Preparing for an uptick in M&A: Strategies for a changing market

A positive outlook from the banks

Many global investment banks are signaling that their deal pipelines are picking up. Companies announced deals worth $2.3 trillion in the first nine months of 2024, 17% higher than the same period in 2023, according to Financial Times, citing data compiled by LSEG. This is partly due to greater stability in the credit markets, which have stalled over the last few years. Speaking to  Financial Times, Kevin Brunner, chair of global mergers and acquisitions at Bank of America, said, “We’re seeing boardroom sentiment become quite positive, and that’s really built around the optimism that there will be a soft landing and that we’re on a path to continued rate cuts.”

The latest interest rate cut from the U.S. Federal Reserve meant that “you’re hopefully going to see a return of deal volume, particularly among middle market and bigger market sponsors, which hopefully drives up deal volume and deal value in the fourth quarter and early part of next year," Krishna Veeraraghavan, global co-head of law firm Paul Weiss’s mergers and acquisitions practice, said in Financial Times.

According to Brian Levy, Global Deals Industries leader at PWC, “Behind the scenes, we are seeing an uptick in activity among sellers, with sale preparations mounting, full-potential business plans being developed, and many vendor due diligence engagements already underway.”

M&A transactions should top $3.2 trillion in 2024. While that number is flat compared to 2023, it comes on the heels of a slow first half, leading to the expectation of a strong recovery in the back half of 2024. Market conditions are more conducive to dealmaking given interest rate expectations and a narrower gap in valuations, and as these conditions continue to improve, deal flow should keep its momentum.

PE sponsors are feeling pressure to act

After a period of low distributions to investors, sponsors are under some pressure to monetise assets and return capital. LPs also rely on these distributions to invest in new PE funds. When exactly central banks will continue to cut rates to the levels the market is predicting is uncertain. However, a further drop in rates will undoubtedly encourage increased deal activity and will make debt financing costs more attractive to global sponsors.

Perfectly timing the market is not always possible, but a shift in sentiment is already underway, and sponsors are primed to assess new opportunities and get ahead of others.

Considerations for companies planning an M&A deal

As deal flow resumes, companies seeking to transact in the M&A market should consider a financial risk management framework that protects them throughout both the transaction period and the investment cycle. One such strategy for mitigating exposures arising between the signing and closing of an M&A transaction is deal-contingent hedging. This tool can be applied to FX, interest rate, and commodity risk. The types of contingencies covered by these products are also broadening from regulatory and similar approvals to the successful completion of any debt financing associated with the transaction. Read more about this strategy in Chatham’s white paper and get in touch with our advisors who can help you find the optimal capital structure for your transaction.