Fasken M&A report ‘cautiously optimistic’ for market rebound in 2024

Despite persistent challenges in the market, according to the Fasken 2024 M&A Forecast, there is cause for cautious optimism in an M&A deal rebound this year.

After a busy 2022, 2023 was a sluggish year for M&A deal volume. Fasken’s Forecast suggests a reversal of that trend is imminent as market actors adjust to the “new normal” of high-interest rates and are persuaded by “pent-up demand and manifest opportunity.”

Sarah Gingrich, co-leader of the capital markets and mergers and acquisitions group at Fasken, says the “significant decline” in 2023 was due to inflationary risk and concern over the cost of capital due to high-interest rates. Geopolitical crises like the wars in Ukraine and the Middle East also played a role.

“It was just a time of great uncertainty, and people started to sit on dry powder.”

Sean Stevens, also a co-leader of Fasken’s capital markets and mergers and acquisitions group, says that four months into 2024, the market remains slow. However, there are “indications of increased certainty” in the market from the expectation of looming interest rate cuts and inflation coming under control.

He adds that North American private equity is sitting on close to $1 trillion in dry powder, and Fortune 500 companies are holding billions in capital for investment that their shareholders are pushing them to deploy. Gingrich notes that conversations with corporate CEOs and chief legal officers have shown they are aware that M&A is a “significant driver” of shareholder value and in boosting returns.

“We just have really significant pent-up demand for deals to happen,” says Stevens.

According to the report, there is a growing consensus that central banks could begin to reduce interest rates by Q3. But geopolitical tension has not abated. The Middle East, Ukraine, and Taiwan each form a “troubling potential flashpoint” and represent a “broader global realignment and friction” between the West and Russia and China. The report adds that the US presidential election “presents widely different possibilities regarding U.S. economic and political policy,” but the US economy shows signs of lasting strength.

“So, there are a few overhangs still there,” says Stevens. “But at some point… someone’s going to take the lead. Once they do, the deals will start to flow again.”

According to the report, there is a possibility that continued uncertainty will cause some dealmakers to adopt a “wait and see” approach. Still, others may be coaxed into the market because they can no longer afford to wait for better market conditions. The report adds that analyst surveys indicate rising enthusiasm in the private equity sector for take-private deals, and an “overwhelming majority” of CEOs say they expect to pursue transactions and are allocating more capital to M&A budgets.

Fasken said it expects much of the deal volume to come out of the middle- and lower-middle market, rather than “a giant wave of mega-deals.” The report adds that information and communications technology, cleantech, infrastructure, agribusiness, and critical minerals will likely continue to be hotspots for deal activity, and housing development could become a deal driver as federal and provincial governments focus on dealing with the housing crisis.

Fasken predicts that enhanced regulatory scrutiny could form a headwind against M&A activity.

“What we're seeing everywhere in all aspects is increased regulatory scrutiny of deals of all types,” says Stevens. This includes US pressure on private equity roll-up strategies, which the Canadian Commissioner of Competition has noted as a concern in Canada as well.

“Any kind of activity that is looking to make deals more complicated is not a good thing for deal-making activity, generally,” he says. “You layer onto that the increasing regulatory complexity of ESG, and general competition law concerns with all industries, and it makes it harder to get M&A deals done.”