Big Debates: How Will M&A and IPOs Drive Markets in 2025?

Summary

Podcast Summary: Big Debates: How Will M&A and IPOs Drive Markets in 2025?

Podcast Information

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: Big Debates: How Will M&A and IPOs Drive Markets in 2025?
• Release Date: January 23, 2025

In this episode of "Thoughts on the Market," Morgan Stanley delves into the evolving landscape of mergers and acquisitions (M&A) and initial public offerings (IPOs), exploring their potential impact on the markets in 2025. Hosted by Michelle Weaver, alongside experts Mike Cypers and Ryan Kenny, the discussion navigates through the resurgence of M&A activity, the IPO market revival, policy influences, and the implications for retail investors.

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1. Introduction to the M&A and IPO Landscape

Michelle Weaver opens the discussion by highlighting the significant decrease in global M&A activity in 2023, marking the lowest levels in over three decades. However, signs of recovery began in 2024, prompting a deeper examination of the factors driving this resurgence and the sustainability of retail investing in the upcoming year.

"2023 saw the lowest level of global M and A activity in at least 30 years, but we've started to see activity pick up in 2024."
— Michelle Weaver [00:14]

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2. Drivers Behind the M&A Resurgence

Mike Cypers identifies a confluence of factors contributing to the uptick in M&A activities:

• Pent-Up Activity: A buildup of deferred transactions during the previous subdued periods.
• Equity Market Growth: Expansion of equity markets globally, providing more opportunities for transactions.
• Stable Financing Conditions: Availability of broad financing with meaningful issuance, supported by tight credit spreads and stabilizing interest rates.
• Improved Liquidity: Enhanced liquidity conditions reducing bid-ask spreads, making transactions more feasible.

"It's a combination of factors in the context of a lot of pent up activity and a growing urge to transact after a very subdued period."
— Mike Cypers [00:45]

Cypers also emphasizes the positive outlook for 2025, despite recent market volatility, attributing confidence to the potential changes under a new administration that may foster a more favorable antitrust environment.

"We are quite positive here in '25 as we think about scope for continued surge of activity."
— Mike Cypers [02:00]

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3. Impact of Rising Interest Rates

Michelle Weaver raises concerns about the significant rise in interest rates since December and their potential to slow down M&A activity.

"We've seen rates rising pretty substantially since December. Does that throw a wrench into this at all or do you think we see more stabilization there?"
— Michelle Weaver [02:06]

Mike Cypers acknowledges the risk of a slowdown but remains optimistic, citing other supportive factors that could continue to drive M&A activity forward.

"I think it could be a little bit of a slowdown that would be the risk here. But... there are a lot of factors that can be very helpful in terms of driving a continued pickup in activity."
— Mike Cypers [02:09]

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4. Role of Financial Sponsors in M&A

Diving deeper, Mike Cypers discusses the pivotal role of financial sponsors in M&A activity. With approximately $4 trillion in capital poised for deployment, sponsors have significant "dry powder" that has been lying idle due to previous market conditions.

Key Points:

• Capital Deployment Pressure: Sponsors face declining returns within funds and looming expirations of dry powder by the end of 2025.
• Portfolio Realization: Sponsors are eager to provide liquidity back to their limited partners (LPs), addressing strained client relationships.
• Enhanced Fundraising Outlook: Successful capital deployment can improve the fundraising environment for private equity funds.

"The return clock is ticking. The lack of deployment is hurting returns within funds... sponsors won't get some of the performance fee economics that come through to them on that capital."
— Mike Cypers [02:33]

This mounting pressure is expected to catalyze a surge in M&A activities from both buy-side and sell-side sponsors.

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5. IPO Trends and Resurgence

Ryan Kenny provides an overview of the IPO landscape, projecting a strong rebound in equity capital markets (ECM) driven by improved market conditions:

• Historical Context: In 2024, M&A volumes were approximately 40% below three-decade averages, while ECM was 50% below.
• Current Indicators: Strong equity markets and low volatility are setting the stage for renewed IPO activity.
• Recent Performance: Several significant IPOs in the previous year performed well, with Q4 2024 showing a 50% year-over-year increase in ECM volumes.

"With IPOs, we are also expecting a significant resurgence off of a low base."
— Ryan Kenny [04:27]

The improvement in ECM activity is closely tied to the favorable conditions similar to those driving M&A resurgence.

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6. Policy Influences: Antitrust Regulation under the Trump Administration

A critical segment of the discussion focuses on the anticipated impact of policy changes under the incoming Trump administration, particularly concerning antitrust regulations.

Ryan Kenny outlines the expected shift from the Biden administration's stringent and unclear antitrust policies to a more "normal" regulatory environment. This normalization is anticipated to reduce uncertainties surrounding M&A transactions, thereby boosting corporate confidence to pursue deals without the fear of prolonged legal challenges.

"We expect there will still be some deals like a challenge, but it will operate under a more historical norms."
— Ryan Kenny [05:34]

This regulatory clarity is expected to reinvigorate large-cap M&A deals, which had been significantly hindered under previous policies.

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7. Catalysts Beyond Political Changes

Beyond policy shifts, Ryan Kenny identifies additional catalysts that investors should monitor in 2025:

• Macro Catalysts:

  • Clarity on tariff and immigration policies.
  • Impact of these policies on GDP growth.
  • Stabilization of the interest rate path, even without further rate cuts.

• Structural Catalysts:

  • Advancements in AI, technology, biotech, healthcare, and energy transition.
  • Reshoring and strategic geographic expansions in a multipolar world.

These factors collectively contribute to a conducive environment for both M&A and IPO activities.

"Structural catalysts that are really critical this cycle are the need for AI capabilities, innovation in tech, innovation in biotech, healthcare, the energy transition..."
— Ryan Kenny [07:37]

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8. Outlook for 2025 and Beyond

Ryan Kenny presents an optimistic outlook for 2025 and beyond:

• 2025 Projections:

  • M&A Announcements: Expected to double from a low base, with a 50% year-over-year increase.
  • ECM Volumes: Significant rebound anticipated, continuing the upward trend from 2024.

• Long-Term Forecast:

  • Initiation of a multi-year capital markets growth cycle.
  • Larger deal sizes and higher deal counts driven by pent-up demand and a robust economy, surpassing the scale of the 2021 capital markets cycle.

"We think this is the beginning of a multi year capital markets growth cycle with bigger deal sizes and more deal count than average."
— Ryan Kenny [08:43]

This sustained growth trajectory positions the markets for a vibrant and dynamic period, underpinned by strong economic fundamentals and strategic corporate actions.

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9. Implications for Retail Investing

Concluding the discussion, Mike Cypers explores the implications of the anticipated rebound in M&A and IPO activities for retail investors:

• Increased Market Engagement: More IPOs and corporate actions provide retail investors with a broader array of investment opportunities.
• Enhanced Trading Volumes: Greater investor engagement is expected to boost trading volumes across stocks and options.
• Margin and Securities Lending: Increased confidence may lead to higher margin lending and securities lending activities, benefiting retail brokerage services.

"Overall, a supportive macro backdrop with rebound and capital markets activity... should be helpful in terms of bringing more investors into the markets, including retail investors."
— Mike Cypers [09:43]

This positive environment is likely to foster greater participation and activity within the retail investment community, contributing to a more vibrant and liquid market.

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10. Conclusion

The episode "Big Debates: How Will M&A and IPOs Drive Markets in 2025?" provides a comprehensive analysis of the factors influencing the resurgence of M&A and IPO activities. With improved market conditions, supportive policy environments, and strategic corporate maneuvers, Morgan Stanley experts project a robust and sustained growth trajectory for the capital markets in 2025 and beyond. Retail investors stand to benefit from increased market engagement and a broader spectrum of investment opportunities, signaling a promising outlook for the financial landscape.

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Notable Quotes:

• "We are quite positive here in '25 as we think about scope for continued surge of activity."
  — Mike Cypers [02:00]

• "We expect there will still be some deals like a challenge, but it will operate under a more historical norms."
  — Ryan Kenny [05:34]

• "We think this is the beginning of a multi year capital markets growth cycle with bigger deal sizes and more deal count than average."
  — Ryan Kenny [08:43]

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For More Information: To stay updated with insightful market analyses, subscribe to Morgan Stanley's "Thoughts on the Market" podcast and share it with colleagues and friends interested in the financial markets.

Transcript

[Michelle Weaver]

Welcome to Thoughts on the Market. I'm Michelle Weaver, US Thematic and Equity Strategist at Morgan Stanley.

[Mike Cypers]

I'm Mike Cypers, head of US Brokers, Asset Managers and Exchanges Research.

[Ryan Kenny]

And I'm Ryan Kenny, US Mid Cap Advisors Analyst at Morgan Stanley.

[Michelle Weaver]

In this episode of our special miniseries covering big debates, we'll focus on the improving M and a and IPO landscape and whether retail investing can sustain in 2025. It's Thursday, January 23rd at 10am in New York. 2023 saw the lowest level of global M and A activity in at least 30 years, but we've started to see activity pick up in 2024. Mike, what have been the key drivers behind this resurgence and where are we now?

[Mike Cypers]

Look, I think it's been a combination of factors in the context of a lot of pent up activity and a growing urge to transact after a very subdued period of, you know, call it four to six quarters of quite limited activity. Key drivers as we see it, ranging from equity markets that have expanded across much of the world, low levels of equity volatility, broad financing availability with meaningful issuance. As you look across investment grade and high yield bond markets, tight credit spreads, interest rates stabilizing in 24 and then the Fed began to cut so liquidity pretty robust. All of that helping reduce bid ask spreads. In terms of where we are now post election, I think there's just a lot of excitement here around a new administration where we could see some changes around the antitrust environment that can be helpful as we think about unlocking greater M and A activity across sponsors as well as strategics and helping improve corporate confidence. But look, the recent rout of market volatility could delay some of the transactional activity uplift, but we view that as more of a timing impact and we are quite positive here in 25 as we think about scope for continued surge of activity.

[Michelle Weaver]

We've seen rates rising pretty substantially since December. Does that throw a wrench into this at all or do you think we see more stabilization there?

[Mike Cypers]

I think it could be a little bit of a slowdown that would be the risk here. But as we think about the path for moving forward, I do think that there are a lot of factors that can be very helpful in terms of driving a continued pickup in activity which we're going to talk about and why that will be the case.

[Michelle Weaver]

Great. And you mentioned financial sponsors earlier. I want to drill down there a little more. What do you think would get sponsor activity to pick up more meaningfully?

[Mike Cypers]

Well, as I think about it Activity is already starting to pick up clearly across strategics as well as sponsors. On the sponsor side, it's been lagging a bit relative to strategics, we think, both of which will build and Ryan will get to that. On the strategic side, as we think about the sponsors, they're sitting with $4 trillion of capital to put to work. That's been sitting on the sidelines where you just haven't seen as much activity over the past couple of years. Overall activity in 24 was probably, call it maybe around 20% below peak levels. And this is burning a hole in the pockets of both sponsors as well as their clients. And so we see a growing urge to transact here, which gets to some of your earlier questions there too. So why is that? Well, the return clock is ticking. The lack of deployment is hur returns within funds. Some of this dry powder also expires by the end of 25. And so if it's not yet deployed, then sponsors won't get some of the performance fee economics that come through to them on that capital. That's all on the deployment side. As we think about the realization or exit side, we think that's probably going to lag, but we'd still expect a steady build through this year. Today, sponsors are sitting on, call it around $10 trillion of portfolio of investments that are in the ground. They haven't really provided much in the way of liquidity back to their custom the LPs and the funds. This is putting a little bit of a strain not only on the client relationships that want more money back from their private investments that haven't received it, but it's also one of the causes of what has been a little bit of a challenging fundraising backdrop across private equity funds. Hence, if sponsors can return more capital to their clients, that can be helpful in terms of healing the overall fundraising backdrop. Look, putting all that together, we expect an expanding pace of transactional deal activity across the sponsors from both the buy side as well as the sell side in terms of their activity.

[Michelle Weaver]

And ryan, how about IPOs? Have they been part of a similar trend?

[Ryan Kenny]

Yes, definitely. So with IPOs, we are also expecting a significant resurgence off of a low base. So just to put some numbers on it, in 2024, announced M& A volumes relative to nominal gdp were around 40% below three decade averages. Equity Capital Markets, or ECM, was even more muted. 50% below three decade averages. And the leading indicators for ECM are very similar to the leading indicators for M and A. You want a strong equity market, relatively low volatility so that companies have the confidence to go public and so that deals can price well. And those conditions are really starting to materialize already in 2024. And we saw a few big IPOs, price well last year and launch well. The fourth quarter also looks strong. We saw a significant acceleration in industry ECM activity in October, November, December, 4Q volumes tracking up over 50% year over year.

[Michelle Weaver]

Let's dig a little deeper into potential policies from the incoming Trump administration. What are your expectations around antitrust regulation and its impact on M and A?

[Ryan Kenny]

So Trump has announced his appointments to the FTC and to the DOJ antitrust division. And our expectation is a return to normal. And that's coming off of what was a more onerous and not clear environment under Biden. The Biden administration's approach was to disincentivize M and A, and they did that by defining M and A market concentration in novel ways, looking at things like labor markets and looking at how competitiveness is defined in new ways. And these new ways of defining concentration decrease the clarity of whether a specific deal would be challenged. So from a CEO and board perspective, you don't want to waste the time of your management team and your board going through a deal that might not go through, in addition to the risk of prolonging the deal and the risk of higher legal expenses during the process. So now that we're returning more towards normal, that's our expectation. We expect there will still be some deals like a challenge, but it will operate under a more historical norms. And so that really checks the box of getting that CEO confidence up to transact more.

[Michelle Weaver]

And I know that dynamic you were talking about with market concentration created quite a big drag on large M and A deals and large cap M and A. Do you think we could start to see that come back as well?

[Ryan Kenny]

Yeah, we expect large cap dealerships deals to rebound even more than small cap deals. When we started to see the activity pick up in 2024, it was led by more mid cap corporates. And now we expect to see large deals return in force at a time when financial sponsors like what Mike was just talking about, coming back in force at the same time, which drives up the animal spirits when all parts of the M and A market are returning at the same time.

[Michelle Weaver]

And what are some other catalysts beyond the political side that investors should watch in 2025 around capital markets developments?

[Ryan Kenny]

So I categorize it as macro catalysts and structural catalysts. The macro catalysts are clarity on tariff and immigration policies, how that will impact GDP, clarity on the interest rate path. And look, you don't need more rate cuts to get this market moving. You can still have a significant increase even if there are no more rate cuts this year. But narrowing the range of outcomes is important. And I think we're already there where maybe we get no cuts this year, maybe we get two cuts. It's a much tighter environment than where we were over the last few years. And so that helps narrow the bid ask spread between buyers and sellers. Structural catalysts that are really critical this cycle are the need for AI capabilities, innovation in tech, innovation in biotech, healthcare, the energy transition, reshoring and exploring your geographic footprint in a multipolar world are all really critical when you evaluate the types of companies that a board would want to acquire.

[Michelle Weaver]

What's your outlook for 2025 and then even beyond that when it comes to both M and A and IPO activity.

[Ryan Kenny]

So in 2025 we see a strong rebound in both ECM and M and A ECM volumes. In our base case, we expect to roughly double off of a low base M and A announcements we expect up over 50% year over year in 2025. And importantly, that's our base case. Even in our bear case, we model an increase in both ECM and M and A volumes. Given we're coming off of such low levels, we've had three years of light activity and pent up demand and pipelines have already begun to build. When we look forward beyond 2025, we think this is the beginning of a multi year capital markets growth cycle with bigger deal sizes and more deal count than average, driven by three years of pent up demand and an economy that's a third larger than 2021, which was the last time we had a capital markets cycle.

[Michelle Weaver]

And then Mike, what does this rebound in capital markets activity, including M and A and IPOs means specifically for retail investing?

[Mike Cypers]

Overall, a supportive macro backdrop with rebound and capital markets activity we think should be helpful in terms of bringing more investors into the markets, including retail investors, whether it's from corporate actions and IPOs. That helps in terms of more stocks to trade, also helps in terms of revising animal spirits. I think that's all helpful in terms of supporting engagement across both single stock volumes and equity markets as well as options. So all of that together we are expecting greater investor engagement here in 25. And confidence as well can help boost not just trading volumes, but also margin lending and securities lending. And so all of that can be helpful as we think about our forecast for our retail brokerage Coverage Group.

[Michelle Weaver]

Mike Ryan thank you for taking the time to talk and to our listeners, thanks for listening. If you enjoy thoughts on the market, please leave us a review wherever you listen and share the podcast with a friend or colleague today. The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for.