Why Mergers and Acquisitions Could Rebound in 2024 | Investing

Keen investors witnessed a steep decline in mergers and acquisitions activity in 2023. Morningstar’s PitchBook, a capital-markets research firm, estimates global M&A activity last year totaled about $3 trillion, nearly a 16% drop from the M&A total of $3.6 trillion in 2022, and a 36% nosedive from 2021’s all-time high of $4.6 trillion.

Why M&A Activity Dropped in Recent Years

What happened? It’s no secret that the Federal Reserve hoisted rates 11 times, from nearly zero on March 17, 2022, to a range of 5.25% to 5.5% on July 27, 2023. In the background, however, these rate increases also raised borrowing costs for many corporations, which prompted business leaders to rethink how much debt they wanted to take on and the number of leveraged deals they were willing to consider in 2023. For perspective, in less than 24 months, the volume of M&A deals slowed from 43,598 in 2021 to 40,298 in 2023, according to data from PitchBook.

Individual investors in investment-grade corporate bonds also experienced significant declines during that period. According to data from BlackRock, the U.S. corporate benchmark index plummeted by 15.3% as the Fed hiked rates in 2022; as of Dec. 31, 2023, the three-year return for this benchmark remained down by 3.2%. Bonds fall when interest rates increase.

Still, seasons change, and the Fed’s monetary policy approach changes with the economic climate. Take Fed Chair Jerome Powell’s comments on March 20, when he announced the central bank’s decision to leave rates unchanged (the third consecutive time rates were left intact since December 2023) and signaled as many as three rate cuts in 2024.

Will It Be Worth the Wait for Corporate Bond Investors?

For movie buffs, this new context may seem reminiscent of a scene from “Being There,” a 1979 film based on Jerzy Kosinski’s novel with the same title. Through various plot twists, Chance the gardener grows in acclaim among world leaders and frequently links gardening and economic principles. For example, when asked about whether governments can help spur economic growth, Chance says, “As long as the roots are not severed, all is well. And all will be well in the garden.” Chance adds, “Growth has its seasons.” And, yes, “there will be growth in the spring.”

Similarly, corporate bond investors, who weathered market declines throughout the last three years, may regain a spring in their steps in 2024. Brian Donnelly, vice president, fixed-income strategist at Fidelity Institutional, believes investors in corporate bonds may soon be rewarded for their patience. “After an aggressive Fed hiking cycle in 2022, higher interest rates led to some of the best bond market yields in the last 20 years,” he says.

Arvind Narayanan, co-head of investment-grade credit at Vanguard, adds, “Despite rising interest expenses and narrowing margins, the fundamentals look good for investment-grade bonds. Investors will likely remain eager to lock in today’s higher interest rates, but we expect supply will be about flat.” Through the end of February 2024, the three-month return for the S&P 500 Investment Grade Corporate Bond Index was 2.5%, and the yield to maturity was 5.45%.

With demand for corporate bonds perhaps a good indicator for future M&A activity, keeping your finger on the pulse of the bond market is a good way to gauge the potential appetite for future M&A deals.

U.S. Outlook for M&A Deals Points to More Action in 2024

Big companies often issue debt to fund expansions, staff additions and M&A activities. So far, new corporate debt issuance is off to a slow start in 2024. This could signal that some companies anticipate the Fed will hold rates higher for longer than the market expects this year. Nonfinancial companies issued $127.8 billion in new debt from Jan. 1 to Feb. 20, a 16% decline from the same period in 2023, but still almost double the comparable amount in 2022, according to current data from S&P Global Market Intelligence.

Still, many corporate CEOs have a sanguine outlook for M&A activity in 2024. The EY-Parthenon CEO Outlook Survey last fall revealed that 52% of U.S. CEOs and 35% of global CEOs planned to execute M&A deals this year. In a separate survey, KPMG found that two-thirds of private equity executives expect to make more deals in 2024 than in 2023.

Drivers of M&A Activity in 2024

There are at least five catalysts for M&A activity that investors should look for this year:

  1. Inflation continues to wane.
  2. The Fed implements interest rate cuts.
  3. Corporate earnings growth remains strong due to resilient consumer spending.
  4. Companies announce strategic business needs for cash.
  5. Investor demand for corporate bonds increases.

The EY-Parthenon macroeconomics team also cites a variety of key factors behind CEOs’ optimism for deals in 2024. Over the last 35 years, it shows a correlation of 98% between private equity deal activity and GDP growth, inflation, corporate profits, and short- and long-run interest rates. “The correlation between M&A activity and these economic indicators plus CEO confidence is around 75%, pointing to robust predictive power,” according to its January report.

With inflation having moderated significantly over the last year and what appears to be a soft landing playing out in the U.S. economy, conditions seem ripe for wheeling and dealing throughout the rest of 2024.

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