Merger puzzle pieces

As interest rates ease, merger and acquisition (M&A) activity among investment-grade companies in North America is expected to rise over the next 12–18 months, says Moody’s Ratings in a report published Thursday.

The rating agency said it expects M&A activity to rise in the months ahead as central banks ease monetary policy and the gap in valuations between likely buyers and sellers continues to shrink.

Many companies are also well positioned to make deals after a prolonged period of retrenching over the past couple of years, the report said.

“Pandemic and supply chain disruptions, along with higher interest rates and rising inflation, prompted many companies to eschew acquisitions and repay debt in the last few years,” Moody’s said.

As well, many companies that were focused on absorbing acquisitions that took place in the previous deal cycle have now “emerged as larger, more diverse businesses with stronger credit metrics and more conservative financial policies,” the report noted.

In this environment, companies will increasingly be ready to pursue deals that expand their capabilities and enhance their growth potential as economic and financial pressures ease, Moody’s suggested.

“However, the bar for M&A will remain high because even with rate cuts likely, the higher-for-longer environment will persist, increasing the need for strong strategic motivation and synergies to make deals work,” the agency said.

Additionally, major, transformational deals will likely remain constrained, Moody’s said, amid heightened regulatory scrutiny and political sensitivity for very large transactions.

Uncertainty ahead of the 2024 election could also prompt some companies to delay announcing blockbuster deals.

Certain sectors are particularly ripe for dealmaking in the months ahead, the report suggested, pointing to the oil and gas sector, tech, pharma, consumer, and homebuilding industries as likely candidates.

Moody’s also said it expects most deals to be funded with cash and new debt — rather than stock — as companies seek to avoid shareholder dilution.