Striving with caution: Transaction Outlook 2023



After a record-breaking year for mergers and acquisitions (M&A) in 2021, many thought the trend would continue into 2022. The reality was quite different, as international businesses grappled with a series of macroeconomic events that have had far-reaching effects on the world's economic outlook. 

As a result, many companies are entering 2023 with caution, unsure of whether the M&A market will return to 2021 levels or continue on a downward spiral. While both options are certainly possible, the reality will likely be somewhere in the middle. 

A short fall from great heights

M&A activity reached unprecedented heights in 2021, leaving much room to fall—and fall it did. While 2021 closed out the fourth quarter with an uptick in deals, the positive trend came to a jarring halt during the first quarter of 2022. And the downward trend continued for the rest of the year, with the M&A value dropping substantially.  

Considering the economic and political turmoil that marked 2022, this decline comes as no surprise. With supply chain issues, record-high inflation rates, increase of interest rates, and geopolitical instability, uncertainty ran high. And when investing billions of dollars in a merger or acquisition, decision-makers need certainty.   

What is a surprise, however, is that the values didn't plummet. It seems more like the market cooled down from an abnormally high year in 2021 and reestablished normal numbers. Even when faced with daunting macroeconomic obstacles, M&A activity remained well above pre-pandemic levels. In fact, many buyers took advantage of the low valuations in hopes of gaining a greater ROI, which helped maintain relatively high activity. 

Just like the previous years, deals in the technology, media, and telecommunications (TMT) sector dominated M&A activity in 2022. Notable transactions included Microsoft's proposed acquisition of video game maker Activision Blizzard for $68.7 billion and Broadcom's acquisition of the software provider VMware for $61 billion.  

While the Americas still held a significant portion of the global deals, their activity diminished slightly in 2022. EMEA, on the other hand, performed better than in pre-pandemic years despite the rising energy costs.  

Dealing with the new normal

The backdrop of 2022—and previous years—presents a new normal: volatility.  

Right when the world was beginning to recover in a post-pandemic environment, the attack on Ukraine in early 2022 shattered any hopes of a return to stability. It prompted a chain reaction of macroeconomic events, from food shortages to an energy crisis, which continues to affect the global economy in 2023.  

Surging interest rates and inflation combined with rumors of a pending global recession and a massive labor shortage have formed the perfect, volatile storm. Uncertainty reigns as business leaders prepare for radical changes at every turn. 


Factors affecting M&A decision-making in 2023

In this time of permacrisis, there's no singular concern, but a medley of factors that might impact M&A activity in 2023. And businesses only expect these risks to increase in the coming years.  

From a global perspective

At the moment, most businesses worldwide (82%) agree that inflation is the most pressing concern, followed by economic uncertainty (79%) and geopolitical risks (74%). Well over half of the businesses are also facing the risks of resource costs (71%), interest rates (64%), and exchange rate volatility (60%).  

Concerns about the ongoing effects of the COVID-19 pandemic have taken a backseat, but still, about half of companies see that as a significant risk. The good news is that most businesses predict that will dwindle as a risk in the coming years—but that is the only factor expected to lower.  

Moving into 2023 and beyond, businesses are beginning to brace for a worsening storm. Most expect three main risks to increase between 2023 and 2028: resources costs, cybersecurity issues, and environmental concerns.  

How these affect the M&A market is yet to be seen. On the one hand, growing environmental concerns could improve M&A activity for industries focused on sustainability and future metals, while a need for better cybersecurity might strengthen the technology market.  

Yet the fears of potential political instability and a global recession might also become a reality and hinder M&A activity. There's also the point of how surging interest rates affect transaction financing. Businesses want to avoid accruing excess debt—especially in the current volatile environment—so they may stray from financing options.  

This can mean one of two things. Either businesses choose more cash and equity transactions to reduce their debt or shy away from deals altogether. We have seen the former occur with past interest rate hikes, but the latter might be of greater concern in 2023. Since businesses are not just facing high interest rates but also uncertainty from all sides, there may be an increase in canceled or paused deals.  

From a local perspective

Of course, each region will likely experience these factors differently. For example, the Australian market may not feel the effects of a pending recession as heavily as the rest of the world. Thanks to its relative geographic distance from major economic markets, it has shown remarkable resilience through last year's economic headwinds and may continue strong throughout 2023.  

The Asia-Pacific market may also expand in 2023. China abruptly ended its near three-year "zero COVID" restrictions at the end of 2022, stirring up hope for a revival of the Chinese economy. If China's economy does return to its pre-pandemic strength, it could bring more deals both in the Asia-Pacific region and globally.  

EMEA sits at the heart of critical geopolitical activity, making it more susceptible to volatility should the conflict continue. This is made evident by Europe's slow macroeconomic growth following the war in Ukraine, inflation, and supply chain issues. Another critical factor is the energy crisis. As costs rise and companies look for alternative energy solutions, this could take a significant toll on the M&A activity in the Middle East.                                                               

Like the rest of the world, the Americas are facing inflation spikes and labor shortages. But a big change could be on the horizon for one of the most influential economies in the region. At the beginning of 2023, Brazil swore in its new president, marking the start of a new government. The country is poised to benefit from an uptick in foreign investors interested in the country's various natural resources and strategic geopolitical position—but it all depends on whether the new government can provide increased credibility and long-term stability in an international market.   

A year of cautious optimism—again

There's no denying that the world is facing some unique challenges as it continues into the new normal of volatility. Yet last year showed us that despite looming macro and microeconomic risks, M&A activity never goes away—it adapts. And just as it adapted in 2022, we might see it adapt and even strengthen in 2023.  

We began 2022 with a sense of cautious optimism, recognizing both the potential for continued record-high M&A activity and the concern for reduced spending as things went back to normal. And while the deals didn't continue at the same pace, nor did the world return to normalcy, M&A activity remained resilient. 

So we are again looking forward to the new year with cautious optimism. There are always diverse factors at play, and 2023 is no different. The bottom line is that deals will happen, and there are plenty of reasons to expect continued or increased M&A activity. 

One positive sign is the tenacity and determination of business leaders. They feel quite optimistic about 2023, with nearly 80% expecting their company to grow this year. The volatility of past years has pushed them to maintain a dual focus on both survival and perpetual transformation, which has prepared them for the current permacrisis. And one way to survive and transform is through mergers and acquisitions, so there is hope for another strong year of M&A spending—even if that means just maintaining the pre-pandemic deal numbers and values.  

Best bets for 2023

While we can expect sustained M&A activity across all sectors, some will likely fair much better than others. 

One of the biggest drivers for M&A growth has been technology deals, and that trend will likely continue. Digital business models are becoming increasingly important, as are cybersecurity solutions and cloud hosting, which help keep technology at the forefront for investors.  

The falling fintech valuations can also make these companies a prime target for M&A spending. Private equity (PE) firms and corporations with surplus cash may choose to invest in fintech to suppress multiples and generate a higher ROI.  

There's also the continued growth of IT service consolidation. As tech infiltrates every industry, there are more opportunities for M&A deals across various sectors. One prime example of this trend is software company Oracle's acquisition of healthcare tech provider Cerner Corporation in 2022.    

Speaking of healthcare, the sector will likely continue with significant M&A activity in 2023. While there are certainly hurdles—like regulatory changes, inflationary pressure, and high costs—they are expected to decrease, allowing for more consolidations. There will likely be more deals focused on specialty platforms, verticalization movements, and, of course, health technology.  

Another sector with a positive outlook is energy. While energy costs still run high, the sector faired well last year. And a continued emphasis on green initiatives and alternative energy sources will likely spark deals with sustainable energy companies. 

Other industries, like real estate and construction, manufacturing, and retail, have a more uncertain year ahead. For example, commercial real estate is still finding its way to stability in a post-pandemic environment, while retail and consumer goods are still seen as high-risk investments.  

Ride out the storm

After an unpredictable 2022, uncertainty shrouds the coming year. Businesses must navigate through a storm of high interest and inflation rates, looming geopolitical conflicts, and a potential recession.  

Yet other things point to a strong year for M&A activity, mainly the market's resilience during last year's turbulence and businesses' proven ability to adapt. Learn more about the topics above and sector-specific trends by contacting our Transaction Advisory team.

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