Deal volume expected to rise even as the vote gives pause
Although 67% of M&A professionals say deal volume will increase in the next six months, slightly less than half are hitting the pause button on deals until after the U.S. election in November, according to a Grant Thornton survey.
Forty percent of the 255 M&A professionals surveyed said they’re holding back on their M&A plans until after the election. The respondents included corporate development team members, investment bankers, in-house legal professionals, private equity investment professionals, M&A attorneys and CFOs.
About half of the respondents said the election will have no effect on their deal activities, and 10% said they are speeding up their M&A processes to close before the election. Grant Thornton Transaction Advisory Services Managing Director Vic Sandhu said buy-side and sell-side professionals whose businesses are especially sensitive to regulation and market uncertainty tend to be the ones who are pausing deal activity.
“If dealmakers do not have the stickiness in their business that can weather economic distress, it makes sense for them to hold off until after the election,” Sandhu said. “They may be able to make more informed M&A decisions once the political landscape becomes clearer, and the stability can potentially lead to better deal outcomes.”
The survey was fielded in July, before Joe Biden relinquished his presidential bid and Kamala Harris became the presumptive Democratic nominee in the race against Republican Donald Trump. The respondents also ranked four factors that might be affected by the election, in order of their impact on the M&A environment. Nearly half (49%) said the election’s effects on the overall economy would have the largest impact on M&A, while 25% cited the election’s effects on regulatory policy and 22% saw the election's implications for tax policy as affecting M&A the most.
One survey respondent said the biggest threat to deals for the next 12 months is “the economic impact from the presidential election and the adverse changes it could bring, depending on whom is elected.”
While not all free-response answers predicted an increase in M&A activity, many expressed optimism about the near-future deal market — and for a variety of reasons:
- “The improving financial market will provide a more robust balance sheet for larger firms to deal in M&A.”
- “I expect the market to improve in comparison to the previous year with the expected interest rate decrease.”
- “AI will help speed up the pace of M&A deals as it has become the front face of digital transformation.”
- “As the demand for decarbonization and sustainability is increasing, industry leaders are looking for companies that provide innovative solutions.”
With respect to the election, waiting can bring the benefit of more certainty, but it also introduces risks. Grant Thornton Transaction Advisory Services Principal Kosta Kourakis said that in the last 6–12 months he has seen businesses doing all the things to prepare to sell — including engaging investment bankers — and then pausing. Whether they’re waiting for post-election certainty or interest rate reductions, this poses valuation risks to sellers.
“If you wait and are trying to sell your business at the same time that everybody else goes to market, you may not get the same level of interest or attention as you would if you had gone to market earlier when deals were less plentiful,” Kourakis said. “Timing is always tricky when you’re selling a business to maximize value, but also are weighing uncertainty around interest rates and elections.”
Industry M&A focus
Survey respondents shared their views on industry-specific M&A trends in the market. Their insights included:
- “With the advent of modernized technologies in the healthcare sector such as robotics or AI, the potential for M&A increased. Hospitals and institutions are co-joining together to formulate and work on these technologies to pace up the development.”
- “Health and wellness trends have accelerated due to the pandemic. Deals centered around fitness technologies, mental health solutions, nutritional items and customized wellness services offer opportunities.”
- “The technology sector has lots of potential with the invention of technologies, and updates to existing ones.”
- “Efficiency at scale [is the biggest opportunity in M&A], especially in the asset management market, as there’s an opportunity to increase margins.”
- “The energy sector is undergoing a major transition. Producers are focusing more on renewables, and renewable sources of energy require heavy infrastructure, for which companies are forming partnerships with technology-based startups and companies.”
- “Considering that oil prices are rising continuously and significantly, energy companies will have adequate capital to diversify into multiple portfolios, resulting in an increase in the M&A activity level.”
- “[In manufacturing], the application of Industry 4.0 technologies is increasing. These involve technologies like robotics, IoT and automation. To increase the efficiency of the manufacturing process, companies are aware of the importance of these technologies. Hence big firms are merging or acquiring the smaller ones that offer these technologies at an increased pace.”
- “[A big opportunity is] consolidation of financial institutions due to exposure to risk assets and valuations that have fallen off.”
- “Financial institutions are looking to scale up their operations, increase the assets under management growth and expand their geographic coverage, and I think M&A is an attractive option to fulfill their organizational growth needs.”
- “In the services industry, there is a significant amount of PE-backed companies. As these PE companies are rolling out of their funds from five to seven years ago, there is so much liquidity that must be reinvested. As long as the economy stays stable, these companies will continue to trade at higher-than-average multiples.”
M&A activity set to increase
M&A professionals’ predictions of a rise in deal volume in the first part of 2024 came to fruition according to Pitchbook data, which shows global deal count and deal value both on track to exceed 2023 levels by 10% to 15%. Despite high interest rates, M&A professionals say several factors are leading to their predictions of stronger deal activity in the later stages of this year:
- Technological innovations: Survey respondents say a hunger for tech enhancements is fueling deals, and many organizations are making acquisitions to add technology capabilities they didn’t have before. Sixty percent of respondents identified technology, media, entertainment and telecommunications as one of the top industries for M&A activity over the next six months; healthcare (34%) and energy (31%) ranked a distant second and third in the results.
Meanwhile, in a separate Grant Thornton International (GTI) survey of 192 U.S. mid-market business executives, improving technology capabilities was the top issue respondents said they might seek to address through M&A within the next two years, followed by improving operational efficiency (which also can be achieved through technology).
“Companies are looking for chances to invest in modern technologies like AI and cloud computing to lead the market and are acquiring or merging with other firms to ease the process,” one survey respondent said.
- Small company fears of capsizing: Small and early-stage companies have been hit particularly hard by high interest rates and the scarcity of bank financing. M&A can present opportunities that are too good to refuse for companies that lack the muscle to weather market volatility.
“Earlier-stage companies that are squeezed because of the economic environment and lending environment may be looking to exit to strategics at more reasonable valuations than in the past couple of years,” one survey respondent said.
- Private equity firms’ need to invest: There’s a lot of dry powder in PE that has been sitting on the sidelines for long enough that some firms may need to return capital to investors if they don’t make a deal soon. At the same time, PE firms that have been holding on to portfolio companies for an extended time are finding they need to sell in order to provide investors a return on their capital.
Although 77% of PE respondents in the M&A survey were somewhat or very optimistic about how their portfolio companies will perform over the next 12 months, 54% of PE and corporate survey respondents are holding assets longer. In PE, investors can get restless when assets are held for longer periods.
“In PE, dry powder needs to be put to work and PE firms need to return capital on older assets that they’ve been holding for four, five, six years,” Kourakis said.
With regard to valuations, survey respondents by almost a 3-to-1 margin expect increases rather than decreases, but deal valuation fundamentals are more complicated than deal volume characteristics. The election uncertainty plays a role in that, but so do supply-side factors such as PE firms accelerating portfolio company sales and a potential overabundance of sellers post-election — as well as buy-side factors, including reduced interest rates.
“Buyers are going to find opportunities where valuations might be a little depressed in some subsectors, but in others, valuations are going to increase,” Sandhu said. “This makes sense given the nature of productivity changes in some sectors and the growth profiles of certain sectors.”
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Financing remains precarious
The survey was completed before the stock market rollercoaster of early August that fueled urgent calls for the Federal Reserve to reduce interest rates — and sparked concerns about a potential recession.
Nonetheless, the survey clearly demonstrated how high interest rates have rocked the M&A environment. Thanks to constraints on the lending environment, respondents have executed fewer deals, increased the equity component in financings and explored alternative financing plans.
Those who are exploring alternative financing are turning to preferred equity and debt structures (85%) as well as investment from specialized private funds (55%). Grant Thornton Transaction Advisory Services Principal Tom Libeg said investors and bankers are spending a lot more time thinking of creative solutions to finance transactions.
“I’ve seen more deals where firms are working together and looking for alternative structures to get a deal done,” Libeg said. “And then they’ll consider different recapitalization options down the line.”
Interestingly, M&A professionals are split on whether lending pressures will ease soon, even though interest rates are widely expected to fall.
About one-third (34%) expect a more constrained lending environment over the next 12 months, while 40% expect lending to be less constrained.
Sandhu predicted that if interest rates fall precipitously, transaction volume will accelerate rapidly. But if rates don’t change much, he said there will be a long-term recovery in M&A similar to what took place in 2010.
Get ready for increasing volume
With so many factors pointing to a potential M&A uptick in the coming months — whether it’s before or after the election — dealmakers need to be preparing for their opportunities. Kourakis said sellers need to develop a clear idea about which assets they want to bring to the market in the next 6–12 months and get them ready for sale. This means reducing back-office inefficiencies, understanding how to differentiate the asset for sale, and engaging parties to do sell-side quality-of-earnings analyses.
Buyers, meanwhile, can do more work upfront to make their bid more appealing, including getting their financing in order and being ready to analyze the quality of earnings and perform business diligence at a moment’s notice.
“When buyers see premium assets, they want to move quickly to get their service providers engaged and differentiate their bid based on speed and certainty to close,” Kourakis said. “As the market continues to heat up and more deals come into play, the ability to move quickly will definitely be a differentiator.”
Other tips for the current M&A environment include:
- Don’t just buy AI for the sake of buying AI. Sandhu said technology acquisitions might not reach their potential when buyers aren’t strategic about the applications of the technology. Leaders should resist the shiny allure of AI unless they understand how to use it. “AI has been most successful in deals that are niche cases where a buyer has taken a large language model or ChatGPT-type tool, homed into their customer base and unlocked it for a user interface,” Sandhu said. “That experience provides a lot of value and then becomes indispensable.”
- Remain vigilant for strategic opportunities. Bolt-on deals for strategic acquirers and PE-owned platforms drove much of the middle market deal activity over the past year until the pickup in recent months for new platform deals. These bolt-ons typically have a strategic angle for creating value — these types of deals may be more attractive amid the current market volatility because they’re inherently less risky. “I think people feel comfortable when they see more of these types of assets on the market,” Libeg said, “but they still probably require more diligence than they did two or three years ago.”
Whether dealmakers decide to wait until after the election or not, the dealmaking environment may accelerate soon. And when it does, the leaders who have carefully examined their plans and operations ahead of time will be the ones who get the best deals.
Contacts:
Tom Libeg
Principal, Transaction Advisory Services
Grant Thornton Advisors LLC
Tom is responsible for leading buy- and sell-side transaction services at corporate and private equity clients. He has extensive experience in all aspects of due diligence, transaction structuring, deal negotiation and post transaction planning and execution.
Cleveland, Ohio
Industries
- Manufacturing, Transportation & Distribution
- Private equity
- Services
- Retail & consumer brands
Service Experience
- Advisory
- Transaction advisory
- Commercial and growth
Vic Sandhu
Managing Director,
Transaction Advisory Services
Grant Thornton Advisors LLC
Vic’s expertise lies in leading teams to deliver operational excellence in buy-side and sell-side M&A financial diligence deals, particularly within the technology sector.
San Francisco, California
Industries
- Technology, media & telecommunications
- Private equity
- Media & entertainment
Service Experience
- Transaction advisory
- Tax Mergers & Aquisitions [M&A]
Todd Patrick
Principal, CFO Advisory Services
Grant Thornton Advisors LLC
Todd Patrick is the National Managing Principal of the Valuation & Modeling practice of Grant Thornton LLP. He is based in Dallas, Texas.
Dallas, Texas
Industries
- Asset management
- Energy
- Hospitality & Restaurants
- Life sciences
- Manufacturing, Transportation & Distribution
- Media & entertainment
- Services
- Retail & consumer brands
- Technology, media & telecommunications
- Transportation & distribution
Service Experience
- Advisory
- Valuation
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