You may have noticed an uptick in big-ticket merger and acquisition (M&A) deals in the second quarter of 2024. The appetite for dealmaking may have grown in response to favourable assumptions on interest rates and inflation, but they are not the only levers at play.
Although it’s apparent that aggregate transaction value is on the rise, deal volumes are still constrained to a degree by the elevated cost of capital, as central banks have been forced to delay rate cuts because core inflation has proved to be stickier than anticipated. We are unlikely to witness a return to the ultra-low levels of financing costs that were in place at the end of 2021, so will not be of the same nature as it once was. M&A activity for the foreseeable future. It’s easy to imagine that some companies may have felt compelled to take advantage of historically low borrowing costs when they were available, hence the surge in aggregate UK deal value in the five years to 2021. But even when the base rate starts to retrace, investors and dealmakers are likely to be more circumspect in their deliberations, so the gap in valuations between buyers and sellers should narrow over time.
And while we are experiencing a rebound in aggregate M&A transaction values, as shown by the above data from the Institute for Mergers, Acquisitions & Alliances (IMAA), it is unlikely to be evident across all sectors. Although interest in the technology, media and telecommunications sectors was maintained through last year, the broader healthcare sector was one of the only areas of the UK economy in which deal volumes didn’t pull back drastically from the end of 2021, reflecting the growth characteristics of the pharma/biotech space. If nothing else, the pandemic reinforced the notion that simple demographics would render this corner of the market progressively more lucrative in the years to come.
But it’s not just down to an ageing populace; medical science itself is undergoing a profound transformation due to digital adoption and the acceleration of gene-based therapies. Competition for innovative technologies is becoming more intense, so companies are increasingly turning to inorganic means of driving growth. Blue-chip pharma stocks are constantly on the look-out for target companies with the right intellectual property (IP) to fill gaps in the development pipeline. Therefore, M&A volumes in the sector are also being underpinned by the scramble to counter the threat posed by impending patent cliffs.