Merger Mania: The Only Way to Grow?

After 18 months in an essential deep freeze, the deal market is starting to thaw—and it is likely to get hotter as the year goes on.

As leaders struggle to create organic growth, they are turning to an old strategy: buying it. Both public companies and private equity firms have returned to dealmaking in a big way to start the year, with major mergers or acquisitions taking place across industries, among them retail, pharmaceuticals, energy, and financial services. In total, deal activity in the US is up 130% through February, to $288 billion. With the exception of last year’s fourth quarter, it’s the most activity in the first two months of any quarter since the start of 2022. Worldwide M&A activity grew 56% through February to $453 billion.

“There’s a lot of pent-up demand coming back into the market,” says Steven Racine, a client partner in the Global Banking and Markets practice at Korn Ferry. Racine sees the hot start to 2024 getting even hotter as the year goes on. “Volume is only going to ramp up from here,” he says.

To be sure, the pickup in M&A coincides with the broader optimism about the economic outlook that began late last year. As fears of a recession faded and interest rates stabilized, leaders felt more confident that the timing was right to start doing deals again, says Jeff Constable, co-leader of the Global Financial Officers practice at Korn Ferry.

At the same time, experts say, sellers are realizing that now may be their best chance to cash out at a fair price. They may not get the rich deals buyers were offering in 2021, but they will get more value than they would have in 2022 or 2023. Lastly, even though regulators have been more aggressive about challenging megadeals—forcing the abandonment of at least one—experts say the possibility of a new administration makes M&A a risk worth taking.

Still, critics say dealmaking isn’t going to solve firms’ long-term challenge of finding organic growth. Overall, top-line growth is stagnating: According to FactSet data, S&P 500 companies grew their revenue by 4.0% in the most recent quarter, which is significantly below the 5-year average of 6.9% and the 10-year average of 5%. “The slowdown in revenue is a sign of organic growth issues,” says Deepali Vyas, senior client partner and global head of the FinTech, Payments, and Crypto practice at Korn Ferry.  The outlook for the rest of the year isn’t much better—analysts are projecting quarterly revenue growth of 3.5% for the current quarter, then 4.6%, 5.0%, and 5.7%, respectively, for the subsequent three quarters.

Some industries are being hit harder than others, of course, including luxury, energy, financial services, tech, and business and professional services. Alan Guarino, a vice-chairman in the CEO and Board Services practice at Korn Ferry, sums it up: “We basically have a white-collar recession across the board.”

Alma Derricks, a senior client partner in the Culture, Change, and Communications practice at Korn Ferry, draws a connection between the slowdown in top-line growth and the hundreds of thousands of layoffs at firms over the last two years. She says companies have gotten rid of a lot of creative, innovative talent. Moreover, after watching thousands of their colleagues walk out the door despite strong company performance, those who remain are so worried about getting fired that they have become risk averse. “Firms need agitators to grow organically,” says Derricks. “The fact that they are buying growth is a red flag that they can’t develop it internally.”

For his part, Guarino says remaking sales processes is one of the areas in which firms see the most opportunity for growth. “Firms are finally embracing the ‘science of selling,’” he says, noting that organizations are investing in predictive and behavioral technologies to improve both the experience of customers and conversions for salespeople.

Guarino says the deal market is likely to remain strong as companies look for scale to fully take advantage of these investments. “M&A is really being driven by the fact that we have weak companies and strong companies,” he says. 

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