When interest rates rose over the past two years, M&A activity nosedived. Now that rates have leveled off and are expected to fall later this year, the outlook for deals has become robust.
Among 238 M&A professionals surveyed by Grant Thornton, 81% said they expect deal volume to increase over the next six months compared with the previous six months. Two-thirds (67%) said they are optimistic about the U.S. economy, citing not only their expectations for interest rates but also technology innovation and stabilized or reduced inflation.
Three-fourths of respondents said they executed fewer deals over the past 12 months specifically because of rate increases. Two-thirds of those surveyed said they believe rates will decrease over the next 12 months, and 81% of those who expect rates to decrease say lower rates will lead to them doing more deals.
“The amount of sell-side work we’re seeing right now should translate into increased volume when these opportunities hit the market in the next couple of months,” said Elliot Findlay, Grant Thornton’s transaction advisory managing national principal.
On the downside, despite the better outlook for interest rates, traditional bank funding for deals may be difficult to obtain, according to Grant Thornton. Private financing will remain a strong element of dealmaking.
Banks “may be skeptical that a corporate borrower will be able to keep up with payments on M&A funding unless performance is immediately and consistently outstanding,” the survey report said.
Still, 47% of the surveyed M&A professionals —investment bankers, private equity investors, M&A attorneys, and in-house corporate development professionals — plan to increase their team size over the next six months, while only 3% expect to pare back the team.
But while there should be significantly more transactions this year, the size of deals likely will lag somewhat behind that surge. Four in 10 respondents expect valuations to increase, while the same proportion anticipate valuations to remain stable over the next six months.
Many of those surveyed said misalignment in valuation expectations contributed to the recent dip in deal volume. “The M&A surge that fueled the record-high deal volume in 2021 created high expectations for valuation among sellers,” Grant Thornton wrote in its survey report.
Although several factors caused buyers to pull back, “sellers didn’t quite adapt to that market,” said Brent Johnson, transaction advisory partner for Grant Thornton. “Sellers’ expectations are not coming down [now], but access to alternative capital, creative deal structures, and other factors have been driving buyers back to the table.”
Survey participants identified the IT sector — where deal activity crashed in 2023 and deal values hit a six-year low — as the industry that would have the most deal activity in the next 12 months.
“This may be a signal,” said Johnson, noting that at the start of the most recent hot deal market in mid-2020, M&A activity spiked first in the tech industry. “As that segment begins to pick up, it may be the bellwether that suggests an uptick is coming in other industries.”
Other sectors anticipated to have strong M&A activity include energy, services, and healthcare.