Key Trends in Mergers & Acquisitions for 2024

As we embrace 2024, dynamic economic trends in the United States will continue to shape the mergers and acquisitions landscape. The influence of fluctuating interest rates is pivotal, serving as both a catalyst and a checkpoint for M&A activities. We believe the coming year will be characterized by a trend of cautious buyer behavior, reflecting a more nuanced and strategic approach toward investments, especially in technology, healthcare, AI, and other rapidly evolving sectors. In parallel, there is pent-up demand for deals, spurred by substantial capital reserves waiting on the sidelines. 

Against the backdrop of increased regulatory scrutiny and a U.S. Presidential election, all of these factors collectively paint a complex 2024 M&A picture — where opportunities are abundant yet intricately tied to the broader economic pulse. Our exploration delves into these top projections to help guide small and mid-sized companies through the complexities of this evolving market. Here are the key trends in mergers and acquisitions for 2024.

Optimistic Economic Outlook Fuels M&A Activity

A key driver of M&A activity is the overarching economic environment, which includes factors like Gross Domestic Product (GDP) growth, inflation rates, and fiscal policies. Next year, we anticipate stronger M&A activity than in 2023, bolstered by the continued strong economic growth that has been a hallmark of the Biden-Harris economic agenda

GDP growth is a crucial component, as it often signals overall economic health and business confidence, which are essential for robust M&A activity. According to the most recent U.S. Bureau of Economic Analysis (BEA) release, GDP “increased at an annual rate of 5.2 percent in the third quarter of 2023” — the fastest pace of expansion we’ve seen since the end of 2021. Furthermore, “profits increased 3.3 percent at a quarterly rate in the third quarter.”

When GDP rises, companies tend to have better financial performances and more optimistic outlooks, making them more willing to engage in acquisitions or seek mergers. Interest rates and inflation, however, also significantly factor into the outlook equation. 

  • High interest rates increase the cost of borrowing; expensive financing can lead to fewer leveraged buyouts and make acquisitions less attractive or feasible, especially for companies with limited cash reserves. 
  • Similarly, while moderate inflation can indicate a growing economy, high inflation may lead to increased borrowing costs, which can impact the affordability of financing M&A transactions. 
  • Higher interest rates also depress valuation multiples, leading to higher discount rates and, therefore, lower valuations, which could influence buyers and sellers in lower middle market M&A. Conservative investment strategies and reduced risk-taking are also byproducts of higher interest rates. 

However, the tide is turning. In December 2023, the Federal Reserve kept its key interest rate unchanged and forecasted three cuts in 2024. Furthermore, the Biden administration’s policies to manage inflation — consumers anticipate a 3.1% annual increase in prices over the next year, marking the lowest expected rate since March 2021 — while fostering economic growth could create a balanced environment conducive to M&A. Tax incentives and government spending in certain sectors, technology or green energy, for example, may also spur acquisitions as companies seek to capitalize on these trends.

“52% of U.S. CEOs plan M&A over the next 12 months, considerably higher than our global survey, which finds only 35% planning deals. In addition, 58% of CEOs plan to divest an asset in that period as leaders seek to fund capital spending in multiple areas.”


Exercising Caution Amidst Demand, Buyers Opt for Smaller Deals

In the evolving M&A landscape, we expect buyers to exercise greater discernment in deal-making decisions. With a heightened focus on value and viability, only the most compelling sellers will likely capture significant interest. This selective approach is part of a broader shift to mitigate risks in an increasingly cautious market. As a result, we anticipate more strategically structured deals, which include:

An emphasis on earn-outs, a contractual provision that ties a portion of the purchase price to the future performance of the acquired business, will help bridge valuation gaps between buyers and sellers. For buyers, earn-outs reduce upfront cash requirements and mitigate risk. Sellers benefit from earn-outs as they offer the potential for a higher sale price, especially if they are confident in the business’s future performance. It also demonstrates the buyer’s commitment to the business’s continued success.

Discounted Purchase Prices
We also expect a rise in discounted purchase prices for all-cash deals, which provide immediate liquidity benefits to sellers while presenting a cost-effective approach for buyers. Sellers may accept a lower total purchase price in exchange for the certainty and immediacy of cash — particularly appealing in uncertain, rapidly changing markets. For buyers, offering a cash deal at a discounted price can be advantageous as it eliminates the need for complex financing arrangements and can expedite the deal process. It also avoids the uncertainties of future valuations or earn-out arrangements.

In both scenarios, the key is to strike a balance that aligns with buyers’ and sellers’ strategic objectives and risk appetites. Earn-outs and cash deals with discounted prices offer flexibility and can be tailored to suit the unique circumstances of each transaction.

Will this cautious approach be put to the test? With significant capital accumulating due to investments largely unutilized in 2023, buyers are ready for the right opportunity. As a result, a notable shift in M&A strategy is emerging in the context of the prevailing high-interest-rate environment. There is an increasing focus on smaller-scale deals, marking a strategic pivot in response to the financial landscape. Buyers, influenced by the higher cost of borrowing, are gravitating towards more modestly sized transactions. This reflects a balancing act between leveraging available capital and navigating the challenges of the current interest rate scenario.

As a mergers and acquisitions consulting firm focused on small to mid-sized companies, we adapt our strategies and solutions to our clients’ evolving needs, effectively providing the agility necessary to navigate changing circumstances.

“It’s easier to have a buy versus build, plug-and-play type transaction in the middle market than it is in very large deals. Middle-market deals can be less exposed to leverage and can represent more of a strategic priority fit for many buyers in the market. As a result, we’re seeing more of these deals get done.”


Increasing Regulatory Scrutiny May Hinder Large M&A Activity 

Next year, regulatory scrutiny, especially concerning anti-competition and national security issues, is expected to intensify, presenting a significant obstacle for large-scale M&A deals. This heightened regulatory environment also steers companies to pursue numerous smaller, more varied industry-specific M&A transactions. Such an approach not only navigates around the complexities of stringent regulations but also offers a competitive edge in the current market landscape for various reasons. 

  • In a challenging regulatory environment, betting heavily on a single large deal can be risky if regulatory approval is uncertain or if the deal faces significant delays or modifications. By spreading investments across different sectors and deal sizes, companies can mitigate the risk associated with regulatory challenges.
  • In industries related to technology, defense, or infrastructure, large deals can raise national security concerns, leading to intense scrutiny and potential rejection. 
  • In a rapidly evolving economic landscape, agility is key. Engaging in smaller transactions enables companies to pivot more easily and integrate acquisitions faster, compared to the complex and time-consuming process often involved in large transactions.
  • In a previous “big is better” era, a broad, all-encompassing approach ruled. Today, smaller, industry-specific acquisitions allow companies to target specific growth areas or capabilities. They can selectively acquire businesses that offer unique technologies, products, or market positions that align closely with their strategic objectives.

“Sharper regulatory scrutiny, which can have a chilling effect on large M&A transactions, can also create a competitive opportunity for enterprises best positioned to complete a higher volume of smaller deals.”


Proven Process, Unlimited Potential 

Next year is poised to outpace 2023 M&A activity, driven by strong economic fundamentals fostered by the current administration’s economic policies. This environment encourages existing companies to expand through M&As and makes it attractive for new players to enter the market through strategic acquisitions.

At Freeman Logan, our expertise guides small to mid-sized companies through their most pivotal transformational endeavors. Whether it involves navigating the complexities of an ownership exit, orchestrating a strategic acquisition, or steering a major organizational overhaul, our mergers & acquisitions advisory team is adept at leading the charge.

We offer a comprehensive suite of mergers and acquisitions consulting services tailored to the unique needs of middle-market companies, entrepreneurs, private equity firms, and women-owned and minority-owned businesses. Our offerings span the full spectrum of M&A activities, encompassing everything from identifying potential targets or partners and marketing to providing thorough valuation, due diligence, and negotiation support. We aim to ensure your journey through the M&A process is seamless, strategic, and successful.