Mergers & Acquisitions Activity in 2024: On Pace to Surpass 2023 Levels

Executive Summary

The global mergers and acquisitions (M&A) market in 2024 is on track to surpass the levels observed in 2023. According to September 2024 M&A Activity Report performed by EY, the US recorded $137B in deal value (US$100m+ deal volume), representing a 44% increase year over year (Aug'23 to Aug’24). This trend is fueled by a combination of favorable economic conditions, technological advancements, and strategic corporate realignments. Despite geopolitical tensions and inflationary pressures, companies are pursuing M&A deals to secure competitive advantages, unlock synergies, and access new markets. This white paper explores the key drivers of the surge in M&A activity in 2024, highlights industry-specific trends, and examines the accounting implications for stakeholders.

Introduction

M&A activity serves as a critical strategic tool for organizations, enhancing shareholder value, diversifying business operations, and strengthening market positioning. The year 2024 has seen a continuation of the momentum that began post-pandemic, with deals across sectors picking up at an accelerated pace. Compared to the previous year, 2024 has already witnessed several high-profile transactions, indicating an optimistic outlook for deal-making.

This paper examines the factors driving the increase in M&A deals, key trends shaping the market, and the evolving role of accounting practices in managing these transactions. We will also discuss the potential challenges companies face in accounting for these complex arrangements, particularly in the context of regulatory scrutiny and evolving financial reporting standards. Based on the recent 44% YoY growth in the US, M&A activity is expected to stay robust, primarily fueled by large transactions led by well-capitalized companies aiming to solidify their market positions and take advantage of favorable acquisition conditions.

Key Drivers of M&A Activity in 2024

1. Economic Recovery and Market Conditions
   As economies stabilize after the COVID-19 pandemic, businesses are increasingly focused on growth and expansion strategies. M&A deals are often seen as an efficient way to achieve inorganic growth, capitalize on emerging opportunities, and respond to competitive pressures. In 2024,  although slightly tighter than in previous years, the favorable interest rate environment has not dampened deal appetite, with firms seeking to leverage financial markets for favorable financing terms.

2. Digital Transformation and Innovation
   Technology continues to play a significant role in shaping M&A strategies. The accelerated adoption of digital tools, artificial intelligence, and automation has prompted companies across sectors to acquire tech firms or merge with companies with robust technological capabilities. In 2024, deals in the technology, media, and telecommunications (TMT) sectors are particularly robust, driven by the desire to integrate digital solutions and stay competitive in a fast-evolving marketplace.

3. Private Equity (PE) and Special Purpose Acquisition Companies (SPACs)
   Private equity funds and SPACs remain influential players in the M&A landscape. PE firms, with abundant dry powder, are keen to deploy capital into strategic acquisitions, often targeting companies in distressed industries or emerging markets. Similarly, the continued evolution of SPACs has provided a flexible vehicle for taking companies public via mergers, a trend that has gained traction post-2020.

4. Corporate Restructuring and Strategic Realignments
   Post-pandemic, several companies have re-evaluated their core competencies and are divesting non-core assets to focus on core operations. This has opened up opportunities for M&A deals involving the sale of divisions, spin-offs, or consolidation within industries to achieve synergies, cost savings, and enhanced operational efficiency.

5. Geopolitical and Regulatory Environment
   Geopolitical factors, including trade tensions and sanctions, have influenced cross-border M&A activity. Companies are increasingly exploring domestic or regional consolidation as a way to mitigate geopolitical risks and supply chain disruptions. However, regulatory scrutiny on antitrust and competition remains a significant factor that may slow down some deals.

Sector-Specific M&A Trends

1. Technology
   The technology sector continues to dominate the M&A landscape, with companies actively pursuing acquisitions to strengthen their digital capabilities, diversify product offerings, and enter new markets. Large tech firms are increasingly targeting smaller innovative start-ups to bolster their artificial intelligence (AI), cloud computing, and cybersecurity portfolios.

2. Healthcare
   In the healthcare and pharmaceutical sectors, M&A activity is being driven by the pursuit of innovative treatments, consolidation among healthcare providers, and the need to scale up research and development (R&D). The rise of telehealth and digital health platforms has also contributed to deal-making in this sector.

3. Energy and Sustainability
   The global push for sustainability and decarbonization has led to a rise in M&A deals within the renewable energy sector. Companies are investing heavily in green technologies, carbon capture solutions, and alternative energy sources to align with regulatory mandates and meet shareholder expectations for environmental, social, and governance (ESG) initiatives.

4. Consumer Goods and Retail
   The retail sector is seeing renewed M&A activity, particularly among e-commerce platforms and digital-first consumer brands. Companies want to expand their online presence, optimize supply chains, and enhance customer experience through acquisitions, mergers, and strategic partnerships.

Accounting Considerations for M&A Deals

M&A transactions involve significant accounting complexities, with financial reporting requirements guided by standards such as International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). Proper accounting for M&A deals is crucial for ensuring accurate financial statements, tax compliance, and regulatory transparency.

1. Purchase Price Allocation (PPA)
   One of the critical steps in accounting for M&A transactions is the allocation of the purchase price to the acquired assets and liabilities. This process, known as purchase price allocation (PPA), requires identifying and valuing tangible and intangible assets, including goodwill. The accounting team must ensure that the valuation of these assets is accurate, as it directly impacts future depreciation, amortization, and potential impairment.

2. Goodwill and Impairment Testing
   Goodwill, often a significant component of M&A deals, arises when the purchase price exceeds the fair value of the identifiable net assets. Accounting for goodwill requires careful impairment testing to ensure it is not overstated on the balance sheet. Impairment testing involves estimating the future cash flows of the acquired business, which can be highly subjective and impacted by market conditions and future projections.

3. Contingent Consideration and Earn-Outs
   Many M&A deals include contingent consideration, where part of the purchase price is tied to the future performance of the acquired company. Accounting for such earn-outs involves complex estimations and adjustments, as these liabilities must be remeasured at each reporting date based on the expected future outcomes.

4. Tax Implications
   M&A deals can have significant tax implications, from structuring the deal to tax due diligence and compliance. Proper tax planning is essential to mitigate risks related to transfer pricing, tax liabilities, and regulatory compliance in cross-border transactions.

5. Post-Merger Integration and Consolidation
   Accounting teams play a critical role in the post-merger integration phase, where the financial systems, reporting structures, and internal controls of the merged entities must be consolidated. Proper consolidation ensures that the financial statements accurately reflect the combined entity's financial position and performance, avoiding discrepancies and audit risks.

Challenges and Risks in Accounting for M&A Deals

Despite the increasing M&A activity, several challenges and risks arise in accounting for these transactions, including:

• Regulatory Scrutiny: With the rise in large-scale mergers, regulators are closely examining deals for antitrust concerns, which can delay deal closure and add to the accounting burden.

• Valuation Uncertainty: The valuation of intangible assets, such as intellectual property or customer relationships, can be highly subjective and prone to future impairments if the business underperforms.

• Cultural and Operational Integration: Post-merger integration is not only an operational challenge but also an accounting one, as financial teams need to merge different accounting practices and systems.

Conclusion

The M&A market in 2024 is poised for another strong year, surpassing the activity levels of 2023, particularly due to the resilience of the American economy which shows a 44% YoY growth in deal value. While opportunities abound, companies must be vigilant in addressing the accounting complexities associated with these transactions. Proper financial reporting, valuation accuracy, and regulatory compliance are key to ensuring that M&A deals create long-term value for stakeholders. As the market continues to evolve, accounting professionals will play a critical role in navigating the challenges and risks that accompany these high-stakes transactions. Contact a Solaris consultant for assistance with M&A evaluation services for your organization at info@solarisadv.com.

References

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