Mergers & Acquisitions Report, News and Outlook for Q1 2024

Q1 2024 Outlook Mergers Acquisitions

In the central region of the United States, M&A activity has remained robust, but across the broader United States, activity was muted in the first half of 2023, picking up through the remainder of the year. Looking ahead to 2024, two factors that will likely bring greater activity: i) stabilizing interest rates contribute to higher valuations and/or higher activity, and ii) consolidation trends in many industries. For the first time in recent memory, more acquirers have been financing deals all equity (cash), although follow on acquisitions would often comprise leverage.

Remaining headwinds are geopolitical tensions and shifting antitrust regulation (although antitrust policy disproportionately impacts larger transactions with minimal impact on the lower middle market).  For the past year, analysts had talked of recession fears that diminished some buyers’ appetite for risk and increased the number of buyers renegotiating deals.  Bolder strategic acquirers with a strong balance sheet used this opportunity to pursue M&A discussions that may not have been well received in 2022’s peak dealmaking.  Notable M&A initiatives across multiple sectors include ESG (energy transition, decarbonization, social impact) and digitization (emerging technologies and AI to leverage capabilities, workforce and increase efficiency).

Broader Positives for 2024 M&A activity

  • Strong balance sheets: both strategic and private equity acquirers have abundant cash available for acquisitions.
  • Price expectations: the gap between buyers’ and sellers’ price expectations has been shrinking, allowing deals to transact that may not have in recent years.
  • Creative dealmaking: with greater awareness of the increased cost of capital and higher costs of financing, sellers and buyers have been more creative in deal structure to get a deal across the finish line.
  • Supply chain: with supply chain challenges of 2020 a recent memory, some acquirers have been looking to joint ventures, merges and acquisitions to reduce supply chain risk and gain greater control.

In the section below, we consider the M&A outlook for several key industries in our region.

Aerospace and Defense
Deal activity in Aerospace and Defense is focusing on portfolio optimization and acquisitions to build capabilities and programs in the lower middle market.

Passenger air travel is thriving in the US, as Americans feel free to travel domestically and internationally, having spent years dealing with COVID travel restrictions. With more passengers flying and increased airline activity, greater earnings, and strong tailwinds, we anticipate increased deal activity among companies that serve the airline industries.  Two examples of note: JetBlue’s attempt to acquire Spirit Airlines and Alaska Airlines announcing a deal to purchase Hawaiian Airlines.

Defense spending continues to be on the rise given the geopolitical events around the world.  Higher defense spending also fuels innovation and digital infrastructure development with emerging technologies and manufacturing.

Technology remains a catalyst for change in both aerospace and defense with AI, cyber, hypersonics, and space as priorities.  Precision 3D printing in aerospace grade materials creates efficiency in the design and manufacturing of drones and other aerospace equipment and remains a focus of investment.

Business Services
The HVAC industry continues to experience high deal activity.  Companies are expanding their corporate development teams to handle the activity, which is in turn driving additional activity.  HVAC companies are also diversifying, acquiring electrical or mechanical add-ons to improve their platform diversity and increase growth.  Due to the essential nature and consistency of the industry, deals will continue in this space.

Landscaping and pest control are expected to have continued robust deal activity, particularly in the South which normally leads in deal volume.  Trends of outdoor living, urbanization, and rising home damage due to pests will drive the demand for these services.  High market fragmentation means many opportunities to gain market share through M&A.

Chemicals deal activity through the remainder of 2023 will be driven by capital availability, portfolio optimization, solutions for environmental challenges, sustainability, and supply chain security. To mitigate supply chain issues, chemical companies have been targeting manufacturing capabilities across multiple regions. M&A offers a faster approach than start up and new-build production.

Companies with strong balance sheets and dry powder gain the advantage by being able to execute deals quickly, while inflated costs of financing have companies with less cash looking for alternative acquisition financing.

The oil and gas sector had a quieter third quarter with deal values down quarter over quarter and year over year. However, two notable megadeals were announced early October: Exxon’s acquisition of Pioneer Natural Resources and Chevron’s takeover of Hess.  Exxon has recently received information requests from the FTC on their proposed acquisition.

For the first time in several years, we have visibility into the M&A upswing. While reduced access and higher cost of capital softened deal activity in the beginning of the year, there are many new energy deals coming to market, with some anticipated IPO activity as well.  While many private equity investors that had participated in the previous cycle remain on the sidelines, activity and valuations are starting to pick up again.

Some companies see this environment as a time to strengthen balance sheets and offload non-core businesses, while smaller privately held companies may find attractive targets in these divestitures.  For other oil and gas companies, this is a suitable time to acquire assets that support long term strategies that could be beneficial in a future regulatory environment.

Engineering and Construction
M&A activity slowed in engineering and construction during 2023.  Higher interest rates impacted not only the E&C companies, but also created headwinds for their customers. However, the right deals can still create value with new markets or synergies that fit a company’s long-term growth strategy.

In addition to technological advances, engineering and construction companies have real opportunities to benefit from tax incentives tied to decarbonization.  Acquirers are looking for targets with lower carbon technologies, offsite construction, and responsible sourcing.

Since the passage of the Bipartisan Infrastructure Law, project applications continue to flow into the department and around 45,000 projects have been approved and funded in all 50 states.  Projects include clean water infrastructure, repaving roads and rebuilding bridges, upgrading the power grid, affordable high-speed internet, and increasing infrastructure resilience.  This has also contributed to job growth and M&A activity in these target sectors.

Deal activity in healthcare remained elevated during the third quarter.  Deal volume was higher than previous third quarters and deal values were above historic levels, but lower headline numbers due to the absence of any healthcare megadeals.

One interesting note from Q3 deal activity was that one in three announced transactions in the hospital and health systems subsector cited financial distress as a driver for the event.

Higher interest rates have impacted earlier stage public biotech companies with large R&D budgets and higher costs of financing. Pharmaceutical M&A hit record highs as larger companies looked for innovation by acquiring earlier stage biotech companies. M&A transactions have focused on drug research with higher likelihood of clinical trial success and a large market in the event of approvals, including cancer, rare diseases, and immune system disorders. However, these acquisitions have been in high demand, so valuations have been remarkably high.

Industrial Manufacturing
The US manufacturing Purchasing Managers’ Index (PMI) registered slightly above forecast at the end of Q3, indicating a slow recovery.  Inventory optimization over new purchases, decline in post-production inventories, lower output, and lower order numbers, as well as cost increases, all add to industrial manufacturing sector contraction.

Higher interest rates have led companies to focus on portfolio alignment to fill strategic gaps or divest non-core assets. Industrial manufacturing remains a high demand sector for acquisition activity and many more acquisition opportunities are expected to hit the market beginning in 2024.

Strengthening resilience and efficiency in supply chains and pressure to automate and digitize continue as themes driving industrial manufacturing deal activity.

Transportation and Logistics
Transportation and Logistics deal activity continued to be muted through Q3 due to macroeconomic conditions like high interest rates and labor uncertainties dampening consumer spending.

Supply chain disruptions are an ongoing issue for Transportation and Logistics. Companies are looking to keep inventory closer to consumers, while investing in technology to help manage and increase the efficiency, sustainability, and transparency of their supply chains. Reshoring pieces of the supply chain takes time; technology and data science can help companies predict and adjust more quickly in the meantime.

While the dockworkers contract dispute was resolved on the West Coast in September, other dockworkers servicing the East Coast and Gulf Coast ports are beginning contract negotiations.  The cost of labor will contribute to increased supply chain overhead, as well as impact volumes shipped.

Forecasting technology is a focus area as companies look to acquire rather than build.  E-commerce has added complexity and unreliability in logistics forecasting.  Hiring knowledgeable talent or acquiring technology will help companies analyze trends and improve timely supplier communications and inventory adaptations, all which impact Transportation and Logistics M&A activity.

Sources: This report has been compiled from reports and research including federal data, independent analysis, Bain & Company, EY, Federal Reserve, Reuters, Janes Capital, US Chamber of Commerce,, Kaufman Hall, DC Advisory, Kiplinger, PCE-Companies, Mergermarket, RL Hulett, Bass, Berry, & Sims, Roll Call, PricewaterhouseCoopers, Deloitte, HPC, Charles Aris and SDR.