EY Deal Barometer Predicts M&A and PE Deal Volume Rise In 2024

A new market trends barometer predicting M&A and PE deal volume points to a double digit rise in both indicators as we make our way through the year. Mitch Berlin, EY strategy and transactions Americas vice chair, shares his 2024 dealmaking outlook. Hunt Scanlon Ventures founder, Scott A. Scanlon, digs into the new research.

EY just launched its first-ever EY Deal Barometer which uses historical economic and financial market indicators to predict future trends and deal volume outlooks in corporate mergers and acquisitions (M&A) and private equity (PE) deals. 

At the moment, the Deal Barometer is predicting that corporate U.S. M&A deal volume will rise by 12% year-over-year in 2024. U.S. PE deal volume, meanwhile,  will rebound 13% in 2024.  

According to EY’s latest market data analysis, global economic activity is expected to remain subdued and de-synchronized in 2024 with rising geopolitical tensions and tightening financial conditions as key downside risks. Still, the U.S. economy is likely to continue to outperform its peers in terms of GDP growth, with profit margins likely to stabilize and slowly turn higher by the end of 2024. 

Downward Rate Pressure

With inflation cooling faster than expected, the Federal Reserve has reached the end of its historic tightening cycle, according to Mitch Berlin, EY strategy and transactions Americas vice chair. While officials have embraced a “higher-for-longer” interest rate paradigm, the Fed will very likely proceed with policy rate, putting downward pressure on interest rates across the yield curve. 

As such, it appears that a proactive strategy of acknowledging and adapting to a higher cost of capital environment will be the most rewarding business strategy. This is all good news to CEOs, chief strategy officers and corporate boards seeking guidance on how this year will likely unfold. 

The Deal Barometer uses historical economic and financial market indicators – GDP growth, corporate profits, corporate bond spreads, CEO confidence, and changes in short- and long-term interest rates – to predict future trends and deal volume outlooks in corporate M&A and PE deals. Analysis of corporate M&A deals focuses on deals that are publicly disclosed and have a value of over $100 million.

Pre-Pandemic Activity Levels

For M&A, corporate U.S. M&A deal volume is expected to gradually pick up through next year, returning to the pre-pandemic levels of activity and rising 12% in 2024, following a nine percent decline last year. The number of deals in 2024 will likely only be about two percent below the average number of deals in 2017-2019. Historically, corporate M&A deal volumes (for deals over $100 million) have been relatively stable around one thousand deals per annum. Like the PE deal space, the pandemic resulted in a large positive shock for deal volumes, registering an impressive jump of more than 40% in 2021. 

For private equity, U.S. deal volumes are likely to rebound 13% in 2024, following a 19% contraction in 2023. While this would still leave deal volumes well below the 2021 peak, it would represent a faster pace of growth than the average nine percent annual pace of growth from 2010 to 2019.

The following composite was taken from a recent letter Mr. Berlin sent to chief executives, heads of strategy and corporate directors. It has been edited for clarity and length.

A more favorable climate seen for enterprise leaders and dealmakers in the months to come.

This month marks the start of my third year as Vice Chair of EY Strategy and Transactions in the Americas. To say the least, I assumed this role at a challenging time: a pandemic still raging, markets volatile, historically high U.S. inflation and geopolitical turmoil. Even as we still navigate these headwinds, I have reason to expect a more favorable climate for enterprise leaders and dealmakers in the months to come.

We are entering a year poised for inflection.

As shown by our first-ever EY Deal Barometer – which uses historical economic and financial market indicators to predict future trends in corporate mergers and acquisitions (M&A) and private equity deals – we enter 2024 poised for inflection. The U.S. Federal Reserve is signaling the end of its historic tightening cycle, and economists say the potential for a “soft landing” is stronger than ever. As a result, corporate leaders, who finally have a line of sight toward a lower cost of capital, are unlocking new growth opportunities.

“Corporate leaders, who finally have a line of sight toward a lower cost of capital, are unlocking new growth opportunities.”

We expect stable growth throughout 2024 and gradual growth beyond.

To be sure, the aftereffects of pandemic shocks that have reshaped the economy, markets, and the workforce are still with us. Moreover, significant risks loom in the coming year. Our permacrisis of geopolitical volatility, slower consumer spending and the impact of disinflation could all pull the punchbowl from the party – to say nothing of what promises to be a fiercely contested U.S. election, as well as other pitched political battles in major global markets. Nonetheless, now that we are returning to pre-pandemic levels of M&A, we expect stable growth throughout 2024 and gradual growth beyond. In our view, now is the time to review capital allocation plans and company portfolios closely. Stakeholders continue to expect returns regardless of economic conditions.

“Corporate leaders do need to prepare for greater information flow and build in longer deal timelines, of up to two or three additional months.”

Lessons learned in 2023 and expectations for 2024 and beyond.

With 2023 in the rearview, the trajectory of the inflection is becoming clearer. Last year saw the U.S. Fed funds rate reach a two-decade high and a bottoming-out in the deal markets. As the cost of capital rapidly surged, slower global economic activity, increased macroeconomic uncertainty and heightened geopolitical tensions led to a severe pullback in dealmaking activity, while a resilient consumer sustained economic growth. Enterprise leaders continued to make transformative deals, especially in sectors where deal multiples came down, such as life sciences, technology and energy. The tech sector in particular was buoyed by the late-2022 emergence of generative artificial intelligence (GenAI), which spurred strategic leaders in 2023 to shift from an experimental phase to begin creating enterprise value. However, many CEOs are finding that buying AI technologies and expertise creates competitive advantage more quickly than trying to build that capability from the ground up.

“On the whole, we are entering 2024 with a positive outlook and new tailwinds.”

Corporate leaders need to prepare for greater information flow and build in longer deal timelines.

At the very end of the year, the U.S. Federal Trade Commission and the Department of Justice issued their final guidelines for mergers and acquisitions. These FTC–DOJ guidelines signal greater scrutiny of deals, but we are advising clients not to lose sleep, or to lose focus on their portfolio goals. Corporate leaders do need to prepare for greater information flow and build in longer deal timelines, of up to two or three additional months – especially when the Hart-Scott-Rodino (HSR) filing requirements are updated around midyear 2024.

Even with these impediments, we expect the number of deals to gradually pick up. For corporate M&A, our baseline expectation is 12% average growth in 2024, and we anticipate a return to pre-pandemic deal volume, with the number of deals in 2024 only about 2% below the average number in 2017-19. On the whole, we are entering 2024 with a positive outlook and new tailwinds. The U.S. economy is expected to outperform global markets. Accordingly, as we chronicled in the October 2023 edition of our CEO Outlook, U.S. CEOs are more optimistic than their global counterparts. Even before the Fed’s repositioning on interest rates, a majority of CEOs in the U.S. (93%) were planning transactions in the coming year, and fully 100% are planning significant investments in GenAI.