The aggregate value of mergers & acquisitions 2024 transactions is on the rise, but volumes are tanking.
Recent data from PwC shows that global merger & acquisition 2024 deal values increased by 5% year on year in the first half of 2024 to $1.3 trillion. Megadeals, such as Diamondback’s $25.8bn acquisition of Endeavor Energy Resources, Capital One’s proposed $35.3bn merger with Discover Financial Services, and Synopsys’s proposed $32.5bn acquisition of Ansys, drove value growth.
Meanwhile, the number of M&A transactions plummeted by 25%, to just over 23,000 deals done. Deal volume went south in all sectors. Even reliably active sectors, such as technology and energy, are down.
This shift from volume to value raises questions about the state of middle market mergers and acquisitions. Here is our merger & acquisition 2024 in review.
Why are middle market merger and acquisition transactions volumes down?
Debt has gotten more expensive, affecting private equity disproportionately.
Higher interest rates, designed by central banks to rein in post-COVID inflation, have prompted traditional bank lenders to raise their bar for financing. This pushed many private equity sponsors to turn to private credit providers. Private credit financing is more expensive than traditional banks, in part due to their higher cost of capital, in part due to their higher risk tolerance: they will fund merger and acquisition deals that banks will not. Deals funded with private credit need to meet a higher bar to still make financial sense.
Valuations are softening.
Lofty valuations commanded in 2022 are over. That’s driving down the supply of willing sellers. Owners who believe their businesses have strong growth potential are holding out for better offers later in the merger and acquisition cycle. Those who acquired corporate assets at peak valuations are struggling to exit at prices that yield acceptable returns. This situation is leading private sponsors to hold on to assets longer than planned, or to grandfather them into continuation funds, reducing the supply of quality targets available in the market.
Corporates’ share of deal activity has increased, but not compensated for private equity pullback.
Corporates are taking advantage of lower valuations and private equity’s pull back in the higher cost of debt environment. But corporates who adopt a wait-and-see approach may find themselves watching from the sidelines. Private equity acquirers have a lot of dry powder to deploy, and they are beginning to rebound through the innovative use of net asset value lending, by borrowing against the value of their asset portfolio.
It’s not back to the drawing boards, but it’s hard going
PE firms are facing headwinds. Their focus needs to be on origination and value creation efforts. Origination efforts, because it’s harder to identify opportunities in a market with fewer attractive targets. We expect the role of performance-based outreach to increase in support of roll-ups. Value creation efforts, because many sponsors paid more for their assets in the last few years than the market will reward them for today. They need to extract all the value they can to maximize returns, whether in the form of post-merger integration, or in the form of organic growth initiatives.
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