Evening Brief – 04.01.24
50% Surge
Morgan Stanley research forecasts a 50% surge in M&A volumes relative to 2023, driven by increasing corporate confidence and alleviating fears regarding inflation and recession, which are facilitating the completion of more deals.
“Last year’s strong market performance masked a dismal deal environment. Global M&A volume fell 35%, the second consecutive decline and the lowest level since 2004,” said Andrew Sheets, head of corporate credit research at Morgan Stanley. “This has created pent-up demand for deals in 2024, especially as companies become more confident about growth, giving those that spent the past two years building strategy, evaluating prospects and engaging preliminary discussions an opportunity to strike as the market turns.
Numerous cyclical and structural factors will drive deal activity, Morgan Stanley analysts observed. Non-financial corporations currently have $5.6 trillion in unallocated capital, while private market investors retain an additional $2.5 trillion, which is poised to stimulate a resurgence in M&As.
Furthermore, firms are seeking to enhance operational effectiveness, broaden their market presence, or acquire competencies such as artificial intelligence and energy transition technologies. Simultaneously, an increasing number of private enterprises and private equity portfolio assets are either seeking buyers or aiming to divest their holdings.
The anticipated increase in transactions in 2024 is based on the current lower level of activity and is driven by both necessity and opportunity. Private equity firms currently hold over 1,200 “unicorns” – startups valued at $1 billion or above – which they must monetize, according to the research.
Morgan Stanley analysts have identified key sectors to monitor M&A activity for the remainder of the year, including banks, energy, healthcare, hotels, real estate, and technology, which may offer the best deal prospects this year. Within real estate, the firm said, “the market appears ready for more, especially in subsectors such as self-storage, apartment, office, retail, health care and industrial REITs.”
“The M&A resurgence will be a global story, with optimism for European equities and a cyclical rebound in Japan driving deal activity in those regions,” added Sheets. “In North America, companies are looking to grow by acquiring smaller players in their markets.” Sheets observed that there is also potential for increased engagement in Australia, India, Korea, and Japan, where there is a considerable emphasis on improving business efficiency.
However, there are still elements that pose a risk. Although recession fears have decreased, they nevertheless persist, and there are still concerns about regulatory hurdles. Analysts said these risks appear to be controllable, as there are increasing signs that central banks will effectively control inflation without causing a recession. This could potentially present opportunities for investors, as current market prices may not accurately represent the resurgence in M&As.