Bain & Company Global M&A Practice Vice President Suzanne Kumar joins Yahoo Finance Live in-studio to highlight mergers and acquisition trends across categories — particularly in the energy sector — and what the Federal Reserve's interest rate policy will mean for the M&A market.
"The story of last year was that disconnect on buyer-seller valuation gap as interest rates rose. There was some kind of confusion and resetting of what is the right price expectation," Kumar says. "And so, we have been waiting to see how that logjam, how that backlog will start to get unlocked, and... when we start to see deals like this come to the market, now there's a new mark and... buyers and sellers can get to a closer place."
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BRAD SMITH: We're seeing some landmark merger activity from Capital One, just acquiring Discover Financial for $35 billion, to Walmart purchasing Vizio in a play to bolster its consumer ecosystem data. From Dealogic, said M&A volume is up 130% year over year so far this quarter. And we're only halfway through the first quarter, basically.
So what's the outlook for the dealmaking environment? Let's bring in Suzanne Kumar who is the Bain Company global M&A practice vice president to discuss more. Thanks so much for joining us here on set.
SUZANNE KUMAR: Thanks for having me.
BRAD SMITH: Absolutely. So let's dive right in here. The outlook for 2024 now that we've got some landmark deals that have already come forward this early in the year. What's the setup?
SUZANNE KUMAR: I think it's really promising. So as the Dealogic data said, M&A activity is up January and February. And there's two places where that's probably a continuation of what we saw last quarter in 2023 and a few places that's some new energy. So tech is new. Seeing some big tech deals is really encouraging. That's a place that has been down dramatically for the past couple of years.
The other place that is encouraging, is seeing a little bit more financial sponsor activity. So private equity investments, which has had been taking a hit over the past year as well.
SEANA SMITH: Suzanne, what are you seeing just in terms of valuation because we were talking about the fact, earlier this week obviously with Capital One, Discover really leveling up that valuation playing field that we have seen when you compare it to some of the deals last year. What does that tell us just in terms of where we are in that cycle and some of the recovery maybe that we could expect?
SUZANNE KUMAR: It is hopeful. I mean, the story of last year was that disconnect on buyer or seller valuation gap, as interest rates rose. There was some kind of confusion and resetting of what is the right price expectation. And so we've been waiting to see how that logjam, how that backlog will start to get unlocked. And when we start to see deals like this comes to market now. There's a new mark, and we can-- buyers and sellers can kind of get to a closer place.
BRAD SMITH: What is the hottest sector that investors should be watching for dealmaking activity this year too?
SUZANNE KUMAR: Again, I think the places we've seen deal activity, including energy, a lot of oil and gas-- consolidation still to come. Health care will continue to be an important part of the M&A market. And then as those would be the two places where we've seen a lot of M&A activity and we should continue to given the underlying industry dynamics and the need for growth in those places.
SEANA SMITH: How much is riding on the Fed's ability and really the fact that they are going to follow through with rate cuts. And we talk about there's so much focus on that timing of the first rate cut. But when we talk about the impact that is ultimately going to have on deal flow, how much of that really revolves obviously around the pace of those future cuts?
SUZANNE KUMAR: For strategic dealmaking led by corporates, I think the current interest rate environment is largely baked in. So higher for longer is a comfortable place, at least it's an understood place. For leveraged dealmaking, so on the private equity side-- venture capital-- they're going to be more sensitive to seeing the specific timing and size of those rate cuts. So for the strategic M&A market, I think that's why we are starting to see pickup in deal activity as executives get comfortable with the cost of capital today.
BRAD SMITH: How much will investors do you believe scrutinize the dealmaking that does come forward here? I mean, we think even in some of the deals that got announced last year that investors were really, really kind of sensitive to where companies were putting that capital to work and the companies that they were going after and acquiring as well.
SUZANNE KUMAR: There's quite a difference between what happens at deal announcement. And then when we do studies of value creation over time related to M&A activity, I would encourage investors to be looking at the longer term perspective. So if you take a 10-year perspective and you look at, is a company doing at least a deal a year, so that puts that in what we call a frequent acquirer category, they're going to outperform in the long run. And so looking beyond the specific large deal announcement and the overall M&A activity would be key.
SEANA SMITH: The regulation aspect, yeah, we haven't brought that up yet. When it comes to the action that we've seen from the FTC when it comes to the scrutiny that we've seen from the Biden administration, how do you see that or within your conversations to the extent that you can share how are companies-- how are potential deal makers thinking about that and how do you think that is ultimately helping to guide some of those decisions when it comes to acquisitions?
SUZANNE KUMAR: This has been building for years. And I would say even versus this time last year, we've moved more into a situation of the known, unknown. So the landscape is a bit clearer in terms of what kind of actions the FTC or the DOJ may be taking. And that allows executives to look at their M&A roadmap and really consider where it might we see regulatory scrutiny. Add that lens to their potential deal pipeline. And if there is the conviction and the strategic need to pursue a deal, you can start to take that into consideration.
So it's stymieing dealmaking on some levels. There's going to be certain deals you just don't consider. And then for the small number of deals that get regulatory scrutiny, you need to factor that in.
SEANA SMITH: Suzanne Kumar, great to have you here in studio with us. Bain Company's global M&A practice vice president. Thanks so much.