Banks hope for M&A revival despite the geopolitics

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Predicting whether dealmaking makes a comeback this year may be a fool’s errand given the unprecedented geopolitical uncertainty we live in and will continue to experience for the foreseeable future. 

Yet, after a year when mergers and acquisitions activity sank below $3tn for the first time in a decade, there are some encouraging signs that 2024 will witness a pick-up in deals. Last year the value of total transactions struck globally fell 17 per cent to about $2.9tn, according to London Stock Exchange Group data.

Frank Aquila, corporate lawyer at Sullivan & Cromwell, said conditions in 2024 were likely to be better after a year marked by two major armed conflicts, central bankers battling inflation with rapid interest rate rises and uncertainty over whether the US would default on its debt.

“Now as we look towards 2024 there is justifiable optimism that central banks will actually achieve the ‘soft landing’ they have been working towards with inflation under control and continued, albeit lower, growth,” he said. “So we can expect a rebound in M&A activity across most sectors and geographies.”

With borrowing costs coming down, it will be easier for chief executives of publicly listed companies to justify the cost of deals to shareholders. Lower interest rates will also make it easier for private equity dealmakers to make the maths work on their leveraged buyouts.

Global stocks have also been rallying in the latter part of the year as investors expect rates to come down. A buoyant equity market tends to go hand in hand with dealmaking, as potential buyers want to snap up assets before they become too expensive, and sellers want to capitalise on their ballooning valuations.

Some sectors are showing signs of a revival, with a number of mega deals in the energy and healthcare sectors. 

In the oil and gas sector, both ExxonMobil and Chevron struck mega transactions, acquiring smaller rivals Pioneer for $60bn and Hess for $53bn, respectively. Those deals opened the gates for more transactions in the sector, including Occidental Petroleum taking over CrownRock for $12bn and Chesapeake Energy agreeing to buy Southwestern Energy in a $7.4bn all-share deal. 

In the pharmaceutical industry, big companies including AstraZeneca, AbbVie and Bristol Myers Squibb have announced about $25bn worth of biotech-related deals. In another sector, BlackRock has struck a deal to buy Global Infrastructure Partners for more than $12.5bn in cash and stock.

But it is not all good news for dealmakers. A tough antitrust environment and geopolitical instability across the globe, two of the main deterrents to dealmaking in 2023, are not going away anytime soon.

Competition watchdogs in the US and Europe, including the UK, have emboldened their stances in recent years on tackling mergers that they deem to be harmful for consumers and society at large. That’s unlikely to change, although a series of court setbacks suffered by US regulators trying to block large deals has led many CEOs to press ahead with deals despite the risk of being challenged by enforcement agencies.

“From a US perspective, an aggressive enforcement posture by the US agencies and difficulty in predicting the outcome or long timelines continue to inhibit deal makers,” said Tom McGrath, a senior antitrust lawyer at Linklaters. 

“At the same time, many of our clients are planning to push ahead on strategically important transactions that are likely to get a close look from the agencies. Some are willing to prepare for long reviews as well as the possibility of litigation with the government in order to achieve their strategic goals.”

The other potential negative factor for dealmaking is democracy at work. In the past decade, deal activity has slowed ahead of elections, particularly in the US, according to LSE Group data. Elections tend to be an inhibitor of M&A as executives prefer to have greater clarity on who will be in government before they decide to strike a deal.

This year about half of the world’s population will be casting a vote, which means we should expect some turbulence, although in the US a new Trump administration would most likely be viewed as more pro-deals, mainly as it is expected that antitrust enforcement would be relaxed.

While the overall M&A scenario feels improved from a year ago, especially as a much feared recession has not occurred, the outlook remains mixed. That said, dealmakers remain confident the worst is over.

“CEOs and corporate boards do not need to have a very clear picture of what the future will look like, but they need a degree of stability. I’m reasonably bullish that this will return, but obviously it will be in fits and starts,” said Stephan Feldgoise, global co-head of M&A at Goldman Sachs.

jfk@ft.com

Twitter: @jfk_america