The Federal Reserve's higher-for-longer interest rate stance won't stop deals from getting done, according to EY. A new EY forecast predicts corporate M&A activity will increase 20% in 2024, while private equity deals will rise 16%.

EY Strategy and Transactions, Americas Vice Chair Mitch Berlin says there are a few reasons why corporate dealmaking is making a comeback. Berlin says companies "need to transact to transform," meaning companies need to make acquisitions to stay ahead of competition, gain market share, and for product expansion, for example. He also highlights that in the tech sector, companies are making acquisitions to get ahead with AI.

Berlin notes that given how differently the two candidates view M&A, the 2024 presidential election could factor into some deal decisions. Regulators in the Biden administration have been more active than in the past. Berlin says that's not stopping deals from happening, but it is making dealmakers "more cautious in how they are doing deals."

Watch the video above to hear what Berlin says about deals in the energy space.

For more expert insight and the latest market action, click here to watch this full episode of Asking for a Trend.

This post was written by Stephanie Mikulich.

Video Transcript

A recent survey from EY reporting that us corporate M and A deal volume will increase by 20% from this year to next.

And the outlook is it's only going up from there.

We'll have the author, we have the author of that survey joining us now, Mitch Berlin Strategy and Transactions Leader at Ey, Mitch.

It's good to see you.

Thanks for being here.

Hi, Julie, thanks for having me.

So I feel like the conventional wisdom for a while was the rates would really have to start to move down more meaningfully before we saw an uptick.

Well, in a lot of stuff right in housing activity.

But certainly M and A was on that list.

So is that what we need to unlock things or are people sort of chomping at the bit to get deals done anyway here?

Well, it's a little bit of both Julie, we need, we do need the rates to come down a bit.

You know, when we started the year, we thought that we'd have about six different decreases in the fed borrowing rate.

Now we're expecting about two, but that's offset by the overall confidence in the market.

Corporate profits are high.

We have CEO confidence at an all time high.

99% of the CEO S we surveyed in a recent interview, uh in a recent survey said that they plan on doing a deal at some point in fiscal 24.

And we're looking at GDP growth about 2.5% which is a little higher than initially predicted.

So we are expecting the market to come back despite that, despite the fact that we probably won't get, we know we won't get six cuts in interest rate, maybe more about two mitch.

What are some of the motivations that you're hearing from in terms of why uh companies are going after deals?

Well, part of it is that, you know, a lot of these corporations have been, let's talk about corporate, then we'll talk about pe corporate has been sitting on the sidelines for about the last year and a half, but they need to transact, to transform, to try to transform through organic means just takes too long, the pace of transformation is too fast.

So they really do need to do some sort of M and A to be able to continue to stay pace or stay ahead of their overall competition.

They're looking to gain market share.

So you see a lot of deals where they're hiring competitors to gain market share, they're looking for product expansion.

So particularly if you look at Life Sciences, they have M and a patents that are coming to exploration, they need to increase their or I'm sorry, they have um they have patents that are expiring.

So they actually need to build our R and D pipeline.

And so they're looking to increase that through M and A, you have capacity expansion.

If you look at the oil and gas industry and the, and the consolidation around the basin and then tech is the largest, the largest sector that's doing transactions a year over year and this year is no exception.

And that has a lot to do with all the emerging A I technology that companies are trying to acquire as, as well as cyber, cyber technology to protect the data that they need to actually drive the A I that they're acquiring.

Mitch, I wanna dig more into some of the sectors in a minute.

But first I, I also want to dig into the timing, you know, we talked about when rates might be coming down and what effect that could have.

But the election also, I imagine is something of a factor, are we seeing sort of a rush of desire to get deals done at least announced if not closed before the presidential election?

Well, if you look at history in the last two elections, M and A started high the in, in the first quarter of the election and then it sort of tapers off towards the end of the year.

It's hard to determine whether that has to do with the election or just the normal M and A cycles where it's a little bit slower in the fourth quarter of the year.

This year may be different because, because there are clearly different attitudes and M and A between the different parties.

And so you have a party right now with the DOJ and FTC, that's putting a lot of scrutiny on deals if that party is out of office and the, and, and the Republican party comes in, there is potential for less scrutiny from the doj and FTC.

What people falsely think is that the, the interest rates are, um, will be impacted by the election.

But the fed is really independent of whatever governing party is in.

So the, the fed will not increase or reduce or hold rates flat depending on the party, they're independent.

But I do think there are some emotional reactions around that that are actually imagine that Mitch.

Um, but at the same time as you referred to, right, this DOJ has been pretty active.

Is that something that, um, clients that folks you're talking to are taking into account, whether they even decide whether they pursue a deal in the first place.

In other words, has that put a damper on things over the past couple of years.

Well, we, we certainly talk about it with their clients truly, but what they're doing, it's not, it's not scaring them away from doing deals, but I think they're more cautious in how they're doing deals.

And so what we're working with them on is look at the current structure of this deal doesn't work because it's gonna be perceived as you dominating a certain product category or a certain geography.

How can we restructure that deal?

So you still get that return on investment, but maybe it's a little bit of a different structure that will satisfy the doj and FTC guidelines.

So it's not discouraging them.

It's just there.

We're, we're working with our clients to create more scenarios than we have in the past.

Um Unless I, I do wanna dig more into energy in particular because there, the deal activity has just been a lot, right?

Because it's not just the number of deals, it's the size of the deals that we have seen of the ones that have been announced.

Um I believe only one of the large ones has closed in the form of Exxon, um and uh pioneer.

There's still a lot are a lot that are pending.

Um Do you think that we've kind of come to the end of that flurry of activity in that industry we have now come to the end?

I think there's still a lot of big deals in the pipeline.

I think we'll continue to see what we're gonna continue to see more.

These are particularly in oil and gas, oil and gas balance sheets are flushed with cash.

Um So it's, it's a lot easier for them to do deals because they don't have to go to, uh, the, the syndicated market to actually finance these deals through debt.

As a matter of fact, if you look at the last 20 if you look at the largest 20 deals in 2024 only three of them, this is across all industries.

Many of those deals that were oil and gas, only three of those deals actually went to the debt markets to fund those deals.

The rest were funded through cash or stock mitch.

Thanks so much for your perspective.

Really interesting stuff and obviously we'll keep in touch as the year goes on.

Thanks Julie.