Why the M&A lion will soon roar once again
In 2022, global M&A fell 12% in volume and 36% in value versus the record-setting tallies of 2021. Despite this cooldown in #mergersandacquisitions, 2022 deal value was up 62% compared to the market low point in the aftermath of the Global Financial Crisis in 2009. Of course, one year doesn’t make a trend, and 2021 was always going to be an outlier given the record-low cost of capital and record high equity prices. But the latest EY CEO Outlook Pulse Survey indicates that while virtually all CEOs expect an economic downturn, two-thirds are still planning to pursue deals. We think transaction activity this year is likely to be active in specific sectors and may also be focused on a few critical issues.
Dealmakers may still shy away from large deals above US$10 billion (although we have already seen a few of those earlier this month). The macro pressures we saw in 2022 came fast and furious: inflation, rising interest rates, geopolitical unrest and ongoing supply-chain disruption have given dealmakers a compelling reason to pause and re-focus on their organic businesses – the core of what they do, and what they do best.
Probably the two biggest culprits for the 2022 M&A slowdown were the skyrocketing cost of capital and a wide disconnect between buyer and seller expectations. While neither of these are expected to subside, we are cautiously optimistic for the second half of 2023 and 2024. Why? Because on the buy-side, companies need to do M&A and want to do M&A and that hasn’t changed. On the sell-side, there will always be a need to rationalize the portfolio through divestitures, spins or splits. The question for M&A then is when, not if, we will see a recovery.
The latest EY CEO Outlook Pulse Survey reveals that CEOs are still planning to pursue deals to drive future growth. The vast majority of respondents (89%) are looking to do some kind of transaction over the next 12 months, with nearly half (46%) looking to buy assets, a third (34%) looking to divest, and 58% looking to enter a joint venture (JV) or strategic alliance.
We think M&A in 2023 may take place disproportionately in certain sectors: life sciences and energy to name a couple. We may also see an uptick in out of favor sectors like real estate. M&A may also be focused on a few critical issues, most prominently navigating new geopolitical dynamics, preparing for a sustainability-driven future, and of course, disruption and innovation.
The impact of geopolitical uncertainty on M&A cannot be understated. While we continue to see a decline in cross-border deals, the trend of “friend-shoring” and more inter-regional deals has increased. Almost four-fifths (78%) of CEOs will look to conduct M&A in countries that are geopolitically and economically aligned with their home country.
Technology and innovation remain at the center of today’s M&A market. Far fewer deals are completed without a tech or growth element. There is ongoing pressure on businesses globally to adopt new technologies both as a driver of new growth and as a source of increased efficiency. Nearly all (96%) of CEOs say that it is important to continue their digital and technology transformation to deliver both revenue growth and leverage operational advantages. CEOs are increasing investments in technology to enhance the digital customer experience, which remains a top priority of the strategic agenda.
Many CEOs are approaching transactions from an environmental, social and governance (ESG) perspective to strengthen the brand and build trust with key stakeholders, including employees, customers and communities. Others see the main benefit as diversifying their product orservice offer and meeting the changing ESG demands of customers or acquiring talent and capabilities to accelerate their ESG agenda, such as sustainability technologies through a start-up or rinnovation ecosystem.
On top of the headwinds mentioned above, in an uncertain environment, buyers and sellers are often not on the same page. Reaching an agreement on valuations and price becomes difficult as sellers struggle to let go of recent high valuations while buyers are hoping to acquire at repriced levels, which becomes the key challenge. It will likely take a few more months or longer until valuation expectations adjust to the new market dynamics.
While there is a consensus that the deal environment is more difficult, the CEOs in our survey seem clear that there are tremendous opportunities to explore in the current climate.
The hibernating bear will transform into a hungry lion soon enough.
Read more M&A insights from the?EY Buy and Integrate practice.
Thanks to article contributors Barry Perkins, Vaishali Madaan and Banipreet Kaur.
EY research and data from Dealogic and CEO Outlook Global Report was sourced for this article.?
?The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.
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