International mergers and acquisitions plunged to a decade low final yr, with $2.9 trillion in deal worth introduced, down 17% from 2022. Dealmakers largely stayed on the sidelines as they grappled with larger inflation, rising rates of interest, elevated regulatory scrutiny, and market uncertainty, whereas potential sellers remained anchored to earlier, richer valuations.
Exercise amongst non-public fairness (PE) consumers declined final yr after accounting for practically 25% of all buyouts within the earlier two years as tighter financing circumstances and better rates of interest made finishing leveraged buyouts harder. In Canada, of the 441 accomplished transactions final yr, most had been bolt-ons to an current firm inside a PE portfolio.
PE corporations discovered methods to maintain doing offers in the next price surroundings by buying minority pursuits in firms. They preserved capital by writing smaller checks however allowed the goal firm shareholders to take care of curiosity within the firm ought to the valuation get better.
There have been some brilliant spots. Exercise picked up amongst commodity and industrial sector corporations as inflation benefited lots of them and firms seemed to scale their operations to drive improved efficiencies. The vitality sector led M&A exercise with a number of mega merger offers introduced within the again half of the yr with deal exercise within the US Permian shale area surpassing $100 billion. Whereas know-how sector M&A fell general, two massive offers — Activision Blizzard’s $69 billion acquisition by Microsoft and VMware’s $61 billion acquisition by Broadcom Inc — closed efficiently. Within the well being care sector, exercise elevated as effectively with dozens of biotech and pharmaceutical merger bulletins, whereas many massive drugmakers face steep patent cliffs over the subsequent decade and are looking for to refresh and prolong their patent drug portfolios.
Regardless of the challenges of 2023, the pick-up within the final quarter gave buyers a glimpse of higher days forward. In 2024, dealmakers are battle-hardened and have tailored to the brand new regime by using extra structured offers to stability danger. These embody the usage of earn-outs, contingent worth rights, carve-outs, and spin-offs. Dealmakers are additionally structuring transactions with all or half inventory consideration versus all money. Acquirers usually construction offers with all money consideration once they have ample money or entry to financing and are assured sufficient to imagine all the chance. With tighter financing circumstances normally and particularly for offers in capital-intensive industries, sharing the chance and reward with shareholders is turning into extra frequent.
Final yr’s headwinds might change into this yr’s tailwinds, and we’re optimistic in regards to the outlook for M&A and merger arbitrage in 2024. As inflation cools, rate of interest expectations pattern decrease, and firms adapt to the put up pandemic surroundings, investor confidence is returning. Regardless of the geopolitical and financial backdrop of uncertainty, savvy firms are looking for alternatives to drive future development and purchase the applied sciences and capabilities wanted to compete and in any other case keep away from being disrupted.
On the deal facet, indications from funding banks, advisors, and firm insiders all counsel that the M&A pipeline is powerful. Rising fairness markets have given administration and boards confidence to make offers with a rising variety of firms in energetic dialogue. Shareholder activism can be rising as annoyed buyers search to unlock worth in shares buying and selling at what they understand as deep reductions to intrinsic worth. Heading into proxy season, ineffective boards might change into targets, and elevated shareholder dissent might deliver opportunistic acquirers to the desk.
Merger arbitrage can also provide a horny funding alternative, with merger arbitrage yields exceeding 10% for the typical North American merger deal. It is a materials premium relative to historic ranges and a major unfold over high-yield bonds. Amid a extra hostile regulatory surroundings, arbitrage buyers now perceive what kinds of offers might come underneath higher regulatory scrutiny.
After a string of losses, regulators are stretched skinny. With large spreads, an improved playbook for assessing deal danger, and the potential for extra M&A exercise to materialize, 2024 may very well be a powerful yr for merger arbitrage efficiency.
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All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the writer’s employer.
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