DUBAI, UAE – The total M&A market dropped 15 percent, to US$3.2 trillion, the lowest level in a decade, as dealmakers grappling with high interest rates, regulatory scrutiny and mixed macroeconomic signals had to be more selective about which deals to pursue in 2023.
But the biggest obstacle was the gap between valuations. At 10.1 times, overall strategic deal multiples were the lowest in 15 years, a press release said.
Looking ahead, many of the assets that didn’t come to market last year will fuel active dealmaking in 2024. These are among the findings of Bain & Company’s sixth annual Global M&A Report.
“The drop in deal multiples led to a wait-and-see atmosphere in 2023, with many sellers hesitant to come to the table at a market bottom,” said Les Baird, partner and head of Bain & Company’s global M&A and Divestitures practice.
“This year, buyers have their eyes on a growing backlog of deals. A need for liquidity will motivate some sellers, while others will divest assets while reshaping their portfolios. As interest rates stabilize, we expect the logjam in M&A markets will break,” he said.
Beneath the surface of 2023 dealmaking
The collapse of technology M&A has been the biggest drag on strategic M&A. Tech deal values declined by roughly 45 percent as median valuations tumbled from 2021 high of 25 times to 13 times in 2023.
Megadeals made a mark in the second half of 2023, a possible signal that dealmakers are ready to look forward.
The year 2023 showed a widening of the gap between how frequent acquirers and their inactive peers behave in M&A downcycles. Most frequent acquirers never stop doing deals even as the market overall contracts. This is significant as Bain’s long-term research shows frequent acquirers outperform in total shareholder return and that this margin continues to grow.
“Throughout history, economic downturns and periods of upheaval have consistently given rise to resilient competitors who have capitalized on the chaos to gain ground in the market,” observed Gregory Garnier, leader of Bain’s Private Equity and Sovereign Wealth Fund practice in the Middle East.
He highlighted the burgeoning trend of investments by Sovereign Wealth Funds (SWFs) in Asian companies, particularly aimed at revitalizing manufacturing and fostering innovation within the Middle East.
According to the data presented in the M&A Report 2024, the value of SWF deals with Asia saw a remarkable upsurge of nearly 60 percent during the first three quarters of 2023, signaling a strategic shift towards increased investment in the region.
The M&A Report 2024 sheds light on the transformative role of SWFs in redefining the economic landscape of the Middle East, steering the region beyond its traditional dependence on oil and gas.
Notably, SWFs have emerged as the primary drivers of investment activity in the GCC, collectively representing a staggering 86 percent of the total deal value, underscoring their pivotal influence in shaping the region’s investment landscape.
“The Middle East is undergoing a significant shift towards accelerating the energy transition, with a growing emphasis on clean energy investments and ambitious net-zero targets,” said Elif Koc, a partner at Bain & Company Middle East.
“Through strategic investments, sovereign wealth funds are leading the charge in reshaping the economic future of the Middle East, diversifying beyond oil and laying the groundwork for sustainable growth and prosperity,” she said.
An evolving regulatory climate
At least $361 billion in announced deals were challenged by regulators around the globe over the past two years.
Among the $255 billion of those deals that ultimately closed, nearly all required remedies. While most contested deals do make it to close, new research from Bain shows timelines for scrutinized deals have extended considerably.
The pre-close period, that crucial and vulnerable phase between announcement and close, can stretch from quarters to years.
The regulatory climate continues to evolve. For example, regulators have focused on deals in technology and healthcare, given wider concerns about competition and consumer well-being in those industries.
Even as the rulebook changes, companies looking for growth and transformation are staying in the M&A game. The best-prepared acquirers use extensive diligence to wrestle the deal thesis to the ground, confirming a base case with plenty of upside to withstand the twists and turns of deal approval.
Generative AI in dealmaking
Bain’s survey of over 300 M&A practitioners shows that while only 16 percent are currently deploying generative AI for deal processes, 80 percent expect to do so within the next three years.
Early generative AI users are focused on process efficiencies in the early stages of the M&A process idea generation in sourcing and reviewing data in diligence. A full 85 percent of early users reporting that the technology met or exceeded their expectations, and 78 percent say they achieved productivity gains from reduced manual effort.
Practitioners are quick to point out challenges too, identifying data inaccuracy, privacy, and cybersecurity as the most concerning risks to using generative artificial intelligence for M&A.