Last year financial sponsors were skittish as potential sellers faced declining valuations and became reluctant to sell. Meanwhile, larger deals faced increased regulatory scrutiny and a rapidly rising interest rate environment.
Then leveraged finance markets closed as banks and other lenders dealt with a large backlog of transactions needing to be financed.
This year is proving to be equally challenging. Dealmakers are confronted with exceptional macroeconomic conditions that are affecting their M&A roadmaps.
M&A is busier than the current news cycle suggests.From inflationary pressures and interest rate rises to supply chain uncertainty, regulatory changes and geopolitical instability, the volatility and outlook have caused a softening of global M&A and increased caution from buyers who are in the market.
Recent regional bank failures have also sparked some serious concerns about the state of the financial services industry.
While a UK financial crash may be unlikely, global leaders are trying to address market jitters by restoring a sense of calm.
On the March 13, US President Joe Biden stressed that “the banking system is safe”, while UK chancellor Jeremy Hunt told the House of Lords economic affairs committee on March 21 that UK banks were stronger and better placed to withstand a crisis, and that “there was no systemic risk to the UK’s financial stability”.
Looking ahead
With the prospect of further rate rises on the horizon, European central banks will have to maintain a delicate balancing act so as not to push the eurozone into recession.
As the end of the first quarter approaches, where is M&A headed and what industries will lead the way to greater activity?
For starters, M&A is busier than the current news cycle suggests.
Specifically, M&A sale launches on Datasite, which annually facilitates around 14,000 deals, including M&As, restructurings or initial public offerings, have remained more buoyant month over month than publicly announced M&A activity, with February being an exceptionally strong month for dealmaking.
M&A activity should pick up pace as buyers and sellers become clearer on consumer demand, revenue projections and valuations.And because deals on Datasite are at their inception rather than announced, the platform provides a unique vantage point as to what is driving deals today, but also what the future direction of M&A is expected to look like in the next six to nine months.
For example, deals in the EMEA region were up 4 per cent in February year over year, indicating a positive outlook for announced deals later this summer.
Strategic M&A is a catalyst for growth, and business leaders recognise the value it can bring to fulfil their ambitious growth agendas.
As some of the headwinds M&A faced in the back half of 2022 subside, there is a thawing of the market, with companies looking to strike at opportunities.
At the same time, M&A activity should pick up pace as buyers and sellers become clearer on consumer demand, revenue projections and valuations.
Well-capitalised companies are likely to make acquisitions in their core businesses, and despite choppy debt financing markets, private equity firms, who have a record amount of uninvested capital on hand, are expected to drive more M&A activity later this year.
Cross-border activity may also rise as companies look to strengthen global supply chains and invest more internationally to achieve that goal.
Three industries are poised to lead the way in UK M&A activity.A weaker pound in comparison to other currencies and depressed company valuations could also spur more cross-border deal activity in the UK, as it becomes more attractive to foreign buyers.
In fact, 60 per cent of respondents in a recent Datasite survey said M&A valuations will continue to decrease, especially in the tech space.
Ultimately, deals will get done as companies reposition their business, valuations are reset, and new assets come to market, including from distressed situations. The opportunities are there, albeit a bit slower to appear and execute.
Looking ahead, three industries are poised to lead the way in UK M&A activity, propelled by digital transformation, portfolio rebalancing and environmental, social and governance issues.
1. Healthcare
Healthcare and life sciences M&A has been relatively insulated from general economic trends and recession concerns. Many companies are still riding the post-pandemic wave and are looking to grow through M&A.
For example, pharmaceutical companies with expiring patents need to replace those products and are on the hunt to acquire biotechnology companies.
Investment activity has been largely driven from the private equity industry.
2. Technology
As businesses continue to embrace digital transformation and adopt technological solutions by acquiring relevant assets to keep pace with the changing world, deals in the technology sector continue to perform well.
Despite tech stocks dropping in 2022, organic growth decelerating and high visibility of cryptocurrency bankruptcy edging into the start of 2023, valuations are becoming more buyer friendly.
Private capital is expected to accelerate and drive strong deal activity. Private equity sponsors with specialisation in technology are also showing a strong interest in take-private transactions, where publicly traded companies return to private status after a sale to one or more financial buyers.
Sub-sectors such as metaverse, Web3, cloud, fintech, telehealth, med and biotech, digital payments and assets, edtech, climate tech, and tech-enabled services like HR, legal, and cybersecurity will drive many of this year’s transactions.
3. Energy
With exceptionally high and volatile energy and commodity prices, many energy, power, and mining companies are achieving record profits and cash flows.
This has strengthened balance sheets and is likely to lead to further investment and an increase in associated M&A activity. Mid-sized energy companies may seek consolidation or convergence opportunities to scale and compete.
As energy security and commodity prices, alongside climate change and energy transition, continue to dominate the energy landscape, private capital is expected to accelerate and drive strong deal activity.
M&A is also emerging as a strategic tool for energy and resource companies looking to improve their ESG practices and meet international carbon commitments.
Overall, the outlook for global M&A for the rest of 2023 is cautiously optimistic.
Merlin Piscitelli is chief revenue officer EMEA at Datasite
