Due diligence dinner: How much M&A activity is on the menu for 2024?

What a pleasure it was to partner with the Financial Times at our M&A dinner last week in New York.

Just as advertised, every seat at the long dinner table was filled by a unique perspective on how to navigate today’s deal environment. We’re all experiencing the economic uncertainty of multiple challenges—geopolitical instability, evolving regulatory environment, activism investment, looming elections and more—impacting the market. 

Personally, I see a greater focus on the cost of capital and the added pressures on investors and corporations seeking new M&A activity. Right now, creating value in transactions requires a dedicated approach to due diligence that moves at lightning speed; financing and deal structuring has become more complex and involves a more diverse set of investor groups. Given regulatory and electoral uncertainty, the mix of M&A activity is likely to bias towards carve-outs, take-privates, and vertical integration with limited horizontal opportunities.

In the past 12 months, the M&A market disappointed deal makers and market participants, leaving everyone hungry for more. At one point in 2023, activity volumes dropped almost 40% year-on-year—the lowest level in four years. 

However, looking ahead, the dinner guests shared a more optimistic tone, with nearly everyone interpreting the macroeconomic indicators as suggesting 2024 will be the time to pursue a deal, citing the fact that CEOs and other parties appear more positive about M&A now than they did a year ago. If market makers are searching for transactions, it is likely a positive sign for M&A activity.

What does all this mean from a due diligence perspective? Following are some of the key trends we discussed over dinner:

1. Financing. Options in this high interest rate environment are gnarly with significant uncertainties ahead. An in-depth diligence (ODD or CDD) that rapidly tests the investment thesis is the new normal in the market—one that is truly bankable and can feed into a wide range of scenario planning. This is driven by increased need to raise capital from a broader range of asset class participants (e.g., private equity funds, sovereign wealth funds, pension plans, private credit lenders, etc.). 
2. Technology. Companies sometimes sacrifice tech upgrades to drive short-term cashflow, which leads to future challenges due to outdated technology. Due diligence teams need to be able to quickly identify those areas and associated risks to the business’ future performance.
3. Value creation. Disruptive forces, structural industry changes industry, and high interest rates have collided to make value creation more urgent—and more difficult—at every stage of the investment cycle. In today’s fast-changing geopolitical and economic environment—including supply chain disruptions and regulatory uncertainty—due diligence has to take on a forward-looking view in a variety of scenarios. Finding an attractive asset, acquiring it at the right price, and successfully executing a value creation plan post-acquisition are all critical components to success; but the true test comes in realizing the value and returns upon exit. A thorough approach to due diligence can de-risk the transaction for potential buyers.
4. Regulation. If the market and industrial economics behind a transaction are strong it should be aggressively pursued with the foresight that regulatory and sign-to-close timelines may be long and uncertain (given the regulatory and political environment). This is a cyclical challenge where strong opportunities require a through-cycle planning horizon.

As we talk to executives around the world, my team at AlixPartners view the recent changes in the market as positive suggestions that conditions are stabilizing. Yes, there is still geopolitical and political uncertainty, but a steady global economy should boost M&A activity into next year’s diet and possibly beyond.