | 19.0 | 21 |
| 7 | Linklaters | 15.8 | 18 |
| 8 | Kirkland & Ellis | 15.5 | 26 |
| 9 | Freshfields Bruckhaus Deringer | 12.6 | 21 |
| 10 | Weil, Gotshal & Manges | 10.9 | 14 |