Dive Brief:
- Global merger and acquisition activity is picking up at a modest pace so far this year, as dealmakers remain cautious despite improving macroeconomic conditions, according to Boston Consulting Group.
- The global value of M&A activity in the first half of 2024 was $1 trillion, up 4% compared with the year-earlier period but below the 10-year average of $1.5 trillion, analysts at BCG, a global management consulting firm based in Boston, Massachusetts, said in a recent report. While M&A activity is gaining momentum, dealmakers continue to face challenges such as uncertainty around interest rates and inflation, as well as regulatory and geopolitical headwinds, they said.
- “There’s been slow improvement, but we’re not totally out of the woods,” Daniel Friedman, global leader of BCG’s transactions and integrations practice and one of the report’s authors, said in an interview.
Dive Insight:
Strong corporate profits, rising executive confidence and stabilizing inflation are driving an M&A recovery after a sluggish 2023, according to a June report from Big Four accounting firm PricewaterhouseCoopers.
“A fixation on potential interest rate cuts has so far hindered a broader bounceback, but we believe dealmakers should accept the new reality instead of wishing for a return of low interest rates,” the report said.
At the start of 2024, the Federal Reserve was expected, by as early as March, to begin cutting the federal funds rate from its current range between 5.25% and 5.5%, the highest level in 23 years. But interest rates have remained high for longer than expected as inflation unexpectedly quickened during the first quarter.
Fed Chair Jerome Powell, who is facing pressure from some lawmakers to begin trimming rates, indicated during a congressional hearing this month that he was prepared to act before inflation falls to the Fed’s 2% target, as previously reported by CFO Dive. But he did not signal the timing of a cut, emphasizing that policymakers need to ensure price pressures are steadily falling before reducing borrowing costs.
Meanwhile, the Fed’s delayed action is dampening hopes for a more robust M&A recovery this year, according to some analysts.
Interest rates have played a significant role in dealmaking fluctuations over the past few years, according to a report from Big Four accounting firm Ernst & Young.
Global M&A activity surged to record levels in 2021 and early 2022 thanks to low inflation and interest rates and high company profits, EY said. However, the Fed’s aggressive policy tightening to combat high inflation, beginning in March 2022, contributed to a sharp decline in deals, along with factors such as the higher cost of capital, increased economic uncertainty and geopolitical strife, the report said.
While the M&A market has been active so far this year, its rebound from 2023 levels has been slower than many observers anticipated amid uncertainty around interest rates, escalating geopolitical tensions among major economic powers, and other factors, according to BCG’s analysts.
“The complexity of forecasting and evaluating these factors makes it harder for decision makers to formulate reliable predictions and plans,” they wrote.
Analysts expect the recent uptick in M&A deals to continue — and possibly accelerate — if economic conditions continue to improve.
In an optimistic macroeconomic scenario — where growth is stronger, inflation cooler and interest rates are lower — EY predicts a more rapid M&A recovery for 2024, with the number of deals increasing 31%. “In the pessimistic scenario — where growth is weaker, inflation hotter and interest rates higher — deal volume is expected to show a muted recovery with 13% growth in 2024,” EY said in its report.
