M&A Set to Pick Up in 2024 Despite Ongoing Headwinds

• Environment Remains Challenging Given Higher Cost of Financing, Geopolitical Tensions, Shifting Antitrust Regulation
• Deal Activity Bottomed Out in Early 2023; Increasing Deal Volume and Pick-up in IPO Market Spark Optimism About the Year Ahead

BOSTON—Over the past year, M&A dealmakers have confronted their most prolonged challenges since the 2008–2009 financial crisis. Rising interest rates, geopolitical tensions, and recession fears contributed to a sustained downturn in deal activity that bottomed out in the first quarter of 2023.

Since that low point, however, more dealmakers have returned to the negotiation table and M&A activity appears to be stabilizing. This bodes well for a pickup in dealmaking in the coming months, despite macroeconomic, geopolitical and regulatory headwinds, according to the 20th edition of BCG’s Global M&A Report.

“We’re relatively optimistic about the outlook for 2024, as deal activity shows promising signs of recovery,” said Jens Kengelbach, BCG’s global head of M&A and a coauthor of the report. “That said, challenges for dealmakers remain—in particular, a higher cost of capital, which will push companies to consider large or transformational deals with an even higher level of scrutiny. This could mean pursuing acquisitions, divestitures, and sometimes a combination of the two in order to bolster growth and reshape businesses.”

M&A Market Stumbled in 2023

After the M&A frenzy in 2021 and early 2022, dealmaking was subdued during the latter half of last year and the first eight months of 2023. Through the end of August 2023, companies had announced approximately 21,500 deals year-to-date, with a total value of $1.18 trillion. Deal volume fell by 14% compared with the same period in 2022, and deal value plummeted by a staggering 41%.

The persistent slowdown in M&A activity since the first half of 2022 was evident across regions. Markets such as India, Taiwan, Italy, and Romania showed slightly more resilience, while the US, Canada, France, and Germany took a harder hit. The energy, power, and resource industries were the most active sectors globally in 2022.

Bold corporate dealmakers, particularly those in strong financial positions, capitalized on the uncertain situation by seeking bargains or pursuing M&A discussions that were not possible two years ago. At the same time, most companies continued to use M&A to pursue their strategic initiatives, particularly in ESG (including energy transition, decarbonization, the circular economy, and social impact) and digitization (to gain access to AI and other emerging technologies and to enhance capabilities and talent).

Some financial investors have continued to make deals when intriguing opportunities arise. In some instances, they have used alternative deal and financing structures, such as partnering with strategic investors or increasing their equity contribution—even to the extent of financing the entire deal with equity, at least initially.

Middle Eastern and other sovereign wealth funds—and the companies they back—have also stayed active. Flush with capital and liquidity, they are investing across regions, sectors, and themes. They have adopted diverse, long-term strategies to diversify into areas other than natural resources and to support the growth of their national economies.

Drivers of M&A Activity in 2024

Owing to current geopolitical uncertainties, the outlook for the M&A market in 2024 is hard to predict. Nevertheless, the fundamental drivers of M&A activity remain intact. The report identifies four key near-term drivers of dealmaking activity:

• Abundant Dry Powder. In the near term, major support for dealmaking will come from the abundance of available capital held by sovereign wealth funds, private equity and venture capital investors, and some large companies.
• Converging Price Expectations. Disparities between sellers' and buyers' pricing expectations have impeded dealmaking over the past year. However, many factors that influence prices—such as inflation level, financing costs, and uncertainty—are stabilizing. As sellers gradually accept this new normal over the next few months, we expect the gap between sellers’ and buyers’ expectations to narrow.
• Evolving Regulations and Policies. Increasingly, regulation and policy changes are influencing M&A activity. Traditional antitrust regulations often complicate larger deals, especially for major technology companies. Dealmakers must also overcome hurdles related to foreign direct investment regulations, national security considerations, and sanctions. On the other hand, deals worked out under antitrust scrutiny often spur divestitures as remedies to counter these concerns.
• The Pursuit of Resilience. Efforts to bolster supply chain resilience, such as through near-shoring, friend-shoring, and other regionalization strategies, may indirectly influence M&A, as dealmaking can facilitate these goals.

In addition, companies will continue using M&A to pursue their ESG and digitization agendas. Some companies will concentrate on transformational deals, whether by making acquisitions in growth areas or by reshaping their corporate portfolios through M&A and divestitures.

Regional Outlooks Diverge

The report also takes a deep-dive look at deal activity in six geographies:

• North America. The region’s deal activity during the second quarter of 2023 significantly trailed its long-term average. Among the headwinds is the current regulatory environment, with recent merger guidelines released by the US Department of Justice and the Federal Trade Commission signaling increased scrutiny.
• Europe. The report points to early signs of a resurgence in European dealmaking. Long-term trends favoring this revival are expected to drive activity beyond 2023. Green technology, materials, and software remained active in 2023.
• Southeast Asia. M&A activity in Southeast Asia has declined since peaking in 2021. Looking ahead, outbound M&A from China and Japan could support M&A in the region, with Singapore poised to be the primary deal-making hub. Automotive and beverage sectors have been the standout sectors in 2023.
• Middle East. M&A activity in the Middle East has been more resilient than in the overall global market. The region’s sovereign wealth funds and state-owned entities have been especially active. Efforts to diversify economically and to enhance digital competencies will help drive near-term dealmaking.
• Japan. Among the major economies in the Asia-Pacific region, only Japan experienced an uptick in M&A deal volume and value in the first half of 2023. Low interest rates, recent reforms, shareholder pressure, and slower organic growth will continue to foster a strong M&A market.
• Africa. Africa’s M&A market has experienced significant turbulence amid the economic and geopolitical uncertainty of the post-pandemic era. The renewable energy and material sectors have been bright spots, however, and seem well positioned to lead the market’s recovery.

“Regardless of what region one is operating in, M&A will play an important role in growth. But to be successful in times of uncertainty, dealmakers will need to be both creative and prepared to strike when the opportunity window opens,” said BCG’s Kengelbach.

Lessons from 20 Years of BCG’s M&A Report

To mark the 20th edition of BCG’s Global M&A report, the firm’s experts looked back at lessons learned along the way, a full list of which can be found here.

Among the lessons:

• Go outside your comfort zone, but not too far. In the M&A context, our research shows, deals involving a company’s core products or regions do not create the most value. Rather, transactions in which dealmakers go outside their comfort zone yield higher returns over the long term.
• Think outside the box. We have observed a consistent rise in alternatives to the plain-vanilla 100% acquisition, including minority shareholdings, joint ventures, strategic partnerships, and corporate venturing. These structures open new strategic options by giving dealmakers much-needed flexibility to customize capital allocation in response to specific conditions.
• Pay more, but only with cash. Although the greatest value creation typically arises from deals with below-average multiples, maximum benefits emerge when low multiples are paired with high premiums over current market valuations. A cash-only approach to transactions ensures discipline, particularly in valuations—a crucial element in times of limited and more expensive capital.

Download each of the three articles that make up the report here: Article 1, Article 2, and Article 3.

Media Contact:
Eric Gregoire
gregoire.eric@bcg.com