Source: Zhitong Finance Author: Rousseau

After experiencing a period of extreme downturn throughout 2023, global M&A transactions finally rebounded in the first quarter of 2024, mainly due to the return of large-scale mergers and acquisitions in the global technology industry. This trend also cheered and excited investment bankers and lawyers' groups waiting for the full recovery of mergers and acquisitions. According to the latest statistics from Dealogic, the total number of global M&A transactions increased by 30% year over year to about 755.1 billion US dollars. Among them, the number of large-scale transactions worth more than $10 billion jumped to 14, compared to only 5 in the same period last year.

Investment bankers have said one after another that against the backdrop of strong corporate performance growth, the Fed's interest rate cut this year, and a recovery in market activity, confidence within large investment banks in mergers and acquisitions has increased dramatically.

Blair Effron (Blair Effron), co-founder of well-known investment bank Centerview Partners, said: “When you see larger mergers and acquisitions taking place, it's a very direct sign that the overall market is recovering well, because of the nature of large deals, boards and CEOs tend to be more conservative when approaching these deals.” “We really think the M&A activity we are seeing today is moving in the right direction.”

In the US, M&A transactions soared more than 59% to $431.8 billion. The volume of transactions in the European M&A market recovered more sharply, with transaction volume growth reaching 64%, but the transaction volume in the Asia-Pacific region declined by about 40%. The deal makers said that in$Astera Labs (ALAB.US)$und$Reddit (RDDT.US)$After the success of these two major targets, the M&A market may show a further recovery trend after the US stock market is listed, which may boost M&A transaction channels.

“We have obtained two important data points in the IPO market.” Tyler Dickson (Tyler Dickson), head of investment banking at Citigroup (Citigroup), said: “It made the CEOs, boards, and financial sponsors we're talking to feel that there may be multiple ways to achieve their immediate goals rather than just one path.”

Krishna Veeraraghavan, global co-head of mergers and acquisitions at Paul, Weiss, Rifkind, Wharton & Garrison, said: “We are still waiting for the private equity business to actually improve — this is still a missing part of the story.” “Based on current interest rates, there is still a mismatch between what sellers expect of their assets and what buyers are willing to pay.”

In the first quarter of 2024, several large companies used strong valuations to finance large transactions, while some investment-grade companies borrowed capital at high costs to pursue high-value goals.

Investment bankers and M&A lawyers have said that as market concerns about the US recession subside, cash-rich buyers are chasing mergers and acquisitions goals, and their channel metrics seem very strong.

Ivan Farman (Ivan Farman), co-head of the Bank of America (Bank of America) global mergers and acquisitions business, said: “The basic situation may be that the US economy has a soft landing and inflation is under control.” “As a result, the board and management team feel more secure about the future, which is an important time when they are more likely to seek M&A deals.”

Capital One bought Discover Financial for $35.3 billion, and Synopsys, a leader in EDA tools necessary for chip design, bought design software competitor Ansys for $35 billion. $Diamondback Energy (FANG.US)$The $26 billion acquisition of Endeavor Energy is the largest merger and acquisition deal of the quarter.

Furthermore, structured transactions, including spin-offs, divestments, and spin-offs, have also boosted the scale of mergers and acquisitions. Large listed companies have carried out strategic assessments to either divest non-core divisions or spin-off fast-growing businesses to achieve huge cash flow in the short term.

Notable deals include building materials giant Holcim (Holcim) divesting its North American business, which could have an overall valuation of $30 billion, and$Unilever (UL.US)$Divestiture of its ice cream business.

David Dubner (David Dubner), head of global mergers and acquisitions structures at Wall Street bank Goldman Sachs, said that the world announced 13 corporate spin-offs estimated to be worth more than 1 billion US dollars this quarter, compared to 8 in the same period last year. Dubner said, “2024 is likely to be one of the years with the highest number of major corporate splits. Looking ahead, ongoing dialogues and related processes support this theme.”

The 2024 Federal Reserve interest rate cut can be called a “foregone conclusion”, and the recovery in mergers and acquisitions transactions is likely to reach its climax

At a press conference after the Fed's March interest rate decision, Federal Reserve Chairman Powell reiterated that the first rate cut after the Fed's interest rate hike cycle may be “sometime this year.”

According to the CME “Federal Reserve Watch Tool”, interest rate futures traders continue to believe that the Fed is most likely to cut interest rates for the first time in June, rather than the 150 basis points that the interest rate futures market once bet on in early 2024 and the March interest rate cut that was commonly bet on. Interest rate cut expectations in the interest rate futures market tend to be in line with the 75 basis point rate cut forecast suggested in the FOMC bitmap for December and March, and there is a sharp decline from expectations of interest rate cuts of up to 150 basis points earlier this year.

Evercore, a well-known investment bank in the US, recently predicted that the Federal Reserve may start cutting interest rates in the early summer of this year, which will further boost the level of M&A activity that is already recovering. CFRA analyst Michael Elliott (Michael Elliott) said that at the end of last year, many investment banks were massively recruiting senior staff. “This trend shows that internal expectations for the economy will recover soon.”

Elliott pointed out that activities in January 2024 increased 15% year over year, and continued strong economic and stock market performance should stimulate people's enthusiasm and drive transaction completion and capital issuance; “Looking ahead to 2024, we believe the improvements in the first half of 2024 will be moderate, then accelerate in the second half of the year. This outlook is driven by two factors: (1) investment banking transactions take time, usually 6 to 9 months, or longer; (2) interest rate cuts are expected to begin in mid-2024.” Elliott wrote in a report.

Morgan Stanley also anticipates a rebound in mergers and acquisitions. The bank's strategist and analyst, led by Andrew Sheets, wrote: “Our financial sector equity analysts expect global M&A volume to increase 50% compared to 2023, as leading indicators light up the green light. Banks indicate that transaction pipelines are being built, and the negative factors of corporate confidence have abated.”

As the downward trend in financing transaction costs becomes more obvious, the Federal Reserve's most aggressive interest rate hike cycle in recent years has come to an end, and the interest rate cut cycle is about to begin. These factors have all created conditions for bold mergers and acquisitions. Bill Anderson (Bill Anderson), head of Evercore's global rights protection and defense business, said that the M&A market is recovering faster than Evercore's previous expectations; Evercore predicted in August last year that the market would have to wait until the second half of 2024 before the Federal Reserve could relax its interest rate policy, and the M&A market is expected to recover at that time.

The recovery trend in M&A transactions can be described as a huge boost for M&A industry leaders like Evercore. Previously, these giants in the M&A consulting sector had to endure a sharp decline in transaction activity for two consecutive years.

“Major mergers and acquisitions” in the technology industry are showing a return trend

In the past ten years, the global technology industry has often been the biggest driver of mergers and acquisitions, but it also experienced a period of extreme downturn last year. However, since 2024, the scale of mergers and acquisitions of global technology companies has recovered to US$153.8 billion, an increase of more than 42%, making it the largest share of M&A transactions.

Driven by consolidation activities in the extremely lucrative Permian shale oil basin, major transactions in the North American oil and gas sector have shown no signs of slowing down. At the end of last year, these deals supported the entire M&A market's transaction scale.

“We've recently seen more all-share transactions. The financing market cannot yet fully support large-scale all-cash transactions. Furthermore, given the economic cycle we are in, the management team seems unwilling to increase leverage to make a big deal.” Mark McMaster (Mark McMaster), head of global mergers and acquisitions at Lazard, said. According to the latest statistics, the volume of leveraged buyout transactions, which declined sharply due to soaring financing costs, fell sharply by about 7% in 2023 to US$91 billion.

Notably, some technology companies around the world are braving a tough anti-monopoly environment to seek large-scale mergers and acquisitions to support themselves in overcoming antitrust regulatory challenges in court on an increasingly large scale. Dwayne Lysaght (Dwayne Lysaght), co-head of J.P. Morgan's EMEA mergers and acquisitions business, said companies must be willing to wait 18 months or more to complete the deal, adding that the time required to complete the deal has increased dramatically.

“The tech industry is the industry most scrutinized by regulators, but the tech industry seems to have substantially returned and is at the cutting edge of trading activity. So this just tells you that current regulatory issues will definitely not be a deterrent to larger tech companies' broader mergers and acquisitions activities,” said Raul Gutierrez (Raul Gutierrez), head of mergers and acquisitions at Truist Securities.

Investment bankers also expect the scale of cross-border transactions to increase as cash-rich buyers seek out transformative mergers and acquisitions. Statistics show that in the third quarter of last year, the volume of cross-border M&A transactions increased 17% to US$171.7 billion, which is one of the brightest performing areas in sluggish M&A transactions.