2024 Predictions For Private Company Deals And Lessons From A Success

Date: February 9, 2024

Note: This content was originally seen on Forbes.com.

In the face of higher interest rates and elevated concerns about spending, 2023 was a slower M&A year overall across industries. Following a busy 2021 and 2022, the market saw deal volume fall 14% through August 2023 compared to the same period in 2022, according to Boston Consulting Group.

Looking forward to 2024, you and your company may be considering M&As to accelerate or enable your strategic goals like scale or market entry—or expand product capabilities and offerings. Or maybe you are a founder thinking about selling or raising your next funding round. When will be the right time? How do you read the signs to maximize your investment?

I am optimistic that private company funding, along with mergers and acquisitions, will pick up in 2024 in light of the macroeconomic trends. Here are some trends I've noted as to why this will be the case:

Inflation will slow, for real.

In mid-December, the U.S. Bureau of Economic Analysis reported that the six-month rate of inflation had fallen to the Federal Reserve's target of 2%. Moreover, GDP (gross domestic product) figures released at the same time revealed that the core PCE (personal consumption expenditures) price index increased at only 2% annually in the third quarter, representing the smallest increase since late 2020. This was welcome news heading into 2024.

We'll see increased confidence in cost of capital.

Investors look for certainty and the last few years have seen anything but that when it comes to borrowing and financing. In 2022-23, we saw interest rates skyrocket by 4.9 percentage points in less than 15 months, surpassing the previous record of 3.2 percentage points over a similar time frame in 1988-89. When investors can't predict the ceiling on the cost of capital, they cannot appropriately price deals, and as a result, many firms have been "risk off" when it came to investing. At its December meeting, the U.S. Federal Reserve gave guidance that rates will decline by 75bps in 2024, immediately making the math more predictable.

The M&A bid-ask spread will narrow.

In the U.S., over $1.5 trillion in global M&A deals were made in the third quarter of 2021, compared to just over $738 billion in the third quarter of 2022 and $771 billion in the third quarter of 2023. Outside the cost of borrowing, another reason for the stagnation in M&A lies in the gap between seller expectations and investor valuation. Moreover, fewer deals getting made means that there were fewer data points to provide comparatives and remove opinion from the equation. The result? Often, a significant gap in valuation between the buyer and seller. Unfortunately for many startup founders, the boom days are over and a more realistic view has come into focus, now two years later. As more deals occur, that view of reality will become even sharper for those on both sides of the deal. M&A can accelerate when buyers and sellers are more aligned on price expectations.

The mountain of cash sitting on the sidelines will (begin to) get spent.

In November 2023, Blackrock reported that over $4 trillion in investor cash was still "sloshing around, waiting for action." While they stopped short of predicting exactly how these funds will be deployed, some of it will by necessity make its way to startups and new ventures. Investors need to show returns and will renew their appetite for risk in the face of more certain economic conditions. Meanwhile, many founders have been waiting patiently to attract their next round of funding and will certainly seize the moment, even if it means taking a hit on valuation.

No one will forget about generative AI.

Since the launch of ChatGPT in November 2022, an AI gold rush has been under way. Crunchbase reports that in 2023 almost 1,500 AI companies have been founded. This doesn't even take into account all the companies in the AI space who have been waiting to launch their next round of funding since the 2022 slowdown. While we are certainly in the early days of the AI revolution, I would expect companies to do acquisitions or acqui-hires in order to not get left behind.

When it comes to acquisitions in particular, it's not only about the money. Intangibles matter, and they can make or break the success of any deal. In 2022, my company, AffiniPay, made the strategic decision to acquire MyCase, a legal practice management software company. That acquisition was successful because both companies maintained a singular focus on our customers throughout the integration process. Input from the people in each organization played a central role in that customer-centricity. For the first six months following AffiniPay's acquisition of MyCase, I was on the road conducting listening tours in all of our combined offices in the U.S. and Canada. Not only did this enable me to hear directly from the people on the front lines with our customers, but it also reinforced the importance of collaboration.

Even the best acquisitions experience bumps in the road. McKinsey points out that the first 12-18 months post-close are the most critical time frame. Their research shows that when a new company outperforms its peers 18 months after closing, there is a nearly 80% chance of that trend continuing three years later. Conversely, if a newly formed company is lagging behind competitors 18 months after the deal is final, there is only a 17% likelihood that performance can be turned around in three years. I'm happy to say that our efforts paid off and that we are well on the road to becoming a successful example.

I can't wait to see what the future brings, and I look forward to tracking the innovative mergers and acquisitions that will occur in 2024 and beyond.