It’s no secret that 2023 was a very slow year for mergers and acquisitions. Sky-high interest rates, valuation gaps, and other factors contributed to a decline of nearly 40% in global private equity deal value.
Accounting firms suffered the effects of this slowdown in the form of reduced M&A services revenue and stiffer competition for every opportunity.
Now, interest rates are dropping and valuations are stabilizing. Does this mean we will see a surge in M&A activity over the coming year? Or are there other factors that might prevent an M&A market comeback? And, perhaps most importantly, how can you set your firm up for success regardless of what the future holds?
To find out, we spoke with Emanuel Mesa, Industry Cloud Architect at Intapp. Here are the highlights of our conversation.
How would you sum up where the M&A market stands as we kick off 2024?
Emanuel Mesa (EM): We’re starting to rebound from some of the major factors that contributed to last year’s big drop in deal value. For example, in 2023 we saw the highest interest rates in two decades, and many private equity firms shied away from dealmaking because of high financing costs. But this year, the U.S. Federal Reserve expects to gradually lower interest rates, which is likely to drive more M&A activity. Unless, that is, they decrease rates too slowly, and deal volume is suppressed because buyers are avoiding expensive debt financing.
Also, there are signs that the large valuation gap that stifled M&A activity last year is finally starting to close. Towards the end of 2023, transaction multiples started to stabilize, indicating that buyers wanting low prices and sellers expecting high valuations rooted in more robust markets are finding ways to work together.
Throughout the 2023 slowdown, private equity firms accumulated an unprecedented $2.59 trillion in dry powder, which is an 8% increase from 2022. And U.S. corporations built a massive cash buffer of $4.15 trillion, exceeding their long-term trendline by $1.38 trillion. Everyone is just waiting for the right time to deploy their stockpiles. However, there are several things that might make both parties unwilling to part with their cash.
Research indicates a tough fundraising environment for 2024, with just 15% of institutional investors actively looking to commit to new fund managers. Private equity firms may be hesitant to make investments or participate in M&A activity given these conditions. As for corporations, treasurers are concerned about the health of the banking system. That coupled with the Federal Reserve’s decision to stop raising rates and tighten monetary policy might cause them to hang on to their capital.
And, as we all know, AI became more accessible in 2023. I think this is going to lead to a lot more M&A activity. Overall, I think we’ll see more M&A volume in the coming months because of that and the interest rate decreases.
Why do you think AI will have such a big impact on M&A activity this year?
EM: AI is a disruptive innovation. This means it’s gradually evolved to become available to a broader audience through companies that are displacing established market leaders by providing simpler, more accessible solutions. Streaming services like Netflix are a good example of this.
Historically, disruptive innovations lead to M&A activity, where both public and private companies acquire smaller companies. With AI, I think we’re going to see something similar, where established companies will acquire startups or small tech companies to gain new capabilities. Established AI companies might also make defensive acquisitions to prevent disruption from new AI startups.
Will M&A teams at accountancies need any specialized skills for AI-related dealmaking?
EM: Yes — there will be a lot of demand for accounting professionals that are skilled in due diligence advisory of AI companies. Firms need to know how to properly value these companies, some of which might not have a lot of cash flow yet. It’s critical for firms to get ahead of the curve and build out the relevant competencies needed to support this now.
What other things should M&A teams do now to set themselves up for success this year?
EM: Since private equity firms and corporations are sitting on a lot of cash, proactively managing client relationships in accounting is more critical now than ever before. Firms that engage in “Activator” behaviors that nurture relationships and build trust within their networks will be at the top of the list when companies are ready to deploy their capital.
Also, about a quarter of all dry powder is held by the top 25 private equity firms. Dealmakers should position themselves with these firms now. However, they shouldn’t put all their eggs in one basket. Their client portfolios should have a healthy mix of sponsors and corporations to mitigate risk. For this same reason, it’s also important to have clients that do big deals, and clients that do small deals.
In 2023, even though deal volume significantly decreased, deal count only dropped by 2.5% because there were still lots of small deals happening. So, in a down market, firms can still win revenue from the companies doing these smaller deals.
How can AI and other technologies help accounting firm M&A teams win more business as the market continues to evolve?
EM: Technology solutions that encourage and even enforce Activator behaviors can ultimately help teams close more deals. For example, platforms like Intapp DealCloud use AI to provide relationship management functionality that helps professionals expand their networks and discover new opportunities. If you’re on the financial due diligence team, for instance, DealCloud will prompt you if it detects a potential cross-sell opportunity for another service line such as commercial due diligence.
Automation is another key area where technology supports growth. Platforms like DealCloud automatically capture data from multiple sources and make it accessible from one centralized location. This can improve sales deal velocity at accounting firms by enabling teams to quickly and easily uncover intelligence that helps them win business.
These platforms also significantly improve productivity and prevent data-entry errors by automatically generating and formatting due diligence checklists and other documents. Because firms are no longer spending excessive billable hours creating documentation manually, they have the major competitive advantage of being able to charge less.
Buyers and sellers today are looking for accounting professionals that are using the latest and greatest technologies because they know these firms are more cost-effective — the best CRM software for accounting firms is no longer enough. Technology assessments are increasingly becoming a part of the vendor evaluation process, and firms that aren’t using AI and other modern technologies will lose business to those that are.
While there are signs indicating that M&A activity will bounce back in 2024, there are many complex factors at play that make it difficult to predict if the market will make a strong comeback. Schedule an Intapp DealCloud demo today to learn how our AI-powered deal and relationship management platform can help your accounting firm grow regardless of how the market evolves.