In 2023 the M&A landscape encountered formidable obstacles, characterized by rising interest rates, intensified regulatory scrutiny, geopolitical tensions and challenges within the US banking sector. As a result, the global value of deals nosedived to $2.2 trillion, marking a substantial 23% decline and reaching its lowest point in a decade.

The sharp downturn in M&A activity reached its zenith in Q3 2023, witnessing a 49% drop compared to the peak in Q3 2021. However, a glimmer of recovery emerged in Q4, marked by mega-deals reaching levels not seen since Q2 2022. Half of 2023's top 10 global deals were announced in this quarter.

Private Equity (PE) participation in M&A during 2023 was constrained by reduced access to leverage, as US debt/Enterprise Value ratios hit their lowest levels since 2005. Overall, deal volumes concluded the year with a 33% decline. However, the PE sector rebounded in the final quarter, showcasing an 11% surge in activity compared to the preceding quarter (Q3).

Sellers during the year encountered turbulence across various industries, grappling with global macro headwinds and an overarching economic deceleration. The predominant challenge in M&A transactions stemmed from a misalignment between sellers' valuation expectations and buyers' willingness to pay. This dissonance was especially pronounced in the technology sector, where sellers aimed for historical high multiples from 2021, despite market stabilization and a revaluation of performance influencing valuations.

Looking ahead, is this the turning point for M&A after a two-year drought? Many believe so.

2024 Consensus

Buyers, both strategic and private equity, express a consensus that a robust increase in M&A activity is expected in the coming year, with many anticipating a rise exceeding 25%. The preconditions for driving deal momentum are in place, with global PE dry powder at approximately $1.4 trillion and strong cash reserves from strategic acquirers.

In the outlook for 2024, there is a strong inclination among sellers to partner with strategic or PE investors capable of de-risking and recapitalizing, offering growth opportunities in areas and markets of interest. The benefits outweigh the risks of remaining a smaller business in the current macro environment for the potential of incremental value gain in the future.

In terms of hot areas of interest for investors in technology and professional services, focus is on nearshoring capabilities, CX tools and services, as well as data and cyber.

Nearshoring

In a post-COVID world where remote work in the tech industry has become the norm, investors are turning to lower-cost development centers that provide high-value services in terms of skills and client readiness. Nearshore development assets have been investing heavily in serving US or Western European markets, upskilling their staff in the latest technology stacks and trends, including ML, AI, embedded software capabilities, and specialization across sectors.

CX (Customer Experience)

In pursuit of harmonizing AI advancements with a personalized human touch, elevating customer service and enhancing overall experience is taking centre stage for investors in 2024. Whether from technology firms striving to enhance customer retention, or from healthcare companies dedicated to amplifying client satisfaction, demand for CX assets is on the rise. The most coveted players will often intertwine technology and services, presenting additional strategic value to clients. This includes services that complement AI, consulting firms crafting tailored solutions, and managed services designed for contact centres.

Data & Cyber

Amid the M&A slowdown of 2022/2023, the field of data analytics and engineering has remained flush with demand. Companies excelling in data strategy, governance, and expertise development within GenAI language models are the most highly sought after. For substantial IT investors and organizations, the focus now shifts to Operations (Ops) and Security as the next frontier of investments. Active subsectors encompass Risk & Compliance, Data Security, SecOps, and Identity Management.AI, embedded software capabilities, and specialization across sectors.

Conclusion

While maintaining some caution regarding broad optimism about market rebound in 2024, not least given the ongoing high stakes geopolitical uncertainty, there is a belief that the opportunities, willingness and enthusiasm exist on both sides of the M&A equation in much improved measures—for both sellers and buyers. This sets the stage for stronger market conditions as we get further into 2024.

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