After an explosive year of M&A in 2021 in the wake of the COVID-19 pandemic, dealmaking returned to more normal levels during 2022. While it is true that this reflected a natural correction following a year of inflated activity and pent-up demand, 2022 saw a far harsher dealmaking environment, with stockmarkets retreating, a general economic downturn and Russia’s protracted war in Ukraine.
As we enter 2023, these headwinds, and others besides, are expected to continue pushing M&A activity downwards, with many forecasting that declining deal volumes and valuations are unlikely to turn about in the near-term.
However, that’s not to say that we’re in for a quiet year. Despite the headwinds, there is also a considerable degree of optimism among dealmakers polled in recent surveys, while certain factors could help to spur relatively strong levels of dealmaking (not least the widespread financial distress that many businesses are already facing in a worsening economic climate) while several key sectors are expected to see major M&A activity.
2022’s downward trend
Dealmaking naturally took a huge hit as the COVID-19 pandemic raged throughout the majority of 2020. As a result, 2021 saw a surge in M&A as a result of pent-up demand, bountiful cash reserves for some corporations, high levels of business distress on the other hand and vast amounts of dry powder built up by private equity firms.
2021’s dealmaking frenzy was always likely to see a correction and so it proved. While deal values increased 1 per cent last year, volumes fell by 8 per cent (still above pre-pandemic levels) and this is a trend that many are forecasting to continue – and perhaps accelerate – during 2023.
Despite some market watchers expressing optimism about the prospects for dealmaking in 2023, a report from S&P forecast that there was not likely to be a sharp turnaround in M&A activity in the near-term, due to a range of adverse factors, including rising interest rates, economic uncertainty and declining appetite among corporate and private equity buyers.
Looking at the EU M&A market, a poll from CMS found that 73 per cent expect an increase in deal volumes during 2023, but also highlighted numerous potential hurdles that buyers face. 16 per cent expect valuation gaps to be the biggest issue that dealmakers will face and that deal value will suffer as a result.If deal volumes are set to increase, then CMS’s report seems to point towards distressed M&A being the leading factor. 26 per cent of respondents to CMS’s poll expect distressed acquisitions to be the biggest driver of sell-side activity, while 23 per cent expect undervalued deals to be the main driver of buyer activity.
Oliver C. Wolfgramm, a Partner at CMS Germany, explains: “We will see more distressed deals as we face simultaneous economic problems, including lingering losses due to the pandemic, continuing supply chain problems, high inflation and recession fears, but also multiple severe geopolitical crises and uncertainties – such as the war in Ukraine and rising tensions between China and Western democracies.”Key sectors will boost activity
Assessing the prospects of tech M&A in 2023, EY’s Global TMT Strategy and Transactions Leader Olivier Wolf commented: “The deal market has slowed due to macro headwinds and financial volatility, but this has improved opportunities for corporate buyers with strong balance sheets. In turn, competition for targets should heat up again next year, as hundreds of billions of private equity dollars come to the market. Transformative acquisitions could launch tech companies into new markets or adjacent verticals like HealthTech, and accretive acquisitions have the potential to strengthen portfolios with leading-edge technologies like artificial intelligence.”Increasing regulation will be another factor to spur investment in tech, which can vastly improve reporting in key areas such as sustainability, financial management and, indeed, within M&A itself.
Professor Scott Moeller, Founder and Director of the M&A Research Centre, Bayes Business School, outlined the key motivation behind tech-related M&A in the CMS report, writing: Many firms realise that to stay competitive requires a technology-savvy organisation and that organically growing their technological expertise may not only be too slow but impossible. Thus they choose the faster route, which is to acquire the companies that have that knowledge.”Wealth management
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