M&A Update: Uncovering conditions in the market

Wednesday September 18, 2024

Dan Bowtell reviews the latest developments in the M&A market

Whilst the M&A market has been characterised by subdued activity and uncertainty of late, the future landscape is far from stagnant.

Compared to the bustling years of 2021 and 2022 which boasted a flurry of deals, volumes have noticeably decreased, with the last six to nine months proving challenging for all dealmakers. However, the lower mid-market, in which FRP Corporate Finance operates, has remained relatively robust.

Several factors have contributed to this quieter period for the market as a whole. Persistent inflation, global conflicts, and rising interest rates have fuelled uncertainty, making it more difficult to close deals. This environment, characterised by sluggish economic growth across most major economies, has created a degree of inertia.

That being said, we expect activity will pick-up in the near future.

Private equity will be one driver of this uplift. Historically, PE firms have held onto their investments for four to five years before exiting – however, many of these investments are now surpassing their typical hold period, leading to a growing number of businesses being prepped for sale. Whilst the market has been quiet, 2025 is poised to see a wave of PE exits, injecting fresh momentum into the M&A landscape. Additionally, with a more positive interest rate environment, we expect PE firms to be making more platform investments.

We also expect corporate acquirers to become more active. Finding it hard to achieve organic growth, they are increasing looking towards M&A as a means of expansion.

Hotspots of activity

Certain sectors are proving to be particular hotspots of activity. The rise of artificial intelligence and the push towards energy transition and net-zero targets are two major trends that are beginning to influence the M&A landscape.

The rapid emergence of AI, particularly generative AI, has been a surprising development. The technology’s potential to enhance value propositions has caught many off guard with its speed and impact. We expect to see increased M&A activity in the AI sector, as companies seek to acquire the expertise and technology needed to remain competitive.

Ongoing efforts to shift to a more environmentally sustainable economy is also driving deal activity, particularly in sectors related to renewable energy and sustainable technologies. These areas are likely to see significant investment as companies and investors alike position themselves to benefit, as governments around the world enact policies to move towards a lower carbon future.

Interest rates and inflation

Interest rates and inflation continue to have a significant influence on the M&A market. The much-anticipated interest rate cut in August has provided some relief and boosted boardroom sentiment.

While the cut itself may not drastically alter financial outcomes, it has sent a clear signal that rates have likely peaked, allowing companies to plan for new investments with greater confidence – confidence that could translate into higher volumes of M&A as businesses translate their financial strategies into action.

Inflation, however, remains a persistent concern. While the rate of price increases in many consumer goods appears to have stabilised, inflation in wages and corporate costs continues to exert pressure on businesses.

We anticipate that inflation will hover around 2-3% for some time, creating an environment where businesses must remain vigilant in managing costs. On balance, though inflation poses challenges, it also presents opportunities. As companies adjust to the new normal, those that can effectively navigate this landscape may find themselves better positioned for growth. A high inflation environment often promotes consolidation as companies look for economies of scale or to reduce competition. Those companies that have successfully navigated the last two years will have opportunities to achieve positive, value-accretive growth through consolidation of smaller or niche players in their global markets.

The road ahead

In the short term, the upcoming Autumn Statement in October is also set to drive M&A activity as businesses seek to act ahead of potential tax regime changes – a pattern we have seen in recent years, particularly in 2021.

Looking more broadly, the global stock market’s high valuations could create opportunities for dealmaking. We may see a narrowing of the valuation gap between public and private companies, leading to greater alignment between buyers and sellers.

In this evolving landscape, corporate acquirers may find themselves in a stronger position to outbid private equity in certain deals, a shift from recent years. Sectors such as healthcare, technology, and energy are expected to remain hotbeds of activity, offering fertile ground for investors looking to capitalise on emerging trends.

Emerging trends in AI, energy transition, and the evolving interest rate and inflation environment present both challenges and opportunities. As we look ahead to the remainder of 2024 and beyond, businesses and investors that can navigate these complexities – with the right support – will be well-positioned to benefit.