The Manhattan skyline is pictured from the Summit at One Vanderbilt observatory in Manhattan in New York City, U.S., April 14, 2023. REUTERS/Mike Segar/File Photo
NEW YORK — Mergers and acquisitions (M&A) bounced back in the first quarter after a downbeat 2023, thanks to the return of mega deals, cheering investment bankers and lawyers waiting for a pick-up.
Total M&A volumes globally climbed 30 percent to about $755.1 billion, according to the most recent data from Dealogic. The number of transactions worth more than $10 billion jumped to 14, compared with five during the same period last year.
Investment bankers said boardroom confidence for dealmaking has improved on the back of strong earnings, potential interest rate cuts this year and an ebullient market.
“When you see larger deals happening, it’s a much more direct sign of the returning health of the market, because boards and CEOs, due to the nature of large deals, are going to be more conservative when they approach them,” said Blair Effron, co-founder of investment bank Centerview Partners. “We do think that the activity that we see today is heading in the right direction.”
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U.S. M&A volumes surged 59 percent to $431.8 billion. European deals jumped 64 percent, while Asia Pacific volumes slumped 40 percent. Dealmakers said a potential market recovery, following the successful debuts of Astera Labs and Reddit, could provide a boost to the pipeline.
“The fact that we’ve got two data points in the IPO market…gives the CEOs, boards and financial sponsors that we’re talking to, a sense that there might be multiple paths to achieve their objectives rather than one,” said Tyler Dickson, head of investment banking at Citigroup.
Leveraged buyout volumes, which slumped last year due to a spike in financing costs, declined 7 percent, to $91 billion.
The missing ingredient
“We’re still waiting for the private equity work to really pick up – that’s still the missing ingredient,” said Krishna Veeraraghavan, global co-head of the M&A group at law firm Paul, Weiss, Rifkind, Wharton & Garrison. “You still are seeing a mismatch between what sellers expect their assets to transact for and what buyers are willing to pay based on where rates are right now.”
During the quarter, several large companies capitalized on strong valuations to finance big deals, while some investment grade companies borrowed to pursue high-value targets.
Bankers and M&A lawyers said their pipelines look robust, with cash-flush buyers pursuing targets as fears of a recession subside.
“The base case is probably a soft landing type scenario for the economy, and that inflation is under control,” said Ivan Farman, co-head of global M&A at Bank of America. “As a result, boards and management teams feel more comfortable about the future and that’s when they’re more likely to pursue deals.”
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Capital One’s $35.3 billion takeover of Discover Financial, Synopsys’ deal to acquire design software rival Ansys for $35 billion, and Diamondback Energy’s $26 billion tie-up with Endeavor Energy were the quarter’s largest transactions.
Structured deals, which include spin-offs, separation, and carve-out transactions, also drove volumes. Large publicly traded companies conducted strategic reviews and either shed non-core units or separated faster-growing businesses.
Notable deals included building materials giant Holcim’s spin-off of its North American operations in a deal that could value the business at $30 billion and Unilever’s ice cream spin-off. During the quarter, 13 corporate separation transactions with an expected value of more than $1 billion were announced globally, compared with eight during the same period last year, according to David Dubner, global head of M&A structuring at Goldman Sachs.
“2024 is on path to be one of the highest years in terms of corporate separation activity, and the dialogue we’re having is supportive of that theme as we look forward,” said Dubner.
Return of the tech
The technology sector is traditionally the biggest driver of deals but underwent a slump last year.
It has since recovered to bring in the largest share of transactions with volumes up more than 42 percent to $153.8 billion.
Blockbuster deals in oil and gas, which propped up volumes towards the end of last year, showed no signs of slowing, driven primarily by consolidation in the lucrative Permian shale oil basin.
“We have seen more all-stock deals recently. The financing markets are not yet fully available to support large all-cash transactions. Also, given where we are in the economic cycle, management teams are reluctant to leverage up to do a big deal,” said Mark McMaster, global head of M&A at Lazard.
Companies braved a tough antitrust environment to pursue large deals, increasingly backing themselves to win in court against regulatory challenges. JPMorgan’s co-head of EMEA M&A, Dwayne Lysaght, said companies have to be willing to wait 18 months or longer for transactions to close, adding that the time it takes to complete deals has risen significantly.
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“Tech is the sector that’s the most scrutinized by regulators, and yet tech seems to be materially back and is right at the forefront of deal activity. So that just tells you that the current regulatory issues certainly aren’t going to be a headwind to broader M&A activity,” said Raul Gutierrez, head of M&A at Truist Securities.
Bankers also expect a pickup in cross-border deals, as cash-flush buyers hunt for transformative acquisitions. Cross-border volumes rose 17% to $171.7 billion during the quarter.
“Corporates remain cautious on the growth prospects for China and Asia more broadly and there is a lot of thinking around hedging against that. We will potentially see more deals from Europe into the US, some of which will be defensive,” said Jan Weber, head of EMEA M&A at Morgan Stanley.