Will 2024’s recovery be (Taylor) swift, paramount or out of time?

With growing confidence in the US, rising M&A, stock markets climbing and a growing expectation of monetary easing, will this promising first quarter be the start of a prolonged and sustained resurgence in capital markets and investment banking? Deals Intelligence experts Matthew Toole and Lucille Jones joined IFR’s Anthony Hughes to discuss. This is a summary of their observations.

• Stock market recovery and rising M&A fuel optimism.
• But elections and macro uncertainties increase execution risk.
• 2025 could be the main beneficiary of a mounting pipeline.

A 38% bounce in first quarter M&A, to surpass $800bn for the second consecutive quarter looks like a recovery, and signals a definite change in pace. But the story is still unfolding…

Clearly, we are witnessing a strongly US centric rebound in corporate M&A activity, with US target deals accounting for 61% of overall M&A – the highest level since 1989. That was the year Taylor Swift was born and of Time’s acquisition of Warner, fending off a bid from Paramount. Fast forward 35 years, and the same names are still calling the tunes. 

Sector-wise, 2024 looks like another throw-back, with oil & gas deals supporting an 80% surge in Q1 deal totals. Adding to the renaissance vibe, it’s easy to point to downturns where the US led the recovery, such as the US pharma M&A boom post-GFC. But it is still early days. Europe has up-ticked nicely, driven by the UK and Germany, but China’s 28% decline in M&A continues to drag on the world-wide tally.

The recovery, so far, has been a mega deal phenomenon, with 14 deals of more than $5bn announced so far this year, almost triple the tally in Q1 2023, and the best annual start in six years. The hope is that such large deals are a sign of confidence that will spur on the rest of the market. There is little sign of this yet, with the number of deal announcements down 28% year-on-year.

Every cycle is different of course, and this recovery has a unique set of drivers. Corporate acquirers have discovered a fungible asset with their name on it. Partial and all-stock purchases, off the back of strong stock market performance across the world, is driving this next wave of deals, with mega transactions such as Capital One’s all-stock offer for Discovery.  

Meanwhile, private equity sponsors are also returning to the market, deploying capital in $160bn worth of deals to take a 19% share of all deals in Q1 – lower than the 25% record slice they took in 2023, but still historically high. 

A less endearing feature of this market is the increasing lag-time between announcement and completion, as regulators and competition authority’s elongate authorisation processes to an average of more than eight months, and up to two years in several cases.

With the world’s stock markets hitting all-time highs, you would be forgiven for thinking that IPOs were ‘back’. However, Q1 world-wide flotations are flat year-on-year, depressed by China’s continued slump in new issues. Again, the US looks much more promising, both in terms of IPOs, as well as convertibles and follow-ons. Wall Street banks are reporting robust numbers for equity underwriting, with revenues up by between half and double last year’s levels.  

Currently, there are five large IPOs on the road in US, and several in Europe, including private equity group CVC Capital Partners. We are even seeing the re-emergence of tech |POs, with candidates such as Microsoft-backed Rubrik, which would be the first tech of the year and only the second since 2021. 

As with M&A, the broader stock market resurgence has been top-heavy, with a few large stocks in the S&P 500 dragging everyone up, while small and mid-cap indices continue to struggle. On the flip side, there is a notable broadening of industry types looking at IPOs. Clearly anything with a strong AI story will be popular (it’s worth noting that software valuations are still well below 2021). Overall, it’s a market that values certainty over promise, conservatism over leverage, profitability now overgrowth later.

How the year will pan out for US IPOs is a question for the connoisseur. April and May tend to see the biggest listings, but in an election year, September may prove the popular window. Bankers in ECM are optimistic for 2024, but the expectation is that the high-profile mega deals will probably hold out for 2025.

That will be the year of the Green Wood snake in the Chinese zodiac, a wise creature capable of solving complex problems. With US listings becoming politically difficult for Chinese companies, IPO advisers may have to exercise subtlety if international investors are to access new equity from the region. 

It's a strange time - banks say their pipelines are bloated but there is still an empty feeling. Meanwhile private financing markets are growing ever faster, but they can’t absorb everything, and even those active private equity sponsors will eventually need to find exit routes.

Things may unblock this year, or they may trickle on a while longer. Sooner or later, the dam will burst. That will be a relief, but will even that offer a return to 2021’s deal and fee bonanza? Probably not.