M &A dealmakers have been on a wild ride. From the pandemic-fueled rout in 2020 to 2021’s record-breaking recovery, followed by a steep decline in 2023, the global M&A market has offered something of a masterclass in volatility.
Toughened by these swings and successive macroeconomic, geopolitical, and regulatory challenges, many dealmakers are approaching the year ahead not with trepidation, but with a healthy dose of optimism. Yes, they just weathered an exceedingly difficult year for dealmaking. And yes, few can remember a time that was more challenging for M&A.
For all of 2023, global M&A activity dropped 16 percent from a year earlier, to $3.1 trillion. This contrasts with other market benchmarks, such as the S&P 500, which climbed 24 percent last year on the wings of a handful of technology- and AI-driven stocks. A longer-term view shows the depth of M&A’s trough in 2023. For example, in the US, the world’s busiest M&A market, activity dropped to its lowest proportion of S&P 500 market value in 20 years.
With curves like that, we were not surprised to hear a provocative question at a recent conference: “Is M&A dead?”
Our answer is: certainly not.
M&A market durability
A variety of factors supports the global M&A market’s durability. First, with the business landscape experiencing seismic shifts—ranging from the rise of AI to the growing importance of sustainability and the emergence of a more demanding, tech-enabled consumer class—CEOs across industries tell us that M&A is a more vital strategic lever than ever. Organic growth—which never compared well with the most effective M&A strategy—pales further when significant strategic shifts are called for. This is especially true when companies need to adapt quickly.
For example, our latest analysis of the “Global 2,000”—the world’s largest global public companies—found that those making more than two small to midsized deals annually over ten years through 2022 delivered a median excess total shareholder return (TSR) of 2.3 percent. This programmatic approach outperformed all other M&A strategies, including organic growth, which actually destroyed value in the same period. Part of this success stems from actively managing portfolios. Programmatic acquirers are not just acquisitive; they also actively divest nonstrategic assets. In a McKinsey global survey on M&A, respondents from programmatic acquirers were more likely than others to say their organizations conducted divestitures in the past five years.
Strikingly, programmatic dealmakers with the most deals earned the highest returns. Seventy percent outperformed programmatic peers who made fewer deals. And the performance gap between programmatic acquirers and companies pursuing organic growth only widened during the COVID-19 years. Programmatic acquirers achieved 3.9 percent excess TSR in the past decade, up from 2.9 percent in the 2010s. Even with some of the lowest M&A volumes in recent years, our latest research shows that the case for programmatic M&A is stronger than ever (see “The seven habits of programmatic acquirers”).
Cash is another important source of ballast. Unlike past markets, when private equity and principal investors drove much global M&A activity, in 2023 they fled to the sidelines, slashing their activity 37 percent to $560 billion, as they were spooked by high costs of capital, uncertainty about central bankers’ plans, and regulators’ more robust scrutiny of deals. (Indeed, the validity of this last source of uncertainty has been confirmed by the lengthening regulatory review process, which has extended on average by about 35 percent over ten years, through 2022, for the 100 largest global deals annually. Further, the proportion of companies undergoing long-term investigations in Europe and the US increased about 50 percent from 2017 to 2022.)
But private equity (PE) investors may not be so rare in the times ahead. Although they accounted for only 18 percent of deal activity in 2023, they are not likely to linger on the sidelines for long. Some funds will need to consider exit strategies and redeployments in the near term, and others, along with corporate dealmakers, may be aroused by the more than $2 trillion in undeployed capital as of the end of 2023. Although macroeconomic and geopolitical challenges could continue to temper PE interest, that mountain of dry powder nonetheless beckons—a temptation that will grow for PE investors and other dealmakers as they sense a return to greater market stability.
While we live in dynamic times, several factors point to a more favorable macroeconomic environment at this writing.
Higher interest rates have tempered the inflationary trends so worrying to central bankers; inflation now hovers just above 3 percent across the US, Europe, and Asia. Job growth has remained healthy, with US unemployment under 4 percent late last year, while the Eurozone hit historic lows of around 6.5 percent. Consumer spending has also remained robust globally, with US retail sales rising at an annual rate of about 4 percent from a year earlier. This improving picture has buoyed economists’ hopes of a soft landing for the US economy—a sentiment shared by many investors who boosted stock market returns at the end of the year.
Although inflation fears have been receding, concern about geopolitical instability is on the rise. For example, late last year, 67 percent of respondents to a McKinsey survey cited geopolitical concerns as the top threat to global economic growth in 2024—the largest share identifying this as a top risk since shortly after the war in Ukraine began. Concerns about political transitions also emerged as a top risk to global economic growth.
These nearly 1,000 survey participants from a broad range of regions and industries remained largely positive about their own economies, with 46 percent expecting conditions in their home economies to improve in the next six months, and only 26 percent expecting them to worsen. But as the media remained riveted by wars and fractious political conditions in some countries, respondents’ optimism about the global economy and their companies’ workforce growth and profits ebbed a bit (see “Economic conditions outlook during turbulent times”).
Analysts, meanwhile, are more sanguine about corporate prospects for 2024. We ended the year with analyst consensus of about 5 percent growth in revenue for the year ahead, with gains in EBITDA and net earnings of around 8 to 9 percent—a bounty that will not land evenly across industries, they believe (see “Who drove the returns in 2023?”).
What we can learn from 2023 M&A market performance
The performance of various sectors and regions may indicate which areas of M&A are likely to recover most quickly from the global M&A market’s ten-year low in 2023—a decline that followed eight years of mostly stable activity (Exhibit 1).
For all of 2023, global M&A value fell 16 percent to $3.1 trillion—a showing even weaker than the pandemic year of 2020. While the average deal size increased 14 percent, owing to a handful of large deals, the number of companies changing hands fell 27 percent from a year earlier.
With macroeconomic, geopolitical, and regulatory pressures all curbing exuberance, megadeals (over $10 billion) fell 17 percent to $705 billion, but maintained their 23 percent share of global deal activity.
The Americas, buoyed by surprisingly strong economic growth and employment figures, remained the most active market for M&A—accounting for more than half of global activity in 2023. Deal value fell 7 percent to $1.6 trillion, a decline that was softened by the activity of programmatic acquirers and a handful of megadeals. Taken together, the value of deals in the Americas for all of 2023 only slightly trails the pandemic-era 2020 total of $1.7 trillion.
Also boosting activity in the Americas was dealmakers’ continuing propensity for large deals, as the region claimed 11 of the world’s 20 largest deals announced in 2023. Indeed, average deal size jumped 38 percent in the region, to approximately $670 million, even as the number of deals in the Americas fell 32 percent.
M&A markets in Europe and the Middle East (EMEA) had a far rougher 2023, experiencing greater challenges from macroeconomic impacts, as well as geopolitical conflict and volatile energy costs. The value of M&A activity in EMEA fell 30 percent to $721 billion in 2023, while deal volume dropped 29 percent. Average deal size remained stable at approximately $400 million.
Meanwhile, the value of M&A transactions in the Asia Pacific (APAC) region fell 19 percent to its lowest level in a decade, $734 billion, but more acquirers outside the region found appealing targets there—especially in fast-growing economies and countries with relatively low geopolitical risk, such as India. The region overall had net-positive deal inflow for the first time in five years. Japan was a particular bright spot, with activity jumping 49 percent, for example. Greater China drove only about 40 percent of overall deal value—its lowest share in five years. Four industries accounted for about two-thirds of dealmaking value in the region: energy and materials; advanced industries; tech, media and telecom; and financial services. Despite the complexities of vastly different business environments across the region, APAC continues to account for about a quarter of global deal value, up from just 15 percent 20 years ago.
We expect robust dealmaking in APAC in the years to come as multinationals headquartered in slower-growing regions look for opportunities to scale up, consolidate operations, diversify, and advance decarbonization and sustainability initiatives. A World Data Lab report projects that Asia will be home to more than 80 percent of the world’s “new consumers” in 2024—tens of millions of people who can afford to spend $12 or more per day for the first time. Brookings points out that the consuming class will outnumber the vulnerable and poor in the region for the first time in history.
Industry sectors also had varied experiences. Having closed a series of behemoth deals that long kept technology, media, and telecom (TMT) companies in top place as the most active dealmakers, TMT passed that baton in 2023. The GEM sector (Global Energy and Materials) has now become the newest fulcrum of M&A activity globally, claiming 26 percent of transaction value as companies sought to grow core businesses or diversify into adjacencies—signaling their continued faith in fossil fuels (Exhibit 2).
And in a departure from recent years, when PE dealmaking accounted for well over 20 percent of global activity, the dominance of corporate dealmaking grew in 2023 to 82 percent of deal value globally, even as corporate-led value fell 10 percent.
As top executives continued to evolve their strategies through M&A, they kept their focus close to home. Domestic deals remained dominant, delivering 72 percent of deal value. However, the proportion of cross-regional deal activity increased—up four percentage points to 17 percent in 2023—as pandemic-era fears continued to recede (Exhibit 3).
Looking ahead
While the timing of a full-throttle M&A market recovery is not entirely clear, global M&A activity gathered steam toward the end of 2023, supporting many leaders’ view that opportunities would open up precipitously (Exhibit 4).
The value of global M&A activity jumped 41 percent in last year’s fourth quarter from the third quarter, and 37 percent from a year earlier, to $1 trillion. The number of companies changing hands also increased 7 percent from the third quarter. With many dealmakers regaining a sense of exuberance, average deal size jumped 32 percent from the third quarter, to $550 million.
All regions participated in the M&A market’s fourth-quarter surge. The value of companies changing hands in the Americas jumped 39 percent from the third quarter, while the average deal size grew 47 percent.
EMEA had an even stronger recovery in the fourth quarter, with the value of deal activity increasing 60 percent from the third quarter, while average deal size jumped 63 percent.
Only numbers like these could make APAC’s improvement appear somewhat muted. The value of APAC M&A activity increased 29 percent in the fourth quarter from the third, and 15 percent from a year earlier. APAC was the only region with an increase in the number of transactions.
How to prepare
In anticipation of a market upturn, many leading CEOs across industries and regions are grooming their M&A teams—and their boards—to be ready to leap. Companies are addressing regional and industry shifts with dealmaking aimed at enhancing or reshaping businesses. In addition to acquisitions (increasingly structured in ways to mitigate risk), transactions often include divestitures and a variety of partnerships. Leading transactors are also prioritizing actions aimed at achieving superior performance in M&A, with the most effective dealmakers finding many ways to stack the deck in their favor.
To get ready for what could be a wave of transactions in 2024, companies can take important steps now:
- Re-evaluate M&A themes and update strategy, invest in capabilities and assets that will effectively evolve the portfolio, and consider divestitures as actively as acquisitions.
- Shift M&A themes to mitigate increased geopolitical risks—for example, by emphasizing localization rather than geographic expansion, targeting sectors with stronger market outlooks, investing in vertical integration, and strengthening supply chain resiliency.
- Establish a higher bar for value creation to offset higher costs of capital, and think broadly about different kinds of synergies—not just cost or revenue-bound but also capex; not only combinational, but also transformational synergies.
- Pursue partnerships and alternative deal structures—such as JVs, alliances, and public market buyouts—to offset the reduced availability of debt financing.
- Use alternative structures to reduce transaction risks, such as milestone payments.
In this collection of articles, we offer in-depth discussions on trends and best practices to help you navigate the global M&A environment in 2024. We offer perspectives on some of the critical issues likely to influence performance in a variety of sectors as well as insights on issues of central importance to leaders.
