Amid more accommodative financial and regulatory conditions, U.S. merger-and-acquisition activity may be poised to accelerate in the year ahead, says Fitch Ratings.
In a new report, the rating agency said that dealmaking may pick up in 2025, given the declining cost of capital and the prospect of softer regulation in the U.S. under the incoming presidential administration.
High equity valuations, tight corporate bond spreads and lower interest rates all contribute supportive financial conditions for M&A, it noted.
“Many U.S. corporates have dry powder for acquisitions,” it said, adding that 82.5% of the North American companies it rates have headroom within their credit ratings to accommodate additional leverage.
Additionally, “North American corporates also generate the highest [free cash flow] margins among their global peers, which means acquisition-related debt can be paid off quickly,” it said.
In particular, Fitch said that issuers in the diversified industrials and building products sectors, “have sufficient financial capacity to continue growing via M&A.”
“We expect them to align business portfolios with attractive end markets, grow market share and focus on competitive strengths,” it said.
And, in the oil and gas sector, “M&A activity has been robust as producers work to add scale and replenish inventories,” it added.
At the same time, the current hawkish approach to large M&A deals may reverse under the new Republican administration, Fitch noted.
For instance, it reported that healthcare companies have faced “significant antitrust scrutiny” in the U.S., which could ease under the new administration.
“Both the medical devices and pharmaceutical sectors could see increased M&A activity motivated by inorganic growth opportunities and preparation for patent cliffs,” it said.
However, from a credit perspective, the fallout from an increase in M&A would likely be mixed, Fitch noted.
The increase in leverage required by M&A deals often outweigh the benefits to the business, it said — which can lead to credit rating downgrades that are hard to undo.
Fitch noted that its study of 111 issuers that dropped from investment-grade status to speculative grade due to their own business decisions, including M&A, were less likely to regain investment-grade status than companies downgraded due to external factors.