Could it be time for large companies looking for growth in the M&A market to pause and re-assess?
Not necessarily, even though some would-be buyers have done just that –– and many of those that opted to go ahead with acquisitions that closed in 2023 haven’t yet begun to realize the expected value from them.
Certainly, some signs point to 2024 being a better year for M&A, noted consulting firm Willis Towers Watson (WTW), which recently released its year-end global M&A report.
But companies could be excused if they’re experiencing some skittishness. Exhibit A: For the sixth time in the last seven years, in 2023 the stocks of companies that completed mergers or acquisitions worth at least $100 million performed worse than the stocks of non-acquirers, according to the report, which used data sourced from Refinitiv.
Further, the underperformance last year was the worst in more than a decade, with the shares of acquirers trailing the broader market by 7.2 percentage points. It was a big drop from 2022 when the underperformance was just 0.8 percentage points. The fourth quarter was particularly brutal, with a deficit of -13.6.
The figures reflect the average change in acquirers’ share price from six months before deal announcement dates to the end of the quarter in which the announcements were made.
And, unsurprisingly given the persistent inflation, rising interest rates, and geopolitical stability that marked 2023, global deal volume sunk by 27%, with 619 transactions worth at least $100 million compared to 853 the prior year. The number of deals valued at more than $1 billion declined by 30%, from 208 to 145.
“It has been a tough 12 months,” said David Dean, managing director of mergers and acquisitions for WTW. “The potential for disruption in 2024 remains considerable, exacerbated by a packed election calendar and a complex regulatory landscape raising more hurdles, scrutiny, and longer timetables to complete deals.”
Regionally, post-deal share-price movements underperformed regional market indices in 2023 by 10.9 percentage points in North America and 7.6 percentage points in Europe. Asia-Pacific bucked the norm, with an outperformance of 6.4 points.
An Improving Climate?
Still, Dean foresees a likelihood that the M&A arena will be stronger this year. “Despite the headwinds, inflation and the cost of financing seem to be stabilizing, and the record level of dry powder waiting to be deployed suggests a rebound of activity in 2024,” he said.
Macroeconomic conditions and geopolitical instability will continue to test dealmakers. At the same time, though, these factors will continue to drive a trend of companies targeting smaller, mid-market transactions that are easier to execute, are less risky to finance, and offer a unique and strategic fit within an acquirer’s portfolio, WTW said.
Dean added that WTW expects joint ventures, strategic alliances, and minority investments to gather pace in 2024 “as companies respond to market disruption by sharing and mitigating risk in pursuit of strategic deals.” He said the new year will “renewed focus on technology not only as a source of growth but also to unlock greater value from M&A.”
And, despite the underperformance of M&A in recent years, the long-term, 15-year trend shows that deals have outperformed the market by an aggregate 1.5 percentage points since the financial crisis of 2007-2009, according to WTW.