M&A activity expected to pick up in 2024; digital infrastructure, renewables to fuel growth

MARKET watchers are optimistic that merger and acquisition (M&A) activity will pick up this year, as the economic environment stabilises after the whirlwind of volatility in 2023.

For one thing, interest rates are starting to show signs of normalising and could come down earlier than expected, after the US Federal Reserve kept its key interest rate steady at its last Federal Open Market Committee meeting in December and hinted at three rate cuts in 2024.

After more than a year of leaning back and sheltering from the storm, market watchers believe investors could be on the active lookout for opportunities again.

“Given the substantial amounts of dry powder for deployment sitting on the sidelines with private equity firms… we expect a gradual pick-up in activity over the course of 2024,” said Andy Tai, head of South-east Asia investment banking at Goldman Sachs.

The potential increase in strategic acquisitions is expected to be more pronounced within the region, Tai said, as multinationals, financial sponsors and Chinese strategics are all focused on expanding their footprints in South-east Asia and Singapore.

John Lin, director of investment banking at Bank of America (BOA), is also optimistic on the M&A sector in the next 12 months, as compared to last year.

He noted that the interest rate environment and the rapid increase of rates in the last 18 months had caused a “temporary blind-spot on the appropriate long-term cost of capital to benchmark valuations”.

Valuations have also fallen, given that cost of capital to invest has “dramatically increased”, said Lin.

This is in contrast with the high valuations that companies – particularly those in tech – enjoyed in previous years. With interest rates then at historical lows, these companies were able to raise capital cheaply.

Official data indicated that the effective federal funds rate remained mostly below 0.1 per cent between 2020 and mid-2022, before surging to 4.65 per cent in 2023.

Companies, however, were reluctant to accept the lower valuations which came on the back of higher funding costs – leading to a larger bid-ask spread on valuations. This, Lin said, was a key driver in the decline in M&A volumes.

But the way he sees it, this will change in 2024. Lin believes a more stable rate environment and potentially loosening of policies in the second half of 2024 will likely catalyse a prompt return to form in the M&A market.

Meanwhile, less uncertainty over the political outlook in some markets could also help foster market confidence.

Johannes Roth, JPMorgan’s head of South-east Asia M&A, said this could lead international and domestic investors and companies to deploy more capital – both organically and through M&As.

In particular, industry watchers are most upbeat about two sectors – digital infrastructure and renewables – which are expected to drive M&A deal flow this year.

Already, they said, there had been some meaningful investor activity and interest in 2023.

Roth said telecommunications tower companies and data centres are expected to remain attractive to investors as data usage in South-east Asia continues to increase.

A secular shift in power generation mix, rising electricity consumption and economies seeking to decarbonise will also drive interest in renewables, he added.

On the other hand, M&A activity may continue to lag for businesses in some other sectors.

For example, it may take some time before deals in the industrial and manufacturing sectors pick up again, said Xiao Hui Ting, principal in Baker McKenzie Wong & Leow’s M&A practice group in Singapore.

Companies in these sectors will look to “transform themselves into more technology-focused businesses”, she added.

Xiao noted that some of these companies will need to reposition their environmental, social and governance (ESG) and global footprints, as well as review and shore up their supply chains.

Nonetheless, market watchers said Singapore is poised to feature prominently in the expected recovery of M&A activity globally.

BOA’s Lin pointed to a build-up of both physical and capital relocation into Singapore, by global multinational companies (MNCs) and investors from China and other regions.

Amid expectations of a recovery in M&A, Singapore is likely to remain the locus, given the build-up of both physical capital relocation from China and other regions into the republic by global MNCs and investors, said Lin.

He added: “As with any upcoming rebound, there will also be a comfort zone of doing M&A within a developed market environment – and Singapore represents that opportunity.”