Outlook for M&A and Shareholder Activism in 2024

The M&A Environment in 2024

Global deal value in 2023 fell to the lowest level seen in a decade. It was the first year since 2013 that the M&A market failed to hit the $3 trillion value mark, with continued reduced deal activity from private equity firms, which spent 36% less on acquisitions than in 2022. For boards and management teams pondering the M&A environment in 2024, a complex mix of macroeconomic, geopolitical and sector-specific headwinds and tailwinds make prognostication difficult.

Such a complex transactional environment provides challenges but also opportunities. From our vantage point, the number of transactions being actively considered is much higher than the relatively depressed 2023 metrics imply, suggesting many deal-makers are not deterred. Below are some key themes from 2023 and lessons for 2024.

Among other sources of friction, the biggest barrier to M&A has been the slowly narrowing but still lingering valuation gap between buyers and sellers in many sectors, which has been exacerbated by the increased cost of capital. In the U.S., the latter appears to be on a path to stabilizing, as a consensus emerges that interest rates have likely peaked, with Federal Reserve policymakers signaling potential rate cuts by the end of 2024. While this bodes well for acquisition financing and deal making generally, the cost of capital will remain elevated relative to pre-pandemic levels for some time and further valuation resetting is likely necessary to bridge the gap between many buyers and sellers, particularly in leveraged transactions.

On the other hand, portfolio reshaping remains a significant driver of transactions, as corporates look for opportunities to reposition strategically and to separate high-growth from low-growth assets and achieve multiple re-ratings. Various sources of industry disruption—from re-shoring or near-shoring to address supply chain vulnerabilities, to energy transition, digitalization, and the adoption of artificial intelligence—will also continue to spur transactions.

Private equity firms are starting the year with a record amount of dry powder, which seems to have become an annual refrain. They are also sitting on a record backlog of portfolio company exits, putting firms under greater pressure to return capital to limited partners. At some point, valuations will further reset and private equity’s share of the market will recover, greasing the skids for deal making overall. Until then, we expect private equity sellers to rely on more structured transactions to bridge valuation gaps—including use of performance-based earn-outs or other contingent consideration, seller financing, and larger equity rollovers—and for private equity buyers to seek opportunities for take-privates and from corporate de-conglomeration and portfolio optimization.

Heightened regulatory scrutiny of transactions will remain top of mind for companies and investors seeking to transact in 2024. High profile, and in some cases unpredictable, merger enforcement has likely had its intended deterrent effect. Yet we believe the headlines tend to overstate the risk for clearing many deals, including those with regulatory complexity, provided the parties have a well-considered and well-executed strategy, which requires seamless coordination among M&A, antitrust and foreign investment lawyers who understand the new playbook (and how to deploy it and where to diverge from it).

2023 also demonstrated that an increasingly broad spectrum of investors, beyond traditional activists, are more willing to weigh in on announced deals and M&A strategy—a trend which will certainly continue in 2024. This places a premium on corporate messaging prior to, at, and following announcement.

Shareholder Activism Outlook

On the shareholder activism front, 2023 saw more M&A-focused demands than observers might have expected for such a down year in the M&A and financing markets. These campaigns predominated at small-cap issuers and fund complexes, however, with larger cap campaigns more focused on operational improvements, portfolio reshaping and capital allocation. CEOs also increasingly found themselves in activists’ cross-hairs. We expect this bifurcation to continue early in 2024 but would expect the push for M&A to accelerate if financing and M&A markets improve over the course of the year.

In the U.S., 2023 was also a noticeably litigious proxy season. Many U.S. issuers seized the occasion of universal proxy implementation to enhance nomination requirements under their advance notice bylaws. In some cases, these amendments included particularly stringent disclosure requirements for nominating stockholders. Companies were also increasingly willing to challenge the validity of nominations, whether under newly adopted or preexisting bylaws. These developments were met with an increase in litigation challenging such bylaws and nominee rejections. In situations involving the most aggressive bylaws or other overly restrictive tactics, these lawsuits generally resulted in settlements with the activist, which provided for appointment of some portion of the activist slate or allowing the activist’s nominees to stand for election.

The year also saw an increase in bespoke terms for settlement agreements. In addition to customary commitments on board and committee composition, a number of settlements included more tailormade features, including changes to organizational documents (including modifications to the rights of existing controlling stockholders or roll-back of advance notice bylaws) and more prescriptive terms for dividend or share repurchase programs.

In preparing for activism in 2024, boards and management teams should consider the following lessons from 2023:

• Strong defensive tactics will continue to have their place in the corporate playbook. But frequently, in the current environment, the use of overly aggressive maneuvers to thwart nominations runs the risk of being poorly received by shareholders, resulting in tarnished incumbents and victorious activists. The best defense begins before the activist emerges, in staying close to shareholders, conducting outside-in reviews of governance and performance, and preemptively addressing potential vulnerabilities or developing communication plans to explain them. When an activist emerges, the most likely path to success is to engage on the merits. Companies should rebut activist demands that are misguided but consider preempting demands, where possible, with actions that are likely to be supported by shareholders.
• Corporations that have not already done so should still consider review of their bylaws to reflect the state of the art in advance notice provisions. But in adopting any amendments, boards and management should be mindful of the increasing scrutiny applied to these bylaws from shareholders, activists and proxy advisors, and be ready to explain how they protect shareholder rights and the integrity of the franchise.
• The advent of universal proxy in the U.S. and the ability of shareholders to pick and choose between slates will result in the continued personalization of election contests, with activists focusing on directors perceived to be most vulnerable. Companies should review their board evaluation and refreshment policies and their disclosure regarding director qualifications, contributions, and board effectiveness.
• Corporations should expect more onerous settlement demands from activists and, in considering these terms, be mindful of the reaction of other shareholders.
• Heightened M&A scrutiny from investors, whether in the form of “bumpitrage” or “breakitrage” campaigns from traditional activists or vocal opposition from institutional investors, is here to stay. Companies should revisit their ongoing disclosure to ensure M&A strategy is properly articulated, to avoid investor surprise, and carefully consider announcement materials to proactively communicate the merits of a transaction and preempt potential critique.