A new survey from Grant Thornton, a provider of audit and assurance, tax and advisory services, showed that mergers and acquisitions professionals are highly optimistic about the state of dealmaking. The survey, which polled 238 M&A professionals, found that 81% of respondents expect deal volume to increase or significantly increase over the next six months.

Additionally, more than two-thirds (67%) of respondents said they are optimistic about the U.S. economy, citing their anticipation of stable or lower interest rates, technology innovations and stabilized or reduced inflation.

“The amount of sell-side work we’re seeing right now should translate into increased volume when these opportunities hit the market in the next couple of months,” Elliot Findlay, national managing principal of transaction advisory at Grant Thornton, said. “There are a lot of positive tailwinds right now, and the market is indicating that volumes will pick up.”

Valuation Expectations Drive Emphasis on Due Diligence

Deal value predictions are slightly less optimistic, as 41% of respondents expect valuations to increase and 40% predict they will stay the same over the next six months.

Many respondents attributed the recent deal volume decrease to misalignment in valuation expectations between sellers and buyers. This misalignment underscores the critical need for comprehensive due diligence on the buy side and sell side. Buyers are now seeking insights beyond financial metrics, delving into areas such as human capital, supply chain and technology capabilities.

“In the recent exits I’ve advised clients on, the amount of diligence that we’ve gone through has been immense, and we were on the sell side,” Bill Pollatos, transaction advisory partner at Grant Thornton, said. “You need to take your time, do it right the first time, go deep and make sure you’re well-presented as you go into a sale process.”

Pollatos, who specializes in financial diligence for technology-focused private equity, has noticed a major shift in transaction criteria. Buyers, once keen on annual recurring revenue and low subscriber churn, now emphasize EBITDA margins and profitability.

Technology Deals Provide a Spark

M&A survey respondents identified technology, media, entertainment and telecommunications as the industries that will have the most deal activity in the next 12 months.

Pitchbook data shows that in the IT sector, deal activity and deal value plummeted in 2023, with the overall IT deal value last year marking a six-year low. Brent Johnson, transaction advisory partner at Grant Thornton, said that at the start of the most recent deal frenzy in the summer of 2020, the tech industry experienced a spike in M&A activity before other industries followed suit.

“As that segment begins to pick up, it may be the bellwether that suggests that an uptick is coming in other industries,” Johnson said.

Consolidation in the media and entertainment sectors, which have experienced several high-profile deals in recent months, could play a role in a potential dealmaking increase.

Funding Remains a Challenge

Even if interest rates recede in 2024, securing traditional bank funding for deals may be challenging. Banking leaders are concerned that the overall amount they have available to lend will shrink in the coming years as new Basel III capital requirement regulations are implemented, and they may be skeptical that a borrower can keep up with payments on M&A funding. Pollatos said organizations that have traditionally funded acquisitions through credit are now embracing new strategies.

The M&A survey reflects these funding difficulties, as nearly half (47%) of respondents said the constraints on the current lending environment caused them to increase the equity component in financings. Another sizeable group (38%) said current lending constraints have caused them to explore more alternative financing options.

“Until that bank lending comes back, private financing is going to remain a pretty strong component of the deal environment,” Max Mitchell, a managing director in Grant Thornton’s transaction advisory service line, said.

The Role of Politics

Although tax and regulatory policies and requirements could be affected significantly by the presidential election, 60% of respondents said the election will have no effect on their M&A plans.

Still, roughly one-third (35%) said they plan to speed up activity to close before the election, and just 5% said they’re holding back until after the election. The desire to accelerate deals may be linked to uncertainty about future tax legislation, as 71% of respondents are either slightly concerned or very concerned about the effect of potential tax law changes on deals.

Expectations for Improvement

Johnson said the easing of supply chain constraints that began during the COVID-19 pandemic could be contributing to buyer optimism. Additionally, the deal environment might benefit from the reduction of supersized earnings fueled by pandemic stimulus payments.

“As you put more of those constraint issues in the rearview mirror and get some stability and history on what sustained earnings look like, it puts more confidence in buyers’ minds,” Johnson said.