2023 Merger & Acquisition Outlook

A return to normal

Global M&A activity slowed in 2022.  Dealogic report the total value of global M&A was $3.7 trillion in 2022, a 36% decline from 2021 levels.  However it is important to put this into context.  2021 was an exceptional year.  Bloomberg report global M&A activity reached $5.9 trillion in 2021, crushing the previous all time high of $4.2 trillion set in 2015.  That level of activity is difficult to replicate year on year.  Bain & Co report total global M&A value consistently between $3.6 trillion and $4.1 trillion annually in the five years from 2016 to 2020.  Most analysts are predicting that we could see a return to pre-2021 activity.

The trend is consistent at a local level.  Experian report that the YTD value of Northern Irish M&A for 2022 shows an 11% year on year decline.  This is set against the backdrop of a blockbuster 2021 that saw the second highest number of deals ever announced in NI.  And it seems likely that 2023 may see levels more typical of the pre-2021 period.              

Smaller deals to the fore

The fall off in M&A activity in 2022 appears most notable at the top end of the market – the global ‘mega’ deal segment.  Many analysts suggest that an uncertain market and macro economic environment will encourage more small, and fewer large deals. 

Increased cost of financing ….. however plenty of dry powder

Recent interest rate hikes have made borrowing money more expensive, and thereby increased the cost of acquisitions that are financed by debt.  At the same time, many companies have performed strongly in recent years, building significant cash reserves as a result.  Private equity firms also have an unprecedented amount of money to deploy.  Both trade and private equity players will be looking to use their dry powder to execute the right strategic acquisitions and investments to deliver growth and returns.  Valuations are softening from all-time highs, and it is widely expected that there will be an increase in stressed (and distressed) opportunities.  The current strength of the dollar makes UK & Irish acquisitions and investments by US entities increasingly attractive.  A combination of these factors may well bolster activity in 2023.  For the right opportunities there will remain high levels of interest from credible buyers with ready access to funds.      

Focus on due diligence

One certainty is that market uncertainty will focus buyers attention on thorough due diligence as they look more forensically at targets.   This means that sellers will need to be prepared on their end, with financials and operations ready to face greater scrutiny.  There are signs that transactions may take longer to execute and so the right preparation will be key to mitigating deal creep.

Other expectations

It is evident that even against a challenging macroeconomic backdrop that deal makers remain bullish and many expect activity to increase over the year ahead.  There may well be a spike in activity in some sectors such as technology, health services and energy.  It was interesting that Experian reported the NI manufacturing sector bucked the general downward trend in 2022, recording a 5% upturn in deal volume year on year.  ESG is rising up the M&A agenda and will be a deal driver.  Deferred and contingent payment terms are likely to be used more frequently to bridge valuation gaps and to address economic unknowns and volatility.  And the lingering prospect of changes to the UK’s capital gains tax regime on business sales may also be a factor prompting shareholders to explore a business sale now rather than a few years down the line. 

No one can predict the future.  There will undoubtedly be unforeseen factors that arise through the course of 2023 that will impact the M&A landscape, and we will keep a close watch on these as we move through the year.