After a slowdown in 2023, mergers and acquisitions activity is poised for a rebound this year. Morgan Stanley Research predicts a 50% increase in M&A volumes compared with 2023, as growing corporate confidence and easing concerns about inflation and recession globally are helping fill deal pipelines.

“Last year’s strong market performance masked a dismal deal environment. Global M&A volume fell 35% last year, the second consecutive decline and the lowest level since 2004,” says 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.”

A number of cyclical and structural factors are likely to propel deal activity. Non-financial companies have amassed $5.6 trillion in unallocated capital, and private market investors hold another $2.5 trillion, which are ready to fuel an M&A comeback.

In addition, companies are looking to improve efficiencies, expand market share or add capabilities such as AI expertise and energy transition technology. At the same time, more private companies and private-equity portfolio assets are either putting themselves up for sale or looking to shed assets.

And while the projected rise in 2024 deal activity is coming off this lower base, it reflects both necessity and opportunity. For example, private equity firms are holding more than 1,200 “unicorns” — startups with valuations of $1 billion or more — that they need to monetize.

Industries Primed for Deals

Analysts have flagged six areas to watch for M&A in the coming year.

1.      Banks: The U.S. banking system has been consolidating for several decades, and it remains highly fragmented compared with many other countries. In addition, regulatory requirements and supervision are becoming stricter, increasing the need for stronger internal controls. As a result, analysts see a growing need for scale, which could drive consolidation over time.

2.      Energy: Despite last year’s slump in M&A volume, 2023 did include two of the largest energy acquisitions in more than a decade, and it could be a sign of more to come. Energy companies are looking for well-structured deals that will help them create value as the future of the industry moves toward fewer, yet higher-quality, companies.

3.      Healthcare: Lower interest rates, a desire for growth and, in the U.S., a need for consolidation are likely to drive transactions. Large European biopharma companies may be on the hunt for deals given their strong balance sheets.

4.      Hotels: Hotels have low valuations in Europe, and large transactions in the past have created significant value by reducing expenses and travel-agent costs. However, the industry remains fragmented. The five biggest hoteliers control just 25% of the market and the biggest player operates just 7% of all rooms globally. With one large merger already in discussions, a broader consolidation could follow.

5.      Real estate: Eleven deals with a value of $61 billion for publicly traded real estate investment trusts (REITs) were announced in 2023, which resulted in greater economies of scale, higher earnings and better portfolios. The market appears ready for more, especially in subsectors such as self-storage, apartment, office, retail, health care and industrial REITs.

6.      Technology: Technology may offer the best deal prospects in 2024, especially in software, which had five transactions last year. Tech still attracts significant amounts of private investment, and companies are looking to expand platforms rapidly in sectors such as communications software.

“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,” says Sheets. “In North America, companies are looking to grow by acquiring smaller players in their markets.” He notes that activity also appears poised to accelerate in Australia, India, Korea and Japan, where the drive for corporate efficiencies is particularly strong.

Even so, risk factors remain. Recession fears, though diminished, still linger and regulatory challenges remain a concern. Analysts say these risks seem manageable given growing indications that central banks will successfully tame the last mile of inflation without triggering a recessions. That could create opportunities for investors as equity prices may not fully reflect the M&A resurgence.