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Navigating the Dips: 2023's Shifting Landscape in M&A and VC Markets

Ankur Tandon

Process Intelligence | Digital Transformation | AI Solutions

发布日期: 2024年1月2日

Following the dealmaking surge of 2021 and early 2022, where valuations soared, factors like rising interest rates, tighter financing conditions, and broader economic uncertainties significantly curtailed deal-making appetite in 2023. According to BCG, for the first eight months of 2023, global deal volumes dropped by 14% compared to the same period last year, while deal value plummeted by a substantial 41%. This came after a disappointing 2022, which already saw a 9% decrease in deal volume and a 38% decline in deal value to US$2.7 trillion from the extraordinary US$4.3 trillion in 2021. This consistent decline in M&A activity succinctly portrays the ongoing scenario: dealmakers are opting for smaller deals, biding their time until conditions favour larger deals. Additionally, according to Pitchbook data, Q3 reported the lowest quarterly deal value in ten years (excluding the COVID-19-induced lockdown of Q2 2020) at USD 776.8 billion, marking a 20% drop compared to Q3 2022 and a substantial 49% decrease from the peak nearly two years ago.

Pitchbook recently published some fascinating datasets. Private Equity’s share of M&A has been limited due to restricted leverage accessibility. Specifically, the Debt/EV ratio for US leveraged buyouts financed through the broadly syndicated loan market has drastically dropped from 50.8% in 2022 to 43.9% YTD to September, the lowest total recorded going back to 2005. From a valuation perspective, the Global transaction multiples show signs of stabilisation. The median EV/EBITDA multiple remained constant at 8.7x for the 12 months ended Q3 2023, mirroring the multiples from 2022. While this is below the all-time peak of 10.6x in 2021 and the average of 10x between 2017 and 2019, this steady trend offers encouragement, potentially indicating the conclusion of a downward valuation cycle, pending no unforeseen adversities. Additionally, EV/Revenue multiples exhibit similar patterns. The median EV/sales multiple for the 12 months ended Q3 2023 reached 1.6x, up from 1.5x in 2022. While below the peak of 2.0x in 2021, this aligns with the 1.6x average between 2017 and 2019. The modest recovery in valuation multiples is promising, potentially signalling the end of the cyclical valuation downturn.

The Venture Capital market faced similar sluggishness globally. In the UK, the largest European VC hub, deal value plummeted by 49.6% year-on-year to €17.2 billion, reflecting a pullback from larger deals amid economic downturn. The German and Swiss VC ecosystems also witnessed considerable declines in deal value, declining by 47.1% to €6.7 billion and 40.1% to €2.5 billion, respectively. India's startup landscape also felt the crunch, with a 65.8% drop in funding value to US$6.9 billion across 1,013 funding deals between January and November 2023 compared to the same period in the previous year. Several recurring trends prevailed universally—Valuation multiples remained contracted compared to their peak in 2021, existing investments experienced substantial devaluations leading to multiple "down rounds" for VC-backed companies, and the threshold for startups to secure venture financing elevated significantly.

During the year, what caught my attention was the considerable time taken by regulators to review large M&A deals. Microsoft, for instance, finalized its US$75 billion takeover of Activision Blizzard only after receiving UK regulatory approval, a process that extended over a staggering 21 months. Initially blocked by the UK Competition and Markets Authority (CMA) over concerns regarding gaming industry competition, the deal eventually received approval with conditions. These conditions ensured that Microsoft licenses cloud streaming rights for Activision titles outside the European Economic Area to Ubisoft, a move unique globally aimed at preventing Activision games from becoming exclusive to Xbox Cloud Gaming.

However, Adobe’s planned US$20 billion acquisition of online design company Figma faced opposition in Europe over antitrust concerns, ultimately leading to its cancellation. The European Commission (EC) stated that the deal could "significantly reduce competition in global markets." Subsequently, the UK’s CMA provisionally blocked the deal, expressing concerns about potential harm to innovation for software used by a majority of UK digital designers. As a result, Adobe is required to pay Figma a reverse termination fee of US$1 billion in cash. Notably, the deal, originally announced in September 2022, raises concerns regarding the duration regulators take to decide on the next course of action (15 months in this case). Such delays evidently hinder growth, impede deal-making progress and erode the trust and assurance of companies operating within specific geographical domains.