Dealmaking outlook: unsettled, with bright spots

The sense of anticipation in capital markets at the start of 2024 has rarely been higher. LSEG’s Deals Intelligence experts, Matthew Toole and Lucille Jones, took a closer look at the trends in M&A and equity/debt issuance, in a hotly-anticipated online session. Their take: while many of the aggregated results for 2023 look dismal, a closer (quarterly, regional and product-based) view reveals a surprising level of positivity for the year ahead. 

• A sub-$3trn 2023 for M&A, but new year pipeline gives hope.
• Rising follow-on equity in 2023 signals latent appetite.
• Unstoppable debt capital markets hit $8.9trn for FY2023.

The combined value of global M&A transactions failed to reach $3trn in 2023 – depths not seen for a decade. While the trend in the latter part of 2022 was downward, this further deterioration was a “plot twist” few were expecting, particularly following the heady Covid years when deal values were twice this level. 

A 17% year-on-year decline in M&A to $2.9trn during 2023 marked a second consecutive annual double-digit fall and represents the severest contraction since the global financial crisis. Every major segment of the corporate world was affected, with cross-border, domestic, mega, private equity and emerging market all seeing declines. 

However, a quarterly view tells a more promising story: there was an overall tone change in the last part of 2023, with an improving tone in the market and an end of year rush to announce deals that fed into a markedly stronger Q4 for world-wide announced M&A, up 20% from Q3, and the strongest three-month period for 18 months. It is also notable that there was a clear pick up in mega deals, with 11 announced in the quarter part of the year.

In addition, there were more than 55,000 deals completed in 2023, which is down on the previous two years, but more than all other full year deal counts since our records began in 1980. 

And consider the confluence of macro-economic challenges: steeply rising interest rates, broader concerns around the economy, stricter anti-trust rules, geo-political tensions, bank failures and conflict. Is it so surprising that this tsunami of external factors put the brakes on the complex and delicate activity of corporate acquisitions?

Regionally, the Americas were down just 7%, where the US led the way in M&A, with a decline of just 5% on 2022. Most of the year’s landmark deals involved a US company. 

This is in stark contrast to most other regions, with Europe down 28% (including a eye-catching 43% fall in UK M&A), while Asia-Pacific fell 26%. But these full year figures are ameliorated by an improving picture towards the year-end, as well as some significant deal activity that is coming through into January 2024.

Energy & Power was 2023’s top sector, constituting 17% of all deal activity globally. The value of deals in the sector rose 12% to a round $500.0bn, boosted by two very large acquisitions by US oil majors towards the end of the year. With rising oil prices as a consequence of geo-political unrest, we could see more free-cash available for consolidation activity in this sector in the year ahead. 

Healthcare has been another bright spot, and one of the few sectors that grew, by 8%, in M&A activity in 2023, as most of the big pharma names put their Covid era cash piles to work. 

Technology M&A saw a heavy 47% decline to $368bn, although we should remember that we are comparing to a year that saw two of the largest tech deals of all time: Microsoft’s acquisition of Activision Blizzard and Broadcom VMware, both valued at more than $60bn. 

Private equity activity fell 29% year-on-year, but still accounts for an historically high one-fifth of all M&A. While financial sponsors are active across sectors, interest in technology, and software in particular, stood out, constituting the lion’s share of PE deals by number. As interest rates begin to stabilise, we may see more activity from financial sponsors.

IPO markets declined a further 24% in 2023 to $113bn, the lowest level for 14 years. Many flotations were pulled or postponed during the year. Flotation proceeds on US exchanges doubled during the year, albeit from a low base. 

More encouraging was the market for follow-on equity financings, which grew by 17% to $323bn during 2023, indicating continued appetite for quality names. Meanwhile convertible issuance was up 34% to $93bn, a level that could be surpassed in 2024 as companies need to refinance maturing debt.

While the astonishing levels of debt capital market activity witnessed since the pandemic have come off slightly, they remain at an historically elevated level, with $8.9trn debt capital raised across all products, and a 6% increase on 2022. 

Global investment-grade corporate bonds were up 5% to $4.3trn for 2023 overall (although with a notable downward trend towards year-end), while high-yield saw a major resurgence, with a 66% growth in issuance to $219bn.

Meanwhile, international bonds were up 7%, despite some weakening in Asia, including in China, hampered by depressed M&A markets. 

In addition, global syndicated loans were down 15% in 2023 to just $4.3trn – a market significantly dependent on the health of M&A markets. 

Even so, DCM remains a tremendously dynamic market, with plenty of innovation and a plurality of funding activity across the world. As rates stabilise, we could expect continued growth across these markets, and indeed our team already report a very strong January, with the number of issuers coming to market in the early new year.

A case-in-point are green and social bonds – the latter coming-of-age during the pandemic era. In 2023, green bonds grew 10% in 2023 to reach $422bn. A general focus on sustainability has become very mainstream for issuers in the DCM area and represents about 10% of the market across all categories. 

Responding to questions around green-washing, our speakers noted a marked shift to a growing linked market, where the cost of finance is linked to sustainability KPIs. So far, we have not seen a decline in returning issuers. However, there is a lot of maturing debt this year, so it will be revealing to monitor who comes back to market.

It is no surprise to see global investment banking fees took a 7% hit in 2023, to total $106bn, the slowest year since 2018, with income dented by subdued M&A, where income fell by a quarter.

The Americas contributed 47% to the global total, taking home $49.6bn, while EMEA bankers saw a 6% fall to $25bn and a similar decline in Asia-Pacific took income to $27bn. Bucking the trend, Japanese dealmakers enjoyed a 24% increase compared to 2022. 

The total share of wallet by the top 10 banks totalled 36%, a fall of 1.25 percentage points in 2022. While a handful of global US banks continued to dominate the global capital markets across most categories, there are interesting strategic plays being initiated by several European and Japanese banks that could make for interesting competition in the years ahead.