Dive Overview:
Global merger and acquisition activity has recovered at a moderate pace so far this year as dealmakers remain cautious despite improving macroeconomic conditions, according to the Boston Consulting Group. Analysts at BCG, a global management consulting firm based in Boston, Massachusetts, said in a recent report that global M&A activity in the first half of 2024 will be $1 trillion, up 4% from the same period last year but below the 10-year average of $1.5 trillion. Despite the momentum in M&A activity, dealmakers continue to face challenges including uncertainty around interest rates and inflation, as well as regulatory and geopolitical headwinds, the analysts said. “We're slowly improving, but we're not out of the woods yet,” Daniel Friedman, global leader of BCG's transactions and integration practice and one of the report's authors, said in an interview.
Dive Insights:
Strong corporate earnings, rising executive confidence and stabilizing inflation are driving a recovery in M&A after a sluggish 2023, according to a June report from Big Four accounting firm PricewaterhouseCoopers.
“So far, the obsession with potential rate cuts has hindered a broader recovery, but we believe dealmakers should embrace the new reality rather than praying for a return of low rates,” the report said.
At the start of 2024, the Fed was expected to begin lowering the federal funds rate from its current 23-year high range of 5.25% to 5.5% as early as March. But inflation unexpectedly accelerated in the first quarter, keeping rates higher than expected.
Federal Reserve Chairman Jerome Powell, under pressure from some lawmakers to start cutting interest rates, suggested at a congressional hearing this month that he would be prepared to act before inflation falls to the Fed's 2% target, as previously reported by CFO Dive. But he gave no indication of when he might cut rates, stressing that policymakers need to see price pressures steadily declining before lowering borrowing costs.
Meanwhile, some analysts say the Fed's delayed response is dampening hopes for a stronger M&A recovery this year.
Interest rates have played a big role in trading fluctuations over the past few years, according to a report by big four accountancy firm Ernst & Young.
According to EY, global M&A activity surged to record levels in 2021 and early 2022, driven by low inflation, low interest rates and high corporate earnings. But the Fed's aggressive monetary tightening policy, which began in March 2022 to combat high inflation, contributed to a sharp decline in deal activity, along with factors such as rising capital costs, growing economic uncertainty and geopolitical conflicts, the report said.
The M&A market has been active so far this year, but factors including uncertainty around interest rates and rising geopolitical tensions between major economic powers mean a slower recovery from 2023 levels than many observers had expected, according to BCG analysts.
“The complexity of predicting and assessing these factors makes it difficult for decision makers to make reliable forecasts and plans,” they wrote.
Analysts expect the recent increase in M&A deals to continue and possibly accelerate if economic conditions continue to improve.
In an optimistic macroeconomic scenario of stronger growth, more moderate inflation and lower interest rates, EY predicts M&A will recover more quickly, with deal volume increasing by 31% in 2024. “In a pessimistic scenario of weaker growth, stronger inflation and rising interest rates, deal volume is expected to show a more modest recovery, increasing by 13% in 2024,” EY said in the report.