Navigating the Current M&A Cycle, Regulatory Impacts, and 2025 Market Dynamics for Corporate Development Leaders

Current state of the M&A market

I look at M&A very broadly. I know a lot of practitioners are in the trenches, working on deals, and for them, I know it always seems very busy. But when you take a step back and look at deals from the totality, sometimes you get a different perspective. 

Right now, things are improving from an M&A standpoint, and we've definitely seen an increase in M&A, but it's off a very low base. When we look at the global M&A picture, we're still in the midst of the downturn that started in 2022, when rates started to rise.

The current activity is nowhere near what we've seen in the record setting levels of 2021. At that time, the deal activity was topping about a trillion a quarter and the number of deals averaged around 14,000. We’re also pretty below the pre-pandemic levels, where the quarterly totals of deals were around $800 billion and there were about 13,000 deals a quarter. 

But that being said, we have seen some positives in the data for the second and third quarter of 2024. We saw an increase in the number of deals and the increase was small, but it was notable, because we hadn't seen that since 2020, where we saw two straight quarters in a row with quarter over quarter growth.

The third quarter also had year over year growth in the number of announcements, and that was the first time that happened in ten quarters. And I'm talking about the third quarter because in the fourth quarter, there was a bit of a slowdown with the U. S. election happening, but that was more of a blip than anything else. 

If we take a step back, we’ll see M&A activities increasing, but we're nowhere near the top of the market. There's plenty of room to grow, but we're definitely moving up off the low point. Right now the low point was the third quarter of 2023. 

Distinguishing the current M&A downturn

The last time we saw a sustained downturn in M&A was after the great financial crisis. From a level of activity standpoint, it feels similar to the 2012-2016 timeframe. Companies at the time were risk averse, and the shock from the financial crisis had not worn off. 

The M&A activity wasn't terrible during those years, but it was just bumping along pretty lackluster. That's kind of how it felt the last couple of years. Executives have just been worried about the economic outlook and just not pulling the trigger on deals.

But a big difference between now and then is the interest rates are higher. Interest rates were so low for so long that even though they're coming down now, they're still very much higher than they were from 2008 until 2022 when the rate hiking cycle began. So, with the higher rates, it just makes the M&A math more challenging.

Factors driving global M&A

In 2024, we did see an increase in large deals. It started in late 2023, the fourth quarter, there were some large oil and gas deals, and then it carried over to 2024. There were 11 deals that had a value over 10 billion in the first quarter of 2024. 

And then, going back to 2018, there were only three quarters that had more deals in that above 10 billion. In those quarters, it wasn't a lot higher. It was about 12 to 14 deals, in those quarters. So it was a pretty big start of the year for large deals last year.

The number of large deals did as 2024 went on, which perhaps had to do with the US election.  As the election neared, the number of deals slowed down, but activity picked up almost right away.

Prior to the election, the US had been the driver behind the increase in large deals, which was interesting just because there was so much increased antitrust scrutiny from the Biden administration. 

It was surprising to see those deals come to market. Under a different regulatory regime, the growth could have been even higher. So, that was certainly a headwind in 2024, and the higher rate environment is also certainly a headwind.

M&A blindspots to lookout for

M&A is just not quite firing on all cylinders. You've seen pockets of growth and spikes in certain areas. For instance, M&A activity in Europe jumped in the second quarter, but then in the second half of the year, it fell. 

The opposite was true in Asia. Activity was slower in the first half, but picked up in the second half. What we didn't see in 2024 was them increasing together and staying up. It was kind of offsetting each other. We saw something similar in the U. S. when looking at different sectors. 

Some colleagues of mine work for a team called 451 Research and they do a ton of work on M&A and the Business IT innovation space. They focus on tech M&A. Something that they have been highlighting is how some tech companies who have been serial acquirers in the past have been pretty much sidelined recently. 

One interesting stat that we had in the M&A Outlook paper was that Microsoft, Adobe, and Oracle collectively spent $78 billion across 99 deals between 2017 and 2021. And each of them did a small deal in 2023, and then were silent in 2024. They were pretty much sidelined, but other areas like oil and gas were very active. So, again, just not firing on all cylinders there. 

Something we've been hearing a lot of chatter about is the lack of private equity activity. And it does seem like there's a turn there, and things might be picking up from the private equity standpoint. 

PE has a ton of capital to put to work, and in 2024, we did see a number of large deals from private equity firms. It was one of the most active years for private equity-backed M&A transactions of $5 billion and up.

Also, a lot of what we do is we listen to earnings conference calls of executives, and over the summer, it seemed like there was a bit of a tone shift from private equity. Our private equity news team puts out this sentiment analysis that's based on language used by executives and analysts, earnings calls.

They look at Apollo, Blackstone, Carlisle, KKR, and pretty much, pretty consistently. Their average net positivity sediment was trailing the S&P 500, but in the third quarter, it got decidedly more positive. What was happening there was private equities were waiting on the sidelines for the change in the rate cycle. And then once it came and then their tone shifted on the deal activity. 

How Fed rate cuts will affect M&A

‍Lower interest rates are certainly a catalyst for M&A.  The net take home is that bid ask spread just narrows, and that should definitely facilitate more deals. It just lowers the cost of acquisition and financing, which gives buyers more wherewithal, and that could certainly boost valuations at the sellers.

We have seen evidence of it already headed into December. Our data shows that the implied enterprise value to EBITDA on global M&A had really stepped up to what it was earlier in 2024. And actually, by the end of 2024, it was pretty much close to the 2021 levels. I did a double take when I first saw that, but it was pretty interesting how quickly it changed. Interest goes down, EBITDA goes up.

Financing M&A deals in a changing market

Consider exploring more financing options. One of our big picture reports focuses on credit. I didn't work on that report, but we have a talented team who put it together. They were talking about how the overall credit market is growing and new structures are developing. 

Obviously there was a proliferation of private credit funds that have come to market in the last few years. But now we're starting to see more partnerships. For instance, Citigroup and Apollo announced a $25 billion fund. And the private market really helps companies that may have otherwise faced unfavorable terms in the public markets. It can bring together alternative arrangements. 

Private credit also stepped in because banks had stepped back in recent years, and banks have been tightening their lending standards after the March 2023 liquidity crisis. They were pulling back because there was concern about credit quality getting worse.

That really helped the private credit funds fill the gap there, but the deterioration in credit really hasn't come to light. Banks have been in pretty good shape, so I think they are going to get more aggressive on the lending front. And because they're looking for a long growth right now, that will give companies more options out there from thinking about financing. 

With the increasing number of private credit funds, there definitely will be an increased competition, especially for smaller transactions because it will make it more challenging. But the fact that banks are trying to do those partnerships funds, there is interest in keeping some of that going along the lines.

Investor sentiment and the future of IPOs

We did see some pickup in IPOs during the third quarter of 2024. For U.S. IPOs, the total value raised in the third quarter was higher than the previous two quarters, which was interesting because normally, activity slows during the summer months, but the bulk of the activity came in July, and in August, volatility spiked. 

We had a weaker than expected jobs report, and there was a hawkish tone from the bank of Japan. So after that volatility spike, the IPO market became a wait until next year's story. We had to pause around the election and then once you roll into the holidays, the windows set to IPO are smaller.

So, to answer your question, I really do think 2025 will see a pickup. It's just been quiet for way too long there. And there's a lot of pent up demand where we're going to start seeing some steady growth of the IPO market.

Impact of market volatility on corporate M&A

The market volatility just makes everything more tricky. The demand for shares you're trying to exit might not be there, and the pricing might not be at the level that you're looking for. If you're doing a stock transaction and you get the price right, the investors could reward the buyer stock and then both the seller and the buyer could actually see some benefit from it.

So volatility definitely has an impact on equity deals, but the volatility also has a significant impact on M&A deals in general. When there's volatility, executive confidence just gets  weakened about the economic outlook. At the end of the day, volatility is just not good for all transactions.

Cross-border M&A: Lessons from Asia Pacific and Europe M&A Activity

The point that we're trying to make in the report was that the M&A recovery has been a bit uneven. Even though Europe had a very strong second quarter, it came back down, and it was offset by the growth in the Asia Pacific. 

So to me, it just seems that corporate M&A leaders are being selective about the deals they pursue. It's not 2021 or 2007, where it's just deals everywhere. It's just finding the right transaction and pursuing them. 

A big question in terms of cross-border M&A is how tariffs will impact the market. We're expecting to see the Trump administration utilize tariffs more again. There is a school of thought out there that tariffs can lead to more deals inside the US. 

The thinking is that companies based outside the U.S. will look to do deals inside the U.S. to avoid tariffs, but once you get into this era of protectionism and trade wars, regulatory approval can become more challenging.

Larger companies might feel like that they have the resources to withstand a drawn out regulatory approval process and the expense of it. But smaller companies might be better off turning to joint ventures or some sort of partnerships so it's quite possible that we can see an increase in the transaction values for cross border deals.

When we look at the big picture, we might just see fewer deals, because again, the bigger companies might feel like they can pull it off while smaller companies might not want to dedicate the resources to it.

How geopolitical factors impact global M&A strategies

Elections definitely matter, and the government certainly plays a role and can impact M&A. Overall, the economy is the biggest driver of deal making. M&A slowed down during the early part of the Obama administration, but that was driven by the fallout from the great financial crisis. 

M&A slowed down in the early 2000s during the Bush administration, but that was fallout from the Obama administration from the dot com bust. 

Under the Biden administration, the slowdown was largely driven by the need to raise interest rates to combat inflation. However, there is no denying that the Biden administration has been more aggressive and challenging mergers and sort of drawing out the process. 

They brought up some novel arguments, even some of the smaller other deals, it was under the Hart Scott Rodino Act. Some of those processes were drawn out and there was just an increase in the amount of information that was demanded and second requests. This had a chilling effect for some deals. Like I mentioned earlier, in large tech deals, we certainly saw fewer deals come to market there.

How to prepare for the heightened regulatory scrutiny

I don't know how lasting an impact the Biden administration will have on M&A. Most of their changes were about interpreting or adjusting guidelines. It didn't have a lot of success in court. So there's not much in the way of precedent set in cases. 

I believe with the Biden administration, there was more coordination with global regulators and we'll probably see less of that from the Trump administration. So that's one thing to think about as we go forward. 

That being said, I think it's sort of an open question on what antitrust is going to look like under the Trump administration. The tech industry is certainly expecting to face more antitrust scrutiny. 

During the first Trump administration, we certainly did see some challenges to deals. The numbers didn't go down to zero or anything like that. So, the consensus is more along the lines of “we'll kind of wait and see what happens.”  

Everyone's more bullish on M&A right now. If there's tax relief given to the companies, that's obviously going to give them more ability to make acquisitions. And if we're trying to stimulate the economy, that bodes well. But I'm interested to see how the antitrust thing is going to play out.

Strategies for mitigating regulatory risks

The one area that I'm most familiar with is financials. And one strategy that we've heard banks talk about a lot is just reaching out to regulators before announcing deals. 

On their deal calls, they're telling their investors that we've been talking to regulators, we feel confident. And they're saying that because the deal has been an elongated process and that obviously adds expense to deals. 

But reaching out to regulators and getting a comfort level is something that banks have been doing before announcing a deal.

M&A insights from earnings calls

An area where I focus on a lot is investment banks, earnings calls, and we definitely saw or heard sort of a shift in their tone as the year went on in 2024. 

In the early part of the year, executives were talking about how 2024 is more about gradual improvement in M&A after two down years. But then the outlook became more bullish as the year went on. 

In the outlook for 2025, and this was even before the presidential election. It was just driven by the rate cutting cycle. And it's not just corporate activity where there's kind of being more bullish. They're also talking about an increase in private equity activity. 

The headwinds that they keep talking about is sort of the global conflicts around the world and just the closing times are being elongated. But the private equity piece is really interesting because just the increase in private equity and how much of an impact that they have on the overall deal environment, it's pivotal for the investment banking business.

Increased investment banking recruiting

What tends to happen during the slower M&A times is the advisory focus firms, the firms that are just focused on M&A and providing advice, tend to pick up more talent in the slower times. The larger bulge bracket firms are cutting costs, and that can lead to some talent becoming available. 

Also investment bankers have a bit more flexibility to move around when there's less deal activity. If you're not working on anything that's imminent, you're in a better position to move and sit out that period of time on your garden leave. 

And for the hiring company, the hope is that the new hire can get set up during the slow time and is ready to take advantage when the activity picks up.  So that's something that is interesting on the recent mollusk earnings call. 

The CEO was talking about how head count can get elevated during slower M&A times just because you need more staffing to service clients who have deals that are stuck in the pipeline. 

He was saying that we take on an assignment. 18 months later, we can't just drop it. We have to have people to service that client. So, I definitely think that the headcount goes up during the slower times and then for those advisory focus firms, I think they just view it as a time to pick up talent.

Practical takeaways for corporate M&A teams

Something I like to think about right now is the assets that you cover. The assets that you covet that are backed by private equity, check in on them. Our private equity news team recently put out a chart that showed the average holding period for a buyout portfolio company was at a 10-year high in October. 

So, those private equity firms, they need to move those assets. They have LPs that want to see some capital returns and the lack of capital returns that they're giving those LPs hinders their ability to raise new funds. 

I'm not suggesting that private equity is going to be selling everything, but it seems to me that now would be a good time to reach out and see where they're at with some of those portfolio companies that they've been holding onto for a long time and maybe they could be looking to move them.

The future of M&A: Trends to watch in 2025

It just goes back to private equity on the deal structure side. Whether it's exits or entries, I think it's going to be a more active year for deals involving financial sponsors. On the corporate side, I could see more growth oriented M&A happening for the last couple of years from my perspective, at least. 

It seems like it's been more about consolidation and divesting non core assets. I think that's largely a reflection of companies not having confidence about the economic outlook and trying to build a moat around their core business. 

It seemed like for a period there, we were just like constantly talking about when the recession was going to happen, and that's not a great time to be looking to expand it to a new area. So I can see companies looking to get back to and trying to look for avenues to expand and build onto their existing business.  

Advice for staying competitive in a volatile market

I don't know if I have anything too novel to say here. But something that I'm always talking to my team about is just thinking about how best to serve our clients,  and I think that's good advice for everyone.

If you have a good understanding of what your clients need and what they want, that can help anyone manage through a difficult period.  

In terms of areas where CorpDev teams can get an edge, something I heard on one of your podcasts was, you had an executive on here talking about how they set up an internal referral program. If I remember correctly, the employees would actually get a bonus if they made an introduction to a target company that the company ended up purchasing.  

And the executive was saying how the pipeline was filled because there were good quality targets in the pipeline because the employees really have a good understanding of what the company is looking for. 

And obviously, that strategy won't work for every company. It probably works best for companies that have a really active M&A strategy. But it reminded me of the whole notion of aligning the incentives for your employees with what outcome you want your company to produce. 

I remember listening to an executive talk about how he helped turn around an investment bank, and he was just saying that the biggest advice that he gave to his team was just service to clients that are going to pay you money and do work for the clients that are going to be able to actually execute deals.

Emerging sectors for 2025

The easy answer there is AI. Our 451 team put out an outlook report that was interesting. They were saying that through the third quarter of 2024, a quarter of the tech M&A value involved the target with machine learning capabilities. And that was up from a fifth the year before and 10 percent in 2022. So, just more deals, AI is going to be a part of M&A going forward. I can see that certainly growing.

What everyone's kind of trying to figure out is how to get value out of it. Obviously, we have the hype, but the point that they made in that paper was just that customers and clients are going to expect it. So, it just helps with that level of service. So, I guess don't overpay is sort of the advice there. 

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