4 February 2023

M&A Industry Trends in 2023

Even during the current challenging economic climate, there is a lot to be excited about for M&A in 2023. Last year, although global M&A volumes dropped, they remain 9% above pre-pandemic levels. While it appears deal flow is trending downward, this is from an extremely high level. In this article, we look at data and opinions of seasoned dealmakers to understand what M&A trends to expect in 2023.

Some sectors weathered the current economic challenges better than others. One new phrase emerging is ‘rolling recession’, coined by Liz Ann Sonders of Charles Schwab. Their notion of a ‘rolling’ recession is a sector-by-sector downturn, rather than one big one wherein everything collapses. For now, housing, autos, manufacturing and consumer confidence remain firmly in recessionary territory while the rest, including financials and energy, are certainly not.

For a real-world example, Barclaycard (in the UK) reported an increase of 5% retail transactions, but the total amount spent was down by 0.8% in 2022. In contrast, Deutsche Bank reported its highest net profit in 15 years for the last quarter of 2022. Admittedly, this was partly due to restructuring, but revenues were up 7% year-on-year.

So how does the M&A landscape look in 2023?

A survey of 300 in-house M&A executives by Bain & Company gives us a very good clue. Many of the seasoned dealmakers that took part expect to close a similar number of deals, if not more, during the next twelve months. Why? With more businesses (competition) sitting on their hands during the uncertain period, this in turn increases asset availability to those bold enough to continue building via on-market and off-market acquisitions. The survey also revealed that acquisitions completed during the last three years have exceeded expectations for more than 60% of respondents.

The winners of M&A in 2023 are the acquirers with strong balance sheets, access to debt and industry leaders within their sector. Vendors with assets that have performed well since 2020 will also win, benefiting from two full years of ‘stronger post-pandemic’ trading to demonstrate how resilient their companies are.

Will less buyers drive down valuations?

It is unlikely valuations will decline, because of the amount of cash readily deployable by private equity firms and other emerging financial buyers such as search funds. For well-run sell-side processes that can attract both trade and financial buyers, competitive processes achieving strong valuations are still very possible. With less strategic players actively participating in M&A, it could be argued that a less strategic price may be attained. However, experienced acquirers will be aware of increasing M&A competition as soon as the current economic ‘flu’ is cured – which may force their hand into paying the strong prices we have seen in recent years.

How will rising interest rates impact M&A?

As of today, the US Federal Reserve has set its interest rate at 4.75%. In March last year it was 0.25%. We all know inflationary pressure has forced this. The reality is the cost of debt is significantly higher now than it was twelve months ago, making raising debt less attractive. However, data is starting to show the battle against inflation is making an impact. Some analysts forecast rate cuts as early as the second half of 2023. Whether they are right or wrong, we appear to be nearing the interest rate peak.

For now, a higher interest rate does play into the hands of companies with cash to spend on their balance sheets. They are more competitive, require less debt per transaction (if any, for SME/SMB transactions) and need to put the capital to work in a high inflation environment.

At Ascent, our clients continue to lead successfully on transactions through this transitionary period. For acquirers, vendors, investors and advisers – fortune favours the bold.

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