Improving Economic Outlook No Guarantee of M&A

The year 2023 wasn't particularly heated in terms of business travel merger and acquisition activity. That's not to say there were no big deals—Blackstone's acquisition of Cvent was among the biggest 2023 private acquisitions of public companies in any industry—but 2023 for the most part didn't have the big swings that the industry has seen in, say, 2021 or 2019.

That trend wasn't unique to business travel. S&P Global in recent report tallied about 33,400 corporate transactions worldwide, of all stripes and in all industries, a far cry from the 60,400 it counted for 2021. 

The primary reasons behind the M&A slowdown, according to BCG, cross industry lines and represent the "most prolonged challenges since the 2008–2009 financial crisis:" rising interest rates, geopolitical tensions and fears of an economic recession. 

While geopolitical tensions, particularly the Russia-Ukraine and Israel-Hamas conflicts, don't appear to be alleviating, the economic outlook, at least in the United States, has shifted notably. With a steady stream of positive economic indicators with limited inflation growth, capped with the Jan. 25 announcement that the U.S. gross domestic product in the fourth quarter of 2023 increased at a 3.3 percent annualized rate, talk of inevitable recession has died down considerably.

That could help to encourage investment in travel industry suppliers and help back M&A activity. BCG global head of M&A Jens Kengelbach in the report said his company was "relatively optimistic about the outlook for 2024, as deal activity shows promising signs of recovery." A report this month in the Harvard Law School Forum on Corporate Governance also pointed to "expectations of interest rate reductions and a 'soft landing' in the U.S. economy" as reasons to project more M&A this year.

Still, as JetBlue and Spirit Airlines can attest, there are barriers to M&A beyond the economy. 

It's the same U.S. regulatory authorities that successfully sued to prevent the merger of the two carriers—and sued to require JetBlue dissolve its Northeast Alliance with American Airlines—that many experts point to as a roadblock to any increase in M&A activity this year. 

"The U.S. political environment has also thrown recent obstacles to dealmaking," S&P Global noted. "President Joe Biden has made antitrust a priority in his administration." In fact, the Federal Trade Commission in December released a new set of guidelines governing potential mergers. 

In addition to what it called the "aggressive enforcement agenda" of the FTC and the Department of Justice, the Harvard Law School report noted those regulators have become less amenable to deals involving remedies to allay competition concerns, like the one American and US Airways reached with DOJ in 2013 to allow that merger to proceed. 

That aggression and skepticism of settlement could have effects not only on potential industry M&A but also on a pair of would-be transactions: Alaska Airlines' agreed-to acquisition of Hawaiian Airlines, and Choice Hotels International's hostile bid for Wyndham Hotels & Resorts. 

First, the airlines: Alaska CEO Ben Minicucci drew a sharp distinction between his company's acquisition and the JetBlue-Spirit deal, noting that Alaska's and Hawaiian's route maps overlap on only 12 routes. Still, he said, the carrier is talking with DOJ about the proposed deal. Will the government go to the mat against the deal? The lack of direct competition makes that seem less likely than it did for the JetBlue-Spirit deal, where it was enough of a clear risk that JetBlue included a nine-figure break-up fee should regulators squash it.

The potential hotel deal is another story. Even if Choice succeeds in its current bid to secure shareholder approval of its acquisition bid—hardly a guarantee, given the thus-far steadfast opposition of Wyndham's board and management—the economy-tier behemoth the combined companies would create seems quite likely to draw antitrust regulators' attention, even though the franchise model both hotel companies employ makes for complex ownership considerations. Wyndham's management has pointed to regulatory risk as a key reason for its opposition to Choice, though Choice executives have said they already have met with the FTC "on a voluntary basis to discuss the pro-competitive nature of the transaction."

In addition, the Biden administration's regulatory stance could chill industry dealmakers from striking new transactions. "Investment bankers have said the increased antitrust scrutiny has extended the closing time for big-ticket transactions and deterred others from considering large M&A deals," noted S&P Global. "Private equity firms face regulatory pressure as they try to execute roll-up strategies by making add-on acquisitions for portfolio companies in industries where policymakers are raising concerns about anti-competitive practices."

Additionally, it's an election year in the United States. Companies looking to deal might wait to see if the Biden administration is replaced in a year by a potentially friendlier Republican—Trump, seemingly—administration. Otherwise, 2024 offers no guarantee of a return to industry dealmaking.