Looking towards the 2023 M&A landscape, let’s start by acknowledging that 2021 was a year of roller coaster highs with record-breaking deal numbers and total value caused partly by pent-up demand from a backlog of deals put on hold during the early pandemic. And 2022 could be viewed as a year of normalization — a market correction to bring deal numbers back in line with pre-pandemic levels. However, the headwinds felt in 2022, namely geopolitical unrest, a looming recession and rising interest rates, should have had a more damaging effect on deal activity. The fact that deals closed as they did indicate a buoyant market and hope for continued resilience into the new year.

Moving into at least the first half of 2023, we see several trends that started in 2022 that are continuing to gain momentum and will continue to inform how M&A leaders make decisions about acquisitions, carve-outs and divestitures.

What’s driving deals? What’s impacting deals?

  1. Competition for technology: Accelerating growth through digital transformation

    No surprise, companies are buying tech in a big way: hardware, software, platforms, and technology solutions that will enable them to achieve their digitalization objectives. Organizations whose technology roadmaps were in slow motion for decades were propelled into new life during COVID-19, which has proven transformative for many industries. Acute need spurred the healthcare industry to leapfrog ten years of digital investment. Retailers without an online presence suffered. Those that survived are now clamoring to catch up to meet their customers in a digital marketplace. Organizations in every industry sector want to enhance their infrastructure, incorporate digital tools, and hire the right people to, for example, migrate to cloud technology that will minimize supply chain issues and source the microchips they need to fulfill business goals. This is increasing the need, and competition, to acquire tech businesses that can accelerate these transformations.

    M&A is a logical step to achieving corporate digitalization goals as it’s much faster to buy than build. Building a new capability might take years. But buying and integrating a tech company with the proven solutions you need can be done in three to six months — capturing revenue can happen much sooner. Acquirers must be prescriptive about what they want to buy and know precisely how the new acquisition will fit with the organization, integrating it as rapidly as possible, without disrupting the secret sauce, to realizing deal value in real-time.

  2. Rising interest rates and economic instability affect M&A activity

    Central banks have raised worldwide interest rates faster and in more economies than ever. This, coupled with geopolitical uncertainty and looming inflation, is causing short-term turbulence in the market.

    M&A thrives on a confident, stable market. Once interest rates rise (or fall), the market regulates, and M&A volumes resume. However, it’s the uncertainty or fear that causes more “pause” than the actual existence of inflation, higher rates or recessions. The opportunity for M&A in a downturn is that better-priced assets are available. Multiples are down, so investors are looking for value now – preference for the shorter window to achieving the return on investment and longer-term synergies that can be achieved by well-planned and efficient integration. This will fuel acquisitions of necessary bolt-on businesses, perhaps spin-offs or fire sales. Additionally, cash buyers and those with strong balance sheets (“dry powder” as the private equity buyers call it) will have first mover advantage; they will be able to snap up a deal without relying on more expensive debt financing.

  3. Supply chain disruption presents M&A opportunities

    Supply chain chaos became acute in 2020 as many industries were hamstrung by a need for more access to parts and products from other regions, namely China. The disruption caused to manufacturing and technology has been a game-changer. The need to get products closer, faster and cheaper to market makes potential sellers “in country” far more attractive. These disruptions to supply chains are likely to be long-term issues continuing well into 2023, and companies will look to M&A transactions to boost their operational resilience. To maintain efficient, cost-effective operations and to equip themselves for disruptions due to unexpected external forces, businesses will focus on reinventing their supply chain networks with onshoring and sourcing suppliers closer to production facilities.

  4. ESG becomes mainstream in M&A

    The priorities on environmental, social and governance (ESG) issues, once a niche focus of impact investors, is now a mainstream topic for boards, shareholders, customers and the media and a key consideration for acquirers, who are doubling down on ESG as part of the due diligence process. Acquirers and investors demand comprehensive and transparent audits of the full suite of climate, social justice sustainability and corporate governance processes and actions.

    With the intense focus on ESG, my colleagues Dean Kepraios and Shankar Raman recently shared how some of our M&A clients approach these issues during due diligence and integration and how they address challenges, especially when a legacy company acquires a start-up.

The FOMO is real

It can sometimes seem foolhardy to make M&A predictions during the current economic climate where many external factors influence buyer behavior — varying by geography, industry and deal size. However, we take comfort that M&A is cyclical and whilst it flourishes in a confident market, the opportunistic buyers remain active even in the downturns. The FOMO (Fear of Missing Out) factor is real in M&A and can create a domino effect. Therefore, as the markets adjust to continuing instability, potentially higher interest rates and inflation, we are confident that M&A will remain a priority on the boardroom agenda and dealmakers with technology needs and a sound deal justification, such as bringing parts and components closer to home, will be the winners in 2023.