M&A activity insights: November 2024

M&A activity likely to pick up in 2025.

Interest rate cuts, pent-up demand and results of the US elections are setting the stage for increased M&A activity. The US economy grew at an annualized rate of 2.8% in the third quarter, on the strength of consumer spending despite lingering inflation pressures. And the overall data confirms the strength of the US economy, which has repeatedly defied expectations of a recession despite the Federal Reserve (the Fed) holding interest rates high to cool down inflation.

A slowdown for M&A during the election cycle  

While the overall US economy is robust, the elevated uncertainty around the US presidential election relatively slowed the momentum of the M&A market. October deal value was down 26% month over month (m/m) and 63% year over year (y/y). October deal volume was almost on par y/y and 7% higher m/m.

Monthly global M&A trend (2022 onwards)

Deal value (US$ 100m+); deal volume (US$100m+)

This is likely to be a temporary slowdown as firms postponed engaging in big deals ahead of the US elections. As for M&A deals greater than US$1B, October saw only 25 deals and 26 for September, compared to the previous busy months of August and July 2024, which saw 33 deals and 38 deals, respectively.

M&A outlook positive as deal fundamentals remain strong

M&A activity is expected to increase, driven by stable financing costs, reduced recession risk and, most importantly, intensified strategic imperatives of companies amid a transaction slowdown. 

Fed rate cuts will likely be a strong tailwind for sponsors and for the M&A markets more broadly — not only by lowering PE’s cost of capital and making it easier to underwrite investments but also by making transactors more confident about the macro environment and target valuations. This perspective aligns with the EY CEO Outlook survey, which points to CEOs and institutional investors having a positive outlook for corporate M&A and private equity (PE) activity in 2025. 

Moreover, dealmakers are expecting some relief from regulatory activism and rising protectionism with the new administration coming up. However, it remains to be seen if corporate M&A activity will really look much different in Trump’s second term.

_{PE firms poised for heightened M&A activity}

PE is likely to drive deal activity driven by interest rate cuts, stabilized financing markets and narrow valuation disconnect. PE firms in the US continue to have record levels of committed but uninvested capital, which could fuel more investment deals. As illustrated in our latest EY PE Pulse survey, rising sentiment is translating more directly into deal activity, while the valuation disconnect — one of the primary market impediments — is beginning to narrow enough that an increasing proportion of transactions is reaching the finish line. Still, exits continue to seek the more fulsome recovery evident on the buy side. 

In the latest PE Pulse survey, 74% of general partners expect that deployment activity will increase over the next six months, up from 63% at the beginning of the year. Survey respondents also cited an increased volume of assets coming to market as the most critical factor needed to jump-start additional deployment activity, ahead of financing issues, fundraising concerns and even valuations.

Key deal drivers

• Improved conditions in the financing market
• Reduced economic uncertainty and better clarity around policy dynamics
• Better economic prospects and subsiding recession fears
• Attractive M&A valuations driven by reduced cost of debt 
• Companies’ continued transition to the cloud, growth in the Internet of Things (IoT) space and rapidly growing data needs from artificial intelligence (AI) adoption

US sector breakdown for US$100m+ deals — YTD

Additional risks to dealmaking in 4Q24

• Impact of new trade and economic policies under the Trump administration
• Changes to existing industrial policies, such as the climate policy (i.e., Inflation Reduction Act) under, the Trump administration
• Continued regulatory scrutiny
• Economic concerns, such as a weak job market and reacceleration of inflation if the Fed shifts its focus away from its inflation target

Looking ahead to 2025

M&A activity is likely to firm up in 2025, given the robust deal fundamentals and the improved deal appetite of both corporates and PE firms. Moreover, factors such as stabilized inflation, healthy debt markets, improved financing conditions and better M&A valuations are likely to stimulate M&A, amid a favorable backdrop in the coming months. 

The US is likely to benefit most from the return of PE acquirers whose debt-fueled buyouts were hit hard by the Fed’s aggressive rate hikes in the aftermath of the pandemic to combat inflation. The Fed reducing interest rates, further rate cuts in the pipeline and the convergence of seller and buyer valuation expectations have created a conducive environment for PE dealmaking. 

With Trump having secured a decisive victory, investors will be weighing the impact his proposed economic and regulatory policies could have. Determining the deal momentum in the longer term will likely depend on how much of Trump’s tax, energy, trade and regulatory agenda is enacted.

Thank you Vaishali Madaan, Assistant Director for Markets & Business Development, for contributing to this article.