Recent Trends and Expectations of the Global M&A Industry

June 23, 2023
David Sanchez
TAS Director

Driven by a worldwide health crisis, uncertain geopolitical conditions, and challenging macroeconomic issues, the M&A industry has lived through ups and downs during the last three years.

After the unprecedented uncertainty and transformation that occurred in 2020 amidst a global pandemic, we saw a boom in M&A activity and investor confidence, as the economy began to recover in 2021, with deal volume and value reaching historical records. Then, the industry saw another downfall after Q2 2022 due to high inflation, rising interest rates, and geopolitical uncertainty. Nevertheless, although overall deal volumes in 2022 were below the record-breaking in 2021, they remained 9% above pre-pandemic levels.

Considering the market’s unsatisfactory end to 2022, many predicted that the slowed deal activity would continue in 2023 and that is exactly what has occurred given that, in early 2023, the short-term economic outlook remains unclear. According to the latest data posted by Bloomberg, all market segments for global M&A transactions experienced further decreases in deal volumes from Q4 2022 to Q1 2023.

As follows is a summary of the main factors that have contributed to the slowdown in M&A activity:

- Rising interest rates make it more expensive to raise capital, which discourages the appetite for M&A.

- Inflation is spoiling corporate profits, making it more difficult for companies to acquire other businesses. Inflation is a major concern for many relevant and influential economies such as the United States, United Kingdom, Canada, and Germany.

- Geopolitical uncertainty, such as the war in Ukraine, can make companies more risk-averse and less likely to make major strategic moves like M&A. The war has led to a sharp increase in energy prices, which has contributed to inflation. The war has also disrupted trade and investment, which has slowed economic growth.

- Supply chain disruptions are another major challenge facing the global economy, which has led to shortages of goods and higher prices. The war in Ukraine has also exacerbated supply chain disruptions, as Russia is a major exporter of commodities such as oil, gas, and wheat.

Nevertheless, there are also some positive signs such as the labor market in many countries which is strong, and corporate profits are high. These factors could help to support economic growth in the upcoming months. The global M&A market is expected to remain active in the second half of 2023, however, it is not likely to reach the record levels of 2021.

The M&A industry is highly cyclical; the deals volume tends to slow down during times of economic volatility or uncertainty, but usually, these are the times when valuations might become attractive and new opportunities come up. According to most investment bankers and M&A analysts, by the end of 2023 and 2024, it is expected to have more interesting conditions for dealmaking due to valuations’ reshuffle, reduced competition, and new assets coming to the market.

There are certain general trends that are shaping the global M&A industry, and these trends are expected to continue to drive deal-making in the upcoming future.

- The need for growth and innovation: Many companies are looking to M&A as the clearest path to grow their businesses, reach new markets, achieve economies of scale, and reduce costs as well as acquire new technologies and capabilities that they need to stay competitive. On the sell side, there is a significant increase in carve-outs and the divestment trend is expected to continue as some corporates are facing pressure to deleverage their balance sheets and are recalibrating their portfolios. In that sense, companies with cash on hand and growth ambitions will be well placed in these market circumstances.

- Cross-border M&A is becoming more common as companies look to expand into new markets. The rise of digital technologies is making it easier for companies to do business across borders. Cross-border M&A deals are becoming more popular for growth-focused companies.

- Technology is playing an increasingly important role in M&A. Companies are using technology to identify potential acquisition targets, assess their value, and close deals. Artificial intelligence is also playing an increasingly large role in M&A dealmaking.

- ESG: More companies are considering environmental, social, and governance factors when deciding. Companies are looking to acquire businesses that align with their ESG goals. C-level executives continue to eye M&A as a mechanism to accelerate the ESG transformation of their businesses.

- Regulatory scrutiny: M&A activity is facing increased regulatory scrutiny in many countries. For example, increases in enforcement and legislation in the US are affecting how companies face deals. Companies need to be aware of the regulatory landscape before deciding to enter an M&A deal.

- Private equity growth: PE firms are increasingly active in M&A and have put record amounts of capital to work over the past few years, being responsible for an increasingly large proportion of deal volume. PEs will continue looking at new deals and will be focused on creating value in their portfolio companies, which in turn will involve optimization, build-ups, and divestitures. Fundraising has continued at pace, such that PE dry powder stands at approximately US$2.4tn globally.

- In terms of sectors, energy, industrials, and tech will continue as the best positioned to strike the largest M&A deals. Meanwhile, small to midsize M&A deals are on the rise as valuations reset.

The current market conditions suggest that we are in a sweet spot for M&A, given that companies have well-formed strategies and the financial muscle to make transformational deals that will contribute to their longer-term success. In any event and given that the global M&A market is a complex and dynamic landscape, companies that are looking to make M&A deals need to be aware of the latest trends and challenges. By understanding the market and its dynamics, companies can increase their chances of success in M&A by making informed investment decisions.


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