15 minute read 12 Dec 2023
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EY M&A sector of the year: Tech leads M&A activity in 2023

Authors
Elizabeth Kaske

EY Americas Strategy and Transactions Buy & Integrate Leader

Focused on mergers, acquisitions, divestitures and large-scale transformations. Mother, golfer, runner. Enjoys yoga, wakesurfing and global travel.

Stephanie Chesnick

EY Americas Strategy and Transactions Energy & Resources Leader

Proud to support clients in navigating the energy transition. Committed mentor and advocate for diversity and inclusiveness. Passionate traveler.

James W. Brundage

Partner, Strategy and Transactions, Ernst & Young LLP

Experienced merger and acquisitions advisor for the technology, media and telecommunication sector. Data-driven dreamer. Always learning. Grandson, son, husband, father and Longhorn.

Ranu Carroll

EY Americas Strategy and Transactions Life Sciences Leader

Life sciences sector leader. Strategy and M&A advisor. Avid traveler. Opera enthusiast. Rugby fan. Proud mom of three small humans.

Khalid Khan

EY Americas Strategy and Transactions AI Leader

Harnesses the power of data and mathematics to drive purpose-led, sustainable transformation for clients. Avid traveler. Proud father.

15 minute read 12 Dec 2023
Related topics Mergers and acquisitions Strategy and Transactions Technology Energy and resources
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M&A activity in 2024 driven by new technology, consolidation and PE. Tech, energy and life sciences bear watching.

A
fter a slow start to the year, US M&A activity is showing signs of an uptick, driven in part by the need for companies to acquire technology and other capabilities to spur growth, the evolution of the energy sector, and private equity deal activity. Through November 30, $1.38 trillion of deals valued at $100 million-plus have been announced, according to an EY analysis of Dealogic data, roughly in line with the same period in 2022. 

US $100 million+ deal volume and value

Volume remains down, due to barriers such as higher interest rates, geopolitical uncertainty and heightened US antitrust scrutiny. Continuing into 2024, M&A activity could be spurred by several factors. Companies need to show growth. They need to address customer demand for generative artificial intelligence (GenAI) and other technologies. At the same time, many companies are looking to access markets to serve existing customers and attract new ones.

As companies adjust to a higher-for-longer interest rate environment, they can look beyond short-term headwinds and seek M&A opportunities to deliver on their strategic growth plans.
Mitch Berlin
EY Americas Vice Chair, Strategy and Transactions

In this article, we focus on three sectors that had the most deal activity announced in 2023 through November 30, based on both volume and value — technology, energy and life sciences — as we identify the most compelling sectors for M&A activity now and in 2024. 

These sectors demonstrate that there is a mix of opportunities for both bolt-on acquisitions and megadeals that can reshape an industry.

Companies still need to show growth and innovation to stay market relevant and competitive; M&A is one way to get there.
Elizabeth Kaske
EY Americas Strategy and Transactions Buy & Integrate Leader

Jump to a section

  1. Sector of the year: Tech
  2. Sector to watch in 2024: Energy
  3. Sector spotlight: Life sciences
  4. 2024 US M&A activity outlook

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Sector of the year | Tech

Tech M&A activity bouncing back with boost from AI and cybersecurity

Tech M&A volume and value saw a jump in Q3 from prior quarters this year but has generally been down in 2023 and still trails pre-pandemic levels from lows earlier in the year. Q4 is trending positive, setting the stage for a stronger 2024. While companies are being more discerning, a surge is expected as companies look to add AI and other capabilities to their product portfolios. In fact, demand for these technologies has also helped drive tech stocks: the sector has outperformed the S&P 500 by about 10% since the start of 2022, according to EY analysis of CapIQ data. Meanwhile, PE funds are getting back into the market via sell-side activity and are also expected to accelerate their investment in software companies as multiples decrease.

Charts show US technology deal value and volume by year from 2018 to 2023 (as of Nov 30).

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    Why it’s the 2023 M&A sector of the year

    • AI helping to spur transformation: Enthusiasm for GenAI as the next major tech platform is at an all-time high, driven by the opportunity to revolutionize productivity, expand product offerings and unlock new markets. Per the October EY CEO Outlook Survey, 87% of global tech CEOs have hired new talent with relevant AI skills or are in the process of doing so. This prominence has resulted in higher M&A multiples compared with traditional segments within the tech industry. 

    • PE firms starting to increase investment: The gap in valuation is closing, driven by the necessity for sellers to raise capital and the mounting pressure on private equity to deploy their resources and show their investors cash returns. In fact, tech deal multiples sunk to 7.8x EV/EBITDA in the first quarter of 2023. While that has since risen to 17.5x in the third quarter, that is still below the highs seen in 2021 and 2022. This, in turn, will sustain the trend of take-private transactions in which PE can take a hard look at cost drivers and refocus products and roadmaps.

    • Cybersecurity continues as a major priority: Safeguarding data has become more complex as attack surfaces grow, mainly because of hybrid work environments and the explosive adoption of GenAI. As a result, cybersecurity remains top of mind for executives and a high priority for IT budgets. Cybersecurity companies continue to acquire new and emerging businesses to maintain share. However, we may see a near-term slowdown in cybersecurity deals as a large percentage of deals involves companies based in Israel or have significant operations there.

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    Tech M&A headwinds

    There are several challenges that the tech sector could grapple with in the next year: 

    • Geopolitical headwinds: Export controls on China may have a negative impact on advanced semiconductor manufacturing, and the ongoing conflicts in the Middle East and Ukraine could threaten dealmaking ability and appetite across the tech sector.

    • Ongoing regulation: There has been a noticeable increase in tech deal scrutiny in major geographies such as the US, EU, UK and China, leading to significant delays and the termination of several multi-billion dollar planned acquisitions. Moreover, increasing data privacy regulations will make it more difficult to integrate companies that manage sensitive customer data. The recent Biden executive order on AI could also affect or delay advances in GenAI.

    • Higher cost of financing: Tech M&A activity has been pressured as borrowing becomes more expensive over a longer period. Tech companies, and especially PE firms, have delayed or reconsidered their acquisition plans because of ongoing uncertainty about how long the cost of financing will be higher.

    Tech M&A activity to watch in 2024

    The quest for GenAI capabilities will continue as the technology becomes a more prominent need across sectors, supporting companies’ desire to transform how they do business and drive growth and profitability. In addition, businesses are boosting investor confidence by embracing AI-related strategies.

    Separately, the 2022 CHIPS and Science Act could also potentially give US technology companies funding to make strategic acquisitions to enhance domestic semiconductor manufacturing capabilities and to diversify their supply chains.

    Divestitures will release assets that will be available for acquirers. As tech companies continue to adapt to rising interest rates and investor preference for cash-efficient growth, they will continue to consider divestitures of non-core businesses to enhance growth and reshape their profit pools. This is backed up by the October EY CEO Outlook Survey, which revealed that 87% of global tech CEOs expect to actively pursue a transaction in the next year, including more than one-third who expect to divest .

    Overall, activity could climb if interest rates ease in the second half of the year, which could increase confidence in the direction of debt markets. Tech companies are primed for deal making: the October EY CEO Outlook Survey shows that 75% of global tech CEOs are planning to invest more in acquisitions in 2024 compared with 2023.

    Contact James Brundage for more information.

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Sector to watch in 2024 | Energy

Decarbonization, consolidation to drive energy deals in 2024

As part of the ongoing energy transition, the combined oil and gas, power and utilities, and mining and metals sectors have seen a surge in announced deal value this year, driven by two major deals, though volume remains down compared with a year ago. The driving deal forces have included strong cash flows, renewed investor confidence, legislative incentives around alternative and renewable technologies, and the recognition that affordable, reliable and sustainable energy supplies are needed globally.

Charts show US energy deal value and volume by year from 2018 to 2023 (as of Nov 30).

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    Why it’s a sector to watch 

    • More than $332 billion in transactions valued at $100 million and above were announced by US energy companies in 2023 through November 30, significantly eclipsing the 2022 figure in the combined energy group, which includes the oil and gas, power and utilities, and mining and metals sectors. The deals include both traditional energy initiatives and those focused more on the energy transition. From a value perspective, deals were led by two blockbuster announcements that highlight the oil and gas consolidation trend: ExxonMobil’s announced deal to acquire Pioneer Natural Resources and Chevron’s planned acquisition of Hess. These are the latest signs that oil majors are looking to increase production through acquisition in areas like the Permian Basin and the Bakken Formation in the US and globally in countries such as Guyana. 

    Record profitability has helped fund some of these deals, as energy stocks have outperformed the S&P 500 by about 54% since the start of 2022 according to EY analysis of CapIQ data, driven by a surge in demand post-pandemic and around geopolitical tension affecting supplies, as well as improved structural performance in the businesses. This has allowed many deals to be 100% stock transactions.

    • Specific to oil and gas, the ExxonMobil and Chevron deals both had higher multiples than the 2023 industry median, according to EY analysis of Dealogic data. This could signal even higher valuations for oil and gas assets, with some expecting more consolidation.
    • Smaller oil and gas players may continue to be attractive targets. Meanwhile, as different companies have divergent visions of how the energy transition progresses, expect the industry and its investment partners to continue looking for bolt-on assets that align with their overall strategy. 

     

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    Ultimately, the oil and gas industry wants to match the best operator with each asset, to drive performance across operations, and optimize capital and carbon management. This has set the stage for a wave of consolidations, with integrated oil companies and large E&Ps (exploration and production companies) looking to secure acreage, enhance their cash flow and maximize returns via acquisition, rather than traditional exploration.
    Bruce On
    EY Strategy and Transactions, Principal, Ernst & Young LLP

    More deals beyond oil and gas consolidation: 

    While oil and gas captured attention with blockbuster deals, others have also been active and are likely to continue to be so in 2024, driven by the energy evolution. Energy transition deal volume jumped in 2021-2023 after growing at a CAGR of 12% from 2017 through 2020. And through September, there were 756 energy transition deals in 2023, exceeding the annual total of both 2022 and 2021.

    • Power and utilities: These companies have been focused on strengthening their balance sheets by divesting noncore assets, though there have also been deals to expand. One example of the latter is Enbridge’s announced acquisition of three companies from Dominion Energy, creating North America’s largest natural gas utility franchise. In 2024, focus areas will depend on where each company sits in the development lifecycle. Attractive investments will include the infrastructure needed to fully step into their energy transition role, such as grid upgrades, preparation for electrification and adding renewables capabilities. 
    • Mining and metals: As the resources underpinning much of the energy transition, these companies have been focused on the impact to critical minerals, offtake agreements and implications to the supply chain. The Inflation Reduction Act (IRA), significantly, has opened new monetization opportunities and is driving new creativity with respect to joint ventures and collaboration on projects. A key area of focus is the lithium needed for electric vehicle batteries, as exemplified by Livent and Allkem’s announced $10.6 billion merger in May.
    • Alternative and renewable energies: The assets, equipment, services and infrastructure of alternative and renewable energy technologies have seen significant investment. For example, EY analysis shows that through November, 65 carbon capture-related projects have been announced since the August 2022 implementation of the IRA. Clean hydrogen saw additional traction in October of 2023 as the Biden administration announced $7 billion in federal grants across 16 states for the development of seven regional hydrogen hubs. These projects are great examples of the cross-sector, public, private consortiums necessary to truly progress the energy transition. Other areas of increasing investment include manufacturing, new energy storage technologies and electric vehicles. 

    Energy activity to watch in 2024

    In the year ahead, utilities will continue divesting both non-core assets and even portions of their transmission and distribution portfolios, strengthening the balance sheet for future investments, while oil and gas is likely to see more consolidation. Finally, traditional energy companies as well as cross-industry corporates, private equity and venture capital will look to capitalize on the incentives provided by local, state and federal legislation, including the Infrastructure Investment and Jobs Act and the IRA. These incentives have made investments and potentially acquisitions, like those around renewable and alternative energy, more economic – which allows companies to progress their carbon reduction goals while generating returns.

    Contact Stephanie Chesnick and Bruce On for more information.

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Sector spotlight | Life sciences

Life sciences companies focus on the core with bolt-on deals

Life sciences M&A in 2023 has been returning close to pre-pandemic M&A levels, and we expect this rebound to continue. It was the second most targeted sector this year through November in terms of deal volume. 

With biotech valuations and IPOs down, patent expiries looming and an ongoing innovation renaissance, there are strong reasons for life sciences companies to use the record US$1.4 trillion firepower they hold to pursue acquisitions that fit their long-term growth strategy. The sector in fact has performed in line with the S&P 500 since the beginning of 2022.
Ranu Carroll
EY Americas Strategy and Transactions Life Sciences Leader

Charts show US life sciences deal value and volume by year from 2018 to 2023 (as of Nov 30).

  • Read more +#Read less -

    Deal-driving factors 

    • Patent expirations: Total sales at risk due to patent expirations between 2023 and 2028 are expected to be about $356 billion, according to Evaluate Pharma. The January 2023 launch of the first biosimilar adalimumab, the world’s best-selling drug, adds to the pressure on companies to develop new therapies that become growth platforms. 

    • Less access to public markets: IPOs and SPAC deals have slowed at the same time that a growing number of smaller MedTech and biopharmas are running short of cash. A recent EY survey shows that 29% of biotechs were operating with less than one year of cash at the end of 2022 and more than half of emerging biotechs were operating with less than two years of cash. An acquisition may be the most attractive exit option for these companies.

    • Focusing on the core: Larger life sciences companies are honing their focus on the core business, divesting consumer health and generics. The “divest-to-invest” mindset could have the dual impact of making more acquisition targets available and providing more funding for companies to make acquisitions that align with their growth strategy.

    Life Sciences M&A activity to watch for in 2024

    Divestments such as GE’s spin-off of GE HealthCare and J&J’s IPO of its Kenvue consumer health business could continue as 48% of global life sciences CEOs are interested in divestments, spin-offs and IPOs compared with 32% interested in M&A over the next 12 months, according to the October EY CEO Outlook survey. However, the life sciences companies also have $1.4 trillion in firepower or capital on their balance sheets to conduct acquisitions, which may make them more able to fund deals than their peers in other sectors.

    When deals are made, we would expect more bolt-on transactions, as the industry continues to shun “bigger-is-better” and take a more focused approach to acquisitions that both support their core capabilities and could have an easier path to approval. 

    PE, meanwhile, is increasingly showing an interest in the sector, accounting for more than half the transactions in the sector through the third quarter. The largest acquisitions have been platform deals, targeting both late- and early-stage pipeline opportunities and potential “foundations” for further R&D innovation across a therapeutic area beyond the pipeline assets. 

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    Contact Ranu Carroll for more information.

.

2024 US M&A activity outlook: Expect gradual, steady growth

M&A has begun showing more signs of life, especially for larger dealmaking, though overall US deal value was roughly flat. Private equity is also showing more activity, with volume up from its Q1 trough. After 2023 marks a new baseline and return to pre-pandemic levels, we anticipate gradual and steady growth in both corporate and PE deals in 2024. 

Headwinds such as higher interest rates and geopolitical uncertainty remain, but US interest in M&A is improving: 52% of US CEOs plan to engage in M&A in the next 12 months, according to the October 2023 EY CEO Outlook survey, compared with 35% of their global colleagues. 

“We expect companies to focus on deals that are likely to produce growth, though CEOs are also willing to do larger deals that rely on both revenue and cost synergies, as long as they are certain those synergies can be achieved,” Kaske said. “In terms of innovation, companies are looking at opportunities to add artificial intelligence and data capabilities.” 

The primary movers are likely to be serial acquirers, which have the necessary cash flow and capabilities, while they are also likely to be more reliant on inorganic growth.

We do not expect to see new entrants for a while as the cost of capital remains high. The valuation gap between buyers and sellers could also remain a check on deal activity. But more acquisition opportunities are emerging as some companies that were expecting to conduct IPOs look to sell instead, while smaller companies find they do not have the available capital to remain viable.

How EY can help

M&A advisory: Buy and integrate

We help enable strategic growth through better integrated and operationalized mergers and acquisitions, JVs and alliances. In particular, we help companies refine their growth strategy, perform deal sourcing, conduct diligence and valuation, and implement M&A integration.

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Summary

M&A activity in the US is starting to show signs of life as leaders look for growth opportunities despite higher interest rates and geopolitical uncertainty. Our EY M&A sector of the year and sectors to watch all offer the prospect for more M&A activity in 2024.

About this article

Authors
Elizabeth Kaske

EY Americas Strategy and Transactions Buy & Integrate Leader

Focused on mergers, acquisitions, divestitures and large-scale transformations. Mother, golfer, runner. Enjoys yoga, wakesurfing and global travel.

Stephanie Chesnick

EY Americas Strategy and Transactions Energy & Resources Leader

Proud to support clients in navigating the energy transition. Committed mentor and advocate for diversity and inclusiveness. Passionate traveler.

James W. Brundage

Partner, Strategy and Transactions, Ernst & Young LLP

Experienced merger and acquisitions advisor for the technology, media and telecommunication sector. Data-driven dreamer. Always learning. Grandson, son, husband, father and Longhorn.

Ranu Carroll

EY Americas Strategy and Transactions Life Sciences Leader

Life sciences sector leader. Strategy and M&A advisor. Avid traveler. Opera enthusiast. Rugby fan. Proud mom of three small humans.

Khalid Khan

EY Americas Strategy and Transactions AI Leader

Harnesses the power of data and mathematics to drive purpose-led, sustainable transformation for clients. Avid traveler. Proud father.

Related topics Mergers and acquisitions Strategy and Transactions Technology Energy and resources
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