M&A professionals: Prepare for a rise in deals


Survey shows optimism for increase in transactions, valuations


Buoyed by expectations of falling interest rates and fading recession concerns, an overwhelming percentage of merger and acquisition professionals expect deal activity to increase over the next six months, according to Grant Thornton’s new M&A Pulse Survey.


Eighty-one percent of M&A professionals said they expect deal volume to increase or significantly increase over the next six months compared with the previous six months. Just 4% of the 238 M&A professionals surveyed, including investment bankers, private equity investors, M&A attorneys and in-house corporate development team members, expect deal volume to decrease, indicating expectations that a two-year stagnation in deals has reached its bottom.


The number of North American M&A deals declined from a record-high of 20,413 in 2021 to an estimated 16,391 last year, according to Pitchbook statistics, but a generally positive outlook on the U.S. economy is fueling predictions of improvement. Two-thirds (67%) of respondents said they are optimistic about the U.S. economy, citing their anticipation of stable or lower interest rates, technology innovations fueling growth and stabilized or reduced inflation that will encourage consumer spending.


High interest rates clearly had a profound effect on deal activity last year, as three-fourths of respondents said they executed fewer deals over the past 12 months because of rate increases. But the Federal Reserve has signaled that interest rate cuts are likely later this year, and 68% of M&A survey respondents expect rates to decrease over the next six months. Eighty-one percent of the respondents who expect rates to decrease say lower rates will lead to them executing more deals.


Although unexpectedly high U.S. inflation data from January dealt a jolt of pessimism into global markets, economic indicators have been largely favorable for expansion in the last several months, and private equity firms have lots of cash that they need to invest soon — or they’ll face having to return funds to their investors. This could drive an increase in transaction volume as PE leaders seek to avoid returning unspent funds.


The survey’s deal volume predictions match the observations that Grant Thornton Transaction Advisory professionals have noticed in their work.

Elliot Findlay

“The amount of sell-side work we’re seeing right now should translate into increased volume when these opportunities hit the market in the next couple of months.”

Elliot Findlay

Grant Thornton National Managing Principal, Transaction Advisory


“The amount of sell-side work we’re seeing right now should translate into increased volume when these opportunities hit the market in the next couple of months,” said Grant Thornton Transaction Advisory National Managing Principal Elliot Findlay. “There are a lot of positive tailwinds right now, and the market is indicating that volumes will pick up.”


Perhaps the most positive sign for deals is this: Many M&A leaders are backing their predictions by hiring talent in the expectation that they have more work now — or they’ll have it soon. Almost half (47%) plan to increase their team size over the next six months, and just 3% expect to reduce their team size. “If these M&A leaders are investing in professionals, that really backs the fact that they expect growth,” said Grant Thornton Transaction Advisory Managing Director Max Mitchell. “They’re hiring ahead of it, or while it’s happening.”


Valuation expectations are more modest


Deal values may also be poised to rise, although those expectations from the survey are a bit less optimistic than the deal volume predictions. Forty-one percent of respondents anticipate valuations to rise, while 40% predict that valuations will stay the same over the next six months.


In free-response questions within the survey, many respondents attributed the decrease in deal volume over the past two years to misalignment in valuation expectations between sellers and buyers. The M&A surge that fueled the record-high deal volume in 2021 created high expectations for valuation among sellers.


However, buyers’ pricing expectations dropped as the economy was buffeted in 2022 and 2023 with the gut-punch combination of high inflation and rising interest rates. One respondent said that although the bid-ask spread seems to be narrowing, an improved outlook for business performance may extend the stalemate. But others are hopeful that buyers’ pricing expectations will inch high enough to meet sellers’ demands.


“We had a high-water mark in 2021 and early 2022, and sellers were enjoying premium multiples and valuations,” said Grant Thornton Transaction Advisory Partner Brent Johnson. “Then a lot of different factors caused buyers to pull back, but sellers didn’t quite adapt to that market, triggering a slowdown. I think sellers’ expectations are not coming down, but access to alternative capital, creative deal structures and other factors have been driving buyers back to the table, allowing better pull through on what would have previously been valuation stalemates.”

Bill Pollatos

“I see more, deeper diligence being performed. You need to take your time, do it right the first time, go deep and make sure you’re well-presented as you go into a sale process.”

Bill Pollatos

Grant Thornton Partner, Transaction Advisory


In this environment, comprehensive due diligence on the buy side and sell side is critically important. In addition to the traditional diligence on financial metrics, buyers are seeking more information on the human capital, supply chain and technology capabilities of target companies so that they will have a full picture of the opportunities and synergies that will be created in a potential deal.


“In the recent exits I’ve advised clients on, the amount of diligence that we’ve gone through has been immense, and we were on the sell side,” said Grant Thornton Transaction Advisory Partner Bill Pollatos. “I see more, deeper diligence being performed. You need to take your time, do it right the first time, go deep and make sure you’re well-presented as you go into a sale process.”


Pollatos, who specializes in financial diligence for technology-focused private equity, said the emphasis in the industry on transactions has seen a shift from revenue growth at all costs to include a higher focus on profitable growth. During the M&A surge that began in 2020, sellers simply needed to show that they were generating revenue growth to attract a handsome bid. Liquidity and cost-of-capital considerations have shifted the landscape.


Strong growth in annual recurring revenue and low subscriber churn were the key metrics that buyers were looking for. But in the past year, EBITDA margins and profitable growth have become much more important to buyers.


“Now a really healthy asset in the software-as-a-service space is one that’s growing and also is profitable or has a visible path to profitability in the current period,” Pollatos said. “I think that those are the companies that will command premium valuations going forward.”


Based on the survey, the expectations for profits at PE portfolio companies must be fairly strong. Sixty-two percent of PE respondents said they’re somewhat optimistic about their portfolio companies’ performance outlook for 2024, and an additional 12% said they’re very optimistic.


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Technology deals provide a spark


As artificial intelligence and cybersecurity needs and capabilities grow exponentially across the business landscape, M&A survey respondents identified technology, media, entertainment and telecommunications as the industry that would have the most deal activity in the next 12 months.


Pitchbook data shows that in the IT sector, deal activity and especially deal value plummeted in 2023, with the overall IT deal value last year marking a six-year low. Johnson said that at the start of the most recent deal frenzy in the summer of 2020, the tech industry experienced a spike in M&A activity before other industries followed suit.


“This may be a signal,” Johnson said. “As that segment begins to pick up, it may be the bellwether that suggests that an uptick is coming in other industries.”


Consolidation in the media and entertainment sectors, which have experienced several high-profile deals in recent months, also may be a factor in the predictions of an increase in this area.


Other industries with high expectations for M&A activity were:

  • Energy. A renewable surge has sparked innovation, while oil and gas opportunities remain strong.
  • Services. A growth in compliance requirements is creating demand from professional services organizations’ clients, while digitalization provides efficiency opportunities.
  • Healthcare. An aging population and rapid technological innovation have fueled a healthy deal environment for years.

Funding remains a challenge


Even if interest rates do recede in 2024, obtaining traditional bank funding for deals may be difficult.


Loans are more difficult to obtain because banking partners may be skeptical that a corporate borrower will be able to keep up with payments on M&A funding unless performance is immediately and consistently outstanding.


Pollatos said certain clients funded acquisitions through a line of credit but have had to embrace new strategies over the past year.

Max Mitchell

“Until that bank lending comes back, private financing is going to remain a pretty strong component of the deal environment.”

Max Mitchell

Grant Thornton Managing Director, Transaction Advisory


“A line of credit becomes a lot more expensive now,” he said. “It’s a quick reality where they need to make large interest payments that have led certain clients to change their capital structure and acquisition strategy.”


The M&A survey reflects these funding difficulties, as nearly half (47%) of respondents said the constraints on the current lending environment caused them to increase the equity component in financing. Another sizeable group (38%) said current lending constraints have caused them to explore more alternative financing options.


New Basel III capital requirement regulations may strain banking resources in the coming years, but Mitchell said bankers are nonetheless confident that they will have more to lend in the near future.


“But until that bank lending comes back, private financing is going to remain a pretty strong component of the deal environment,” Mitchell said.


The role of politics


Although tax and regulatory policies and requirements could be significantly affected by the presidential election in November, more than half (60%) of respondents said the election will have no effect on their M&A plans.


About a third (35%) said they plan to speed up activity to close before the election, and just 5% said they’re holding back until after the election. Respondents were divided on which choice in the election would be better for M&A.


But the overall sentiment that 60% say the election will have no effect on M&A may be the result of a potentially unusual race between two presidents who have held the office already.


Meanwhile, 61% of respondents said they’re slightly concerned, and 10% are very concerned about the effect of potential tax law changes on deals, and 60% said tax planning or structuring is very important in their deals.


Expectations for improvement


While not all free-response answers predicted an increase in M&A activity, many expressed optimism about the near-future deal market — and for a variety of reasons:

  • “The improving financial market will provide a more robust balance sheet for larger firms to deal in M&A.”
  • “I expect the market to improve in comparison to the previous year with the expected interest rate decrease.”
  • “AI will help speed up the pace of M&A deals as it has become the front face of digital transformation.”
  • “As the demand for decarbonization and sustainability is increasing, industry leaders are looking for companies that provide innovative solutions.”
Brent Johnson

“As you put more of those constraint issues in the rear-view mirror and get some stability and history on what sustained earnings looks like, it puts more confidence in buyers’ minds.”

Brent Johnson

Grant Thornton Partner, Transaction Advisory

Johnson said the reduction of the supply chain constraints that began during the COVID-19 pandemic and continued immediately afterward also might be contributing to optimism on the buyer side. In Grant Thornton’s CFO survey for the fourth quarter of 2023, supply chain confidence surged to a two-year high. The deal environment also may be aided by the abatement of the supersized earnings fueled by government pandemic stimulus payments in 2021.


“A lot of buyers didn’t know quite how to interpret those outsized earnings, and a lot of those waters have receded, and you see some contraction happening in certain places,” Johnson said. “As you put more of those constraint issues in the rear-view mirror and get some stability and history on what sustained earnings looks like, it puts more confidence in buyers’ minds.”


That confidence is translating into strong predictions for M&A growth after a tepid year when a lot of buyers stayed on the sidelines.



Maxwell G. Mitchell

Max leads Grant Thornton’s Purchase Agreement Advisory Practice, having established the service offering for Grant Thornton in February 2019. Max previously performed the same work for Grant Thornton UK. Max has fourteen years of experience providing financial and accounting services to clients.

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