S&P webinar: Megadeals offset M&A slowdown as AI boosts asset-heavy sectors

➤ Global M&A values exceeded $1 trillion in Q2 2024, even as deal counts fell below 10,000 for the fourth time since 2020.

➤ Most activity is concentrated in megadeals over $10 billion, particularly in tech, media, telecom and energy sectors.

➤ AI is driving indirect M&A activity in asset-heavy sectors like environmental services and infrastructure, as data centers require cooling and power.

Deals of $10 billion-plus are offsetting a slowdown in M&A transactions, according to speakers at a recent S&P Global Market Intelligence webinar.

Deal counts in 2021 regularly reached 13,000 to 15,000 per quarter globally, compared to fewer than 10,000 in the second quarter of 2024, said Joe Mantone, editorial senior lead for financial institutions at Market Intelligence, during the webinar.

"The total value being over one trillion is a pretty robust number. This was sort of where we were in 2021, when M&A was booming," said Mantone, during the M&A in Focus: Bucking the AI Boom with Asset-Heavy and Services Deals webinar. "But the total number of deals is much lower than it was back then."

The market has seen its most active period ever for deals exceeding $10 billion, with 38 such transactions over the past three quarters.

However, these megadeals are primarily strategic acquisitions rather than private equity-driven activity. The tech, media, telecom and energy sectors recorded the highest M&A values in the second quarter, with notable deals including NextEra Energy Inc.'s acquisition of Dominion Energy Inc.'s assets and the Paramount Skydance Corp. - Warner Bros. Discovery Inc. transaction.

AI drives asset-heavy sector activity

While AI-related megadeals dominate headlines, the technology is creating significant opportunities in asset-heavy sectors that support AI infrastructure, particularly environmental services and industrial businesses.

"AI is an asset-heavy sector. When you think about data centers, you build these data centers, and that is a fixed asset with highly contracted revenue," said Effram Kaplan, co-CEO at Brown Gibbons Lang & Co. LLC. "The opportunity goes back to whether it's environmental or HVAC or other infra services, is to be able to surround, be the first derivative or the second derivative to that fixed asset base."

Kaplan pointed to Ecolab Inc.'s acquisition of CoolIT Systems Inc. as an example of how essential services supporting AI infrastructure command premium valuations. "That is an essential service where you need to cool down these facilities," he said.

Robert Michalik, managing director at Kinderhook Industries, noted that AI is already being deployed to improve operational efficiency in portfolio companies. "The ability to crunch data, we really have started in our environmental space, looking at routes, breaking down routes and your volumes at each stop and the pricing of the volumes at those stops," Michalik said. "It's amazing the data and the analytical power that you can really achieve with some of these AI tools."

However, Michalik cautioned that AI has limitations. "None of these AI tools have gotten to a point where they can think of the right question and apply the next level of analysis," he said.

Access the webinar here.

Private equity explores alternative exits

Private equity firms are increasingly exploring alternative liquidity solutions beyond traditional exits amid a challenging market for middle-market deals.

"It is no longer the day when, in order to generate liquidity for your business, you have to sell your business into private markets," Kaplan said. "The product proliferation in the private markets continues to expand. Whether it's hybrid capital, whether it be CD products to extend the life of the hold."

Despite hopes for a surge in transactions, dealmakers expect steady rather than explosive growth. Kaplan's firm has seen top-line revenue increase about 35% in the first seven months of the year, with deal counts up around 20%, indicating larger average transaction sizes.

Strategic considerations have replaced financial engineering as the primary driver of exit timing. "I can't tell you the last time I actually had a conversation with the sponsor that was focused on our interest rate is gonna drop down another 150 basis points, so we can increase the value," Kaplan said. "It's all about what the strategic marketplace is doing."

Essential services command premium valuations

Environmental services and other asset-heavy sectors continue to see strong M&A activity, with private equity leading both buyouts and add-on transactions. These sectors offer predictability and inflation resistance, making them attractive amid macroeconomic uncertainty.

Valuations in these markets continue to rise, driven partly by an influx of infrastructure capital. The concentration of capital in larger deals and specific sectors suggests the bifurcated M&A market will persist, with smaller businesses struggling to attract interest while megadeals and strategic acquisitions in essential services continue to command premium valuations.

"When you're a smaller business, it's really hard to have a differentiating factor compared to larger businesses," Kaplan said. "Expertise is very critical in terms of adding value."

The outlook for the remainder of 2024 remains cautiously optimistic, with dealmakers expecting continued activity in asset-heavy sectors even as broader market challenges persist. Private equity's backlog of portfolio companies acquired during the zero-interest-rate environment of 2019 to 2021 continues to create a valuation gap that must be reconciled before transaction volumes increase meaningfully.

"Private equity deal flow is partially jammed up by virtue of the fact that they haven't quite digested the 2019, 2020 and 2021 activities that were robust and executed under a zero interest rate environment," Michalik said.

– Access the Market Intelligence webinar replay portal. – Explore more investment banking news. – Read about the concentration of private capital in AI funding rounds.

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