To The Moon

In analyzing the U.S. M&A market for 2023, investors should consider several key factors as below:

Market Overview:

Understand the overall landscape of the U.S. M&A market, including deal values, trends, and factors influencing activity.

FactSet’s U.S. Mergers and Acquisitions (M&A) data revealed continued weakness for M&A as 2023 progressed. Though deal values bottomed in 1Q23 and saw an uptick in October with the large Exxon/Pioneer and the Chevron/Hess deals, they dipped again in November and aggregate transaction counts were lower through the first 11 months.

2023 Performance:

Evaluate the performance of the U.S. M&A market throughout 2023, considering any fluctuations in deal values and transaction counts.

Aggregate deal values and deal counts in FactSet’s data are both lower by ~25% year-to-date, a disappointment after the sharper declines in 2H22 of nearly 50% year/year.

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Economic and Market Influences &Global Factors:

Recognize the impact of economic conditions, such as recession fears, rising inflation, and interest rates, on M&A activities.

Consider how global trade tensions, military conflicts, and geopolitical issues have influenced M&A trends in the U.S.

2023 was a weak year for M&A both in count and dollar amounts because of recession fears, rising inflation and interest rates, bank failures, and global trade and military conflicts. And this weakness was despite reserves in private capital pools and new large government spending programs. Though perceptions of an interest rate peak have helped market sentiment in the past couple months, rates may remain higher than recent history during the next few years, even with modest declines. In addition, geopolitical tensions and lingering recession fears should remain headwinds for M&A activity.

Decarbonization Efforts:

Understand how efforts to decarbonize operations have influenced M&A deals, particularly in sectors related to lower carbon energy and technologies.

Efforts to decarbonize operations could also drive some M&A deals to access lower carbon energy or other technologies. Industrial automation and monitoring devices, for example, should continue to be in-demand businesses.

Varying regional carbon policies are also evolving and will impact regulatory costs in some jurisdictions. These trends could suggest a business shift as well. In these cases, the objectives of joint ventures and other structures (rather than full-company M&A) may be to keep operations balanced and change exposures—either because of seller requirements or scarcity of targets.

“Carbon” decisions could also be an added factor in global supply-chain adjustments. Real assets with energy transition benefits and resource plays could accordingly garner more M&A interest.

Private Equity and IPO Market:

Examine the activity of private equity firms, considering how higher interest rates may impact their involvement, and monitor the IPO market as a key factor in the private capital cycle.

Private buyers including some international funds remain in good positions to continue buying businesses. That said, private equity firms were very inactive in 2023, and indeed many took the sub-optimal path of returning money to shareholders. Higher rates made leveraged buyout math more difficult and widened the buyer-seller value gap.

The IPO market is a key factor in the private capital cycle. That is, there’s a cash-out or monetization goal for many private funds after a period of time. Many private equity funds chose not to sell businesses in 2023 due to interest rate, market, and economic uncertainties.

IPO activity in 2023 plunged again after a tough 2022. But after lower IPO counts in 2022 and 2023, there are some signs that private capital pools may increasingly look for more sales or IPOs and hold portfolio companies to maturity. Some activity, too, may be driven by private capital’s continuing trend to both:

• Improve weaker businesses out of public market view

• Win the ongoing race to control cream-of-the-crop businesses

We see several positive and negative variables that could develop and impact M&A levels going forward.

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Potential Opportunities and Risks:

Identify potential opportunities and risks in the market, such as emerging trends, changing regulations, and uncertainties that could impact M&A decisions.

In 2024, despite lingering headwinds, the M&A market shows signs of improvement, driven by changing market sentiments and strategic responses to major shifts. Economic uncertainties may lead to asset sales, with companies capitalizing on improved sentiments.

Geopolitical tensions are influencing strategies, prompting shifts in production and supply chain security. From bolstering domestic operations to reconfiguring supply chains, companies are adapting, potentially boosting M&A activity. While challenges persist, the outlook for 2024 appears more positive, propelled by global changes, decarbonization efforts, and private capital dynamics.

Conclusion

There remain some meaningful headwinds for the M&A markets but, with less concern about rising interest rates and recession of late, the setup should yield improved levels of M&A activity in 2024. Despite some wildcards that could go either direction, levels of M&A should be driven higher by the significant changes in globalization, decarbonization, and private capital cycles.

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