Mergers and acquisitions across the Americas have been down overall throughout 2023. Yet as the year draws to a close, there are encouraging hints that the economy and the credit markets are stabilizing. How should dealmakers respond? Financial Times partnered with Datasite for a panel discussion on how savvy M&A professionals can position themselves for the coming year.

2024: A Return to Normal?

Looking ahead to next year, the speakers agreed that the outlook is generally positive. M&A activity seems poised for a modest upswing in 2024.

Mark Williams, Datasite’s CRO for the Americas, noted that the number of projects initiated on the platform is up as the year winds down. Pipelines are growing, more assets are coming to market, and both buyers and sellers are adjusting to the higher cost of capital.

This shift seems to be driven largely by the emerging signs that the economy is bouncing back. Interest rates are showing signs of plateauing after more than a year of repeated hikes. And Thais Garcia of Clifford Chance said that the prospect of a recession is no longer looming as large. She’s hearing that many clients are ready to go, doing their homework, and feel more confident than they did last year. 

However, anyone hoping for a return to the free-flowing credit of the pandemic years should prepare for disappointment. David Humphrey, a partner and co-head of North American Private Equity for Bain Capital, said he views the period from late 2020 to early 2022 as a historical aberration. He expects deal profiles more reminiscent of 2018 and 2019 to prevail moving forward.

Interest Rate Forecast: Hope For the Best, Plan for the Worst

Moderator Antoine Gara of Financial Times asked the panelists how confident they were that the cycle of interest rate hikes is over. The consensus was that while things look good, firms should still take precautions.

Christopher Blum, who heads up both Sectors & Advisory and the Corporate Clients Group at BNP Paribas noted that they are advising clients to prepare for the worst as one of the most important things they have learned is the importance of hedging. 

Gara noted that Bain had taken significant hedge positions back in the heady days of 2021 he asked Humphrey if present conditions call for a similar approach.

Humphrey said that while there’s always some value in buying protection for capital structures, the cost of hedging new investments was much lower in 2021.

Alternative Deal Structures May Be Here to Stay

Though deal activity is picking back up, a substantial valuation gap is still hampering many transactions. The group discussed some of the tactics dealmakers are using to overcome it.

Blum pointed to a few approaches, including partial monetization and portable capital structures. He also said that he’s seeing more use of creative deal structures such as securitizations or sponsor agreements to defer part of the purchase price.

Garcia agreed that there’s a greater interest in these kinds of deals. She also noted that earnouts are increasingly part of the conversation — while they’re not yet the norm, her clients are becoming more open to exploring them. Other non-traditional options that are gaining more traction include preferred equity and secondary transactions.

Gara asked the panelists if they see this move toward more complex structures as a positive shift or more as a necessary evil. The consensus was that these innovations can be helpful in some circumstances, such as when there’s a valuation gap or a need for a risk-sharing mechanism. However, there’s always a cost in time and effort.

Humphrey noted that even in today’s environment, valuation gaps can also be closed the old-fashioned way: by sellers bringing assets to market and finding out if buyers will pay their asking price. This kind of “reality check” may become increasingly common as the M&A market thaws.

Carve-Outs Could Be a Significant Driver of Corporate M&A

On the corporate side of the market, the panelists noted that both buyers and sellers are showing a rekindled interest in transformational deals.

Blum mentioned that as the cost of capital is projected to increase, core assets may become non-core with a significant number of carve-outs happening over the next few years.

That doesn’t just apply to small deals, either — he said he’s anticipating quite a bit of activity in the $5-10 billion range.

Garcia seconded this forecast and added that she’s also seeing lots of buyers (both PE and corporate) looking at add-ons.

Williams mentioned that activity on Datasite backs up this forecast. He said that inflation, and its impact on the 5-to-10-year business case, is top of mind for corporate development teams as 2023 draws to a close.

Meet the New Normal, Same as the Old Normal

Taken together, the panelist’s observations suggest that there’s genuine cause for optimism about the state of M&A in the Americas as we approach the new year. The market seems to be finding its feet, and dealmakers are beginning to adapt to the new landscape — which may look a lot like it did before the pandemic.

At the same time, some of the legacies of 2022 and 2023 may remain, such as the increasing acceptance of earnouts and other alternative structures. As Gara put it, it may be time for a return to “the craft of the deal.”