Global M&A outlook 2023 headwinds, tailwinds and fog

GLOBAL M&A OUTLOOK 2023 HEADWINDS, TAILWINDS AND FOG

HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

SECTION

01Introduction

03

02National security or nationalist sentiment?

04

03Global politics and operational repositioning

06

04Portfolio realignment

08

05ESG in every deal

10

06How effective is the growing shareholder voice in public M&A? 12

07Trends in M&A

14

08Regional perspectives

16

09Sectoral insights

33

Introduction

Will the global M&A market take off again in 2023?

Up to 2020, the belief prevailed that M&A activity required certainty in climatic conditions in order to thrive. The pandemic upended that, as it did so many things. The concept of economic cycles was suspended as the world focused on a single effort to recover from that seismic shock. After a short pause in mid-2020, M&A roared back to life, producing a remarkable period of deal activity through the disruption. Strategics felt the imperative to reposition their businesses, using M&A to accelerate those efforts, while private capital firms proved determined to deploy their ample funds, supported by favourable debt markets, in economies supported by governmental stimuli. The significance and pace of change required by global macro themes, not least digitalisation, energy transition and ESG and now rebalancing of global supply chains has been the framing for this spate of frenetic deal activity.

The statistics have borne this out the value of global M&A averaged around US$1 trillion for eight consecutive quarters from Q3 2020 to Q2 2022, with 2021 seeing record deal values of over US$4.2 trillion. But there was a marked deterioration in M&A conditions in the second half of 2022, with deal values of only US$1.4 trillion across Q3 and Q4 combined, a 33% decline compared to the first half of the year.

If it is now evident that the M&A market can cope with the unexpected, the question posed by 2022 is whether it can fully absorb our current perma-crisis state, with once-in-a-generation events now erupting with disturbing frequency. Geopolitical tensions reached new heights with Russia's invasion of Ukraine raising political, economic and energy security issues and providing international businesses with the salutary experience of needing to rapidly exit operations in a developed market. Inflationary pressures, meanwhile, are challenging asset valuations in deals, and in some cases testing business viability. Even the tech sector, that unrivalled growth engine of recent years, has seen valuations take a battering, and rising interest rates are forcing those operating with leverage to revisit their models. More than a decade of low inflation and interest rates mean that we need to rebuild experience of transacting within these more challenging conditions.

A key focus for deal lawyers remains the priority of reducing periods between signing and closing, and catering for any negative developments during that gap at a time when merger control and foreign direct investment regulators have never been more numerous and proactive, blowing out deal timetables and increasing execution risk. M&A lawyers also face greater demands to gauge the context in which they advise. Every transaction will have ESG considerations. While the precise issues will vary between sectors and geographies, the direction of travel on ESG is clear businesses are being held to higher standards of corporate responsibility by a diverse collection of stakeholders. 'Licence to operate', for example, may increasingly involve decisions of where to no longer operate.

Our annual M&A review looks at consequential legal themes in more detail, including how political considerations are playing out through national security regimes and how multi-nationals are approaching operational repositioning driven by geopolitical issues. Other notable trends we explore include how carve-outs are being used to accelerate portfolio realignment, the increasing manifestation of ESG in transactions, and how shareholders are making their voices heard in M&A.

Yet despite challenging conditions, M&A markets are far from closed. There remain good reasons that transactions have proceeded amid a turbulent environment. Among the drivers of such resilient deal activity are balance sheet planning and the continued hunt for transformational deals by strategics, the deployment of more equity by funds and availability of private credit, and the opportunism on the part of well-positioned buyers, including through currency arbitrage and in distressed situations. Reason for optimism remained at the end of 2022, with a US$50 billion 'Merger Monday' providing a mid-December bright spot.

As the market digests tougher economic circumstances, will the slowdown be as short-lived as the pause in 2020? Or will the ominous outlook and fiscal picture in many major economies hobble M&A well into 2023? That is currently unclear. Headwinds and tailwinds have for some while been the metaphors of choice for global M&A. We now add to those a third weather condition fog.

Gavin Davies Head of global M&A

//03

HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

National security or nationalist sentiment?

Are regulatory regimes being misappropriated by politics?

Foreign direct investment (FDI) flows have started to surge back above pre-pandemic levels, but many existing FDI screening regimes have been expanded recently and more new regimes have been adopted (particularly in the EU, in response to strong encouragement from the European Commission). Economic conditions and heightened geopolitical tensions have both undoubtedly accelerated this trend. Anticipating the potential for intervention in any transaction involving foreign investment is essential in the current climate.

In most countries, the focus of FDI regulation remains on national security rather than wider national interest considerations. However, the scope of activities and technologies considered by policymakers to fall within the concept of national security has evolved to become extremely broad, often encompassing not just military and defence but also critical infrastructure, communications assets, advanced technology and data, healthcare and even matters such as food security. At the same time, we have seen increased political focus on the domestic impact of consolidation of global value chains where this is perceived to work against the interests of countries that have nurtured the targeted industries (in particular, in advanced manufacturing, research intensive and technology sectors). National security is rarely defined in FDI regimes and we have seen a number of cases that seem influenced more by national interest considerations.

more recently Russia. However, it is also clear that many FDI regulators are broadening their focus: there are numerous examples of proposed acquisitions involving investors from countries such as Canada, the US and the United Arab Emirates coming under scrutiny, and under the new UK investment screening regime we have even seen an example of conditions being imposed in relation to investment in a UK company by a UK investor.

This means that it is now more important than ever before that deal parties and their advisers consider early in the transaction planning process what investment screening issues may arise, how these might be addressed, and whether they may ultimately threaten the viability of the transaction.

The global trend towards greater protectionism and stricter enforcement of FDI regulation remains an important consideration for deal planning

Inevitably, geopolitical tensions result in increased focus on investment from countries such as China and

Widening focus

Over 85% of acquisitions reviewed by the Committee on Foreign Investment in the US (CFIUS) in both 2020 and 2021 involved non-Chinese acquirers

Six of the 14 transactions in which remedies were imposed under the new UK investment screening regime in 2022 involved non-Chinese acquirers (although all three prohibition decisions and one of the two divestment decisions did involve Chinese acquirers)

The first publicly announced refusal of FDI authorisation in France, in December 2020, involved the proposed acquisition of French company Photonis by US group Teledyne

Practical experience of remedies under the new UK investment screening regime

The UK's National Security and Investment Act (NSI Act) entered into force in January 2022, introducing a new standalone UK regime for the review of qualifying transactions and investments on national security grounds.

The government emphasised that the UK remains open to foreign investment and that it did not expect to require remedies in a significant number of cases. However, since the first final order was published in July 2022, we have seen nine conditional clearance decisions, three prohibitions and two divestment orders. While this remains a small number of transactions in absolute terms, it nonetheless represents a sea-change compared to the previous regime under the Enterprise Act 2002, where the government intervened in just 16 transactions between 2003 and 2021.

High level summaries of prohibition or conditional clearance decisions under the NSI Act are made public. However, only very limited information will be included about the national security concerns identified and any conditions imposed. This can make it difficult for parties to rely on publicly available decisions as a guide when conducting a risk assessment for a proposed transaction. The government has issued general guidance on its intended approach, but this is no substitute for practical experience of the new regime in action.

We have been involved in a number of the conditional clearance decisions issued to date and are advising on a number of other transactions currently under review by the Investment Security Unit (ISU). The types of conditions which we are seeing include:

restrictions on information flows;

restrictions relating to the appointment of board members and key staff;

the appointment of a government observer to the board;

requirements relating to notification of future transfers of assets; and

requirements relating to maintenance of R&D and manufacturing capabilities in the UK.

Upfront consideration of possible remedies is advisable for any qualifying transaction which could potentially be considered to give rise to national security concerns (broadly defined), alongside early engagement with the ISU.

Joseph Falcone New York

Kyriakos Fountoukakos Brussels

Matthew Fitzgerald Brisbane

Veronica Roberts London

//05

HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

Global politics and operational repositioning

Geopolitical tensions are driving decisions on where to invest and operate, and when to exit

Political risk is a consistent theme in this report and the events in Ukraine have brought into sharp focus the risks faced by companies with global or international operations.

These are not confined to challenges arising from the outbreak of war; the gradual retrenchment from globalisation and increasing political risk in several jurisdictions necessitate a detailed risk analysis and planning to mitigate financial loss in the event continued operation becomes untenable.

Lessons can be taken from the experience of companies that exited Russia in the aftermath of Russia's invasion of Ukraine. These include:

Not all companies must act at the same pace: some will be compelled to act quickly because of the nature of their business or products, their profile, relationship with governments or customer base. Others will have more time to formulate a plan. However, in either case understanding potential exit strategies in advance is crucial to preserving value.

The options available to each company will differ. Contrast the experience of McDonald's, which was able to close its Russian restaurants swiftly, with that of Burger King, which was unable under the terms of its joint venture and franchise arrangements to procure the immediate cessation of operations. Some companies had no choice but to cease operation because their Russian business was dependent on intellectual property that could not be transferred or licensed without negating the purpose of exiting and exposing the company to unacceptable risk of replication and competition.

Some companies may be better served by not taking proactive measures, but instead allowing assets to be nationalised or otherwise appropriated and then falling back on international law rights and remedies; a high risk strategy but one that needs to be considered.

M&A can be a useful tool for a company looking to exit a jurisdiction, along with 'warehousing' the business (that is, transferring it to an independent party as a temporary measure) which can be an attractive option, particularly if there is a realistic prospect of the situation normalising within a short period.

Inevitably, there will be challenges that will have to be considered on such transactions. These include:

Tax and regulatory issues These will be key on any transaction. Where a warehousing structure is being used, it will also be important to understand the risks impacting a future retransfer of the business. The Russian government took active measures to encourage warehousing and other transactions to transfer businesses to local management, including changing the tax code to exempt Russian citizens from tax on gains from such transfers. Whether the Russian government will be so supportive of retransfers of businesses back to western owners in the future or to western sellers benefitting from anti-embarrassment or similar provisions remains to be seen.

Employees Companies must consider the impact of their actions on employees 'in country'; while selling or closing a business may be justified by the economic circumstances, companies must be wary of exposing employees to other risks. Russia introduced laws that exposed local managers to criminal liability for making redundancies in certain circumstances. The risks for citizens of western countries were exacerbated and there was therefore an imperative to repatriate them quickly.

Funds repatriation Companies will have to establish how they can get the proceeds of any sale out of a jurisdiction, whether that be by way of dividend, intra group loan or royalty/service fees.

Each crisis has its own characteristics and the next will differ from the last, but companies would be well advised to consider the consequences of geopolitical risk and the role M&A might play in preserving value in the event of an enforced exit

Mike Flockhart London

Rebecca Maslen-Stannage Sydney

Gavin Guo Shanghai (Kewei)

James Palmer London

//07

HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

Portfolio realignment

The pace of repositioning by large corporates continues to drive carve-outs

Carve-out transactions, whether structured as private sales, public spin-offs or break-up bids, are a key M&A tool for large corporates in reshaping their portfolios, shoring-up balance sheets and delivering value to shareholders.

What will we see in 2023?

While we saw carve-out activity soften in the second half of 2022, in line with M&A more generally, we expect these types of transformative deals to remain a firm feature of the M&A landscape in 2023 for a variety of reasons:

Firstly, difficult market conditions can stunt business growth and drive tougher competition for capex within organisations. In response to this, large corporates could seek to generate value through divestments and shed non-core assets in order to optimise their portfolios, rationalise cost centres and reduce leverage.

Secondly, corporates will need to continue to respond to sector-specific trends, such as energy transition. This will continue to drive targeted refocusing of business goals, and can often lead to associated transformative M&A.

Thirdly, we expect competition for high-quality assets to remain buoyant, with financial buyers and strategics often open to exploring more complex transactions in order to access good M&A targets. As we saw in 2022, this may include pairing-up on public bids, with a view to breaking-up the listed company's business on completion.

Types of carve-out deals

PRIVATE SALES Where a large corporate disposes of a non-core business via a private sale process.

Typically structured as an auction, with the seller undertaking considerable vendor due diligence and reorganisation planning work pre-launch. Early stage planning by the seller is critical in keeping transaction timelines tight in the sale process and in protecting value in the target business.

PUBLIC SPIN-OFFS Where a large corporate separates part of its business operations into a standalone listed entity, and distributes the shares in that entity to its current shareholders, or sells the shares to new investors, or both.

Significant work is required to separate the target business from the parent organisation and replicate or replace parent organisation functions, in order to minimise ongoing transitional support.

BREAK-UP BIDS Where bidders team up to acquire a listed entity and break up its assets on completion, with each bidder taking a different portion of the business.

Bidders will conduct thorough outside-in diligence pre-approach to assess the feasibility of a break-up bid. However, limited information access usually necessitates some use of assumptions and flexibility in consortium documents as to how the separation will be executed. More detailed planning can be undertaken, with co-operation from the target, as the bid progresses.

How to plan for success

While the subject matter of carve-out transactions can vary significantly, from specific business divisions or units, brands or geographies, a unifying feature is the high level of integration or interdependence between the target business and the parent organisation. This means that significantly more work is required in defining, separating and setting up the target business for a deal than is customary for most M&A.

In all forms of carve-out transaction, detailed preparation is critical to successful implementation and protection of value. This includes:

Determining the perimeter: identifying at an early stage what assets and which personnel will be the subject of the carve-out transaction, where they are currently located (within the parent organisation's legal structure) and how they overlap with the retained business. Use of clear separation principles to determine the perimeter and the target operating model accelerates the process and, in the context of a private sale, reduces the risk of cherry picking by a buyer. A well-defined perimeter is also critical to efficient preparation of carve-out financials and vendor due diligence reports with late changes having significant knock-on impacts to numerous workstreams.

Mapping the reorganisation: the next critical step is detailing the reorganisation required to legally separate the identified assets and personnel from the parent organisation and ensuring this is done in a tax efficient way. Timing of the reorganisation will differ depending on the type of deal. For public spin-offs, the reorganisation will need to occur pre-launch. For break-up bids, bidders will want the reorganisation to occur on or as soon as possible after completion. For private sales, the reorganisation typically occurs between signing and completion so having a detailed plan in place pre-signing is helpful in instilling confidence in potential buyers, minimising execution risk and keeping transaction timelines tight. Break-up bidders may however be hampered by incomplete advance diligence given the public nature of the bid.

Identifying the pressure points: hot spots vary from deal to deal but can include operational complexities (such as difficult systems or data separation), workforce management (including consultation and consent processes with employees and addressing pension risks), stakeholder engagement (such as complex contract migration exercises), tricky regulatory clearances (noting that the reorganisation, as well as the ultimate transaction, may require various approvals) and large Day 1 costs (for example if there are material assets which are excluded from the perimeter but which are required for the ongoing operation of the target business). Identifying these complexities at the outset and planning effectively for them will help limit the potential for value destruction through the time consuming carve-out process.

Planning for transition: inevitably, the carve-out business may not be able to operate entirely independently on Day 1. Therefore, to minimise business disruption, a degree of ongoing transitional, or indeed reverse-transitional, support will be required from/to the parent organisation. Transitional periods can be long and very involved and, on private processes, can require significant co-operation between the seller and buyer post-completion. We have sometimes seen this lead to financial buyers being preferred over competitors or strategics in auction processes.

All of the above means there is generally quite a long lead time on a successful carve-out transaction, and many of the opportunities we see come to market in 2023 will already be deep in the planning phase.

Laura Ackroyd London

Raji Azzam Melbourne

Frdric Bouvet Paris

Gavin Williams London

//09

HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

ESG in every deal

What is now market norm, and what is best practice?

Background

Environmental, social and governance (ESG) issues have become key considerations in M&A transactions in recent years. Businesses operating within, or with links to, developed economies have long been regulated in areas such as anti-bribery and corruption, environmental protection, and health and safety. These obligations are now increasingly accompanied by disclosure requirements whether under national laws, stock exchange rules, or voluntary instruments. As it becomes easier to scrutinise corporate behaviour, disclosure and reporting requirements are facilitating greater levels of activism and litigation risk, with an increasing spotlight on allegations of greenwashing in particular.

Lenders are likewise increasingly incorporating ESG metrics into their credit analysis and borrower evaluation. This can impact both the availability of acquisition financing and the ongoing financing for the combined business post-closing.

ESG market norm in M&A

Traditional due diligence, focusing on purely legal issues, is often insufficient to identify pervasive ESG risks, which commonly extend into areas of reputation and stakeholder risk. Indeed, many of the large ESG failings globally over recent years have not involved breaches of indisputable black letter law but failures to comply with the law's spirit. These include instances where businesses failed to meet community expectations or manage reputational risk exposures.

Buyers are therefore incorporating broader, forward-looking assessments of ESG risks, and looking beyond the target to consider the wider business, its supply chains and associated reputational concerns, into their due diligence processes.

Sustainability Due Diligence Directive and which are currently stipulated under domestic law such as the German Supply Chain Act (LkSG) or Corporate Duty of Vigilance Law.

A comprehensive approach can help identify regulatory or litigation risk further down the road. Where risks are identified as part of the diligence process, acquirers may seek contractual protection, including specific ESG-focused warranties and indemnities. Such provisions must be drafted carefully to ensure a breach or trigger event can be identified and resulting losses demonstrated.

Post-completion, companies should remain focused on ESG considerations. Any integration plan must address ESG risks, implement remedial efforts and develop compliance measures to ensure ESG risks that persist beyond completion do not snowball into live legal implications.

Likewise, sellers may look to negotiate a 'responsible' exit to get assurance that the buyer will run the business with integrity. Sellers which adopt international best practices are employing vendor ESG due diligence to help identify issues, corresponding rectification actions and appropriate disclosures to mitigate liability. Other common measures include carrying out due diligence on prospective buyers to check they do not have a history of conducting operations in an irresponsible manner. We also continue to see enhanced post-completion undertakings being sought from buyers however, careful consideration must be given to contractual obligations that involve an ongoing relationship with the buyer.

Best practices

While it is market norm for buyers to be conscious of ESG risk, those that follow international best practices actively consider ESG issues as part of comprehensive due diligence processes. This is in line with the requirements which will be imposed on larger companies under the EU's proposed Corporate

Even where ESG factors are not the driving force behind a deal, they are now commonly integrated into most transaction processes

ESG-driven deals

Heightened focus on ESG is leading companies to dispose of poor ESG-performing businesses. In 2022, significant deals included the sale by Dutch chemical firm DSM of its Engineering Materials business for 3.5 billion and the bids by Brookfield Asset Management and EIG Global Energy Partners for Origin Energy, which was valued at US$12 billion. The latter deal saw the bidders aim to split Origin into its extractive gas operations and retail energy supply businesses.

M&A transactions also aim to take account of ESG-related upside, with strong ESG performers commanding a premium. In 2022, Goldman Sachs found that EU-Taxonomy aligned companies trade at a 37% price-to-earnings and enterprise-value-to-EBITDA sector-relative premium.

ESG best practice on M&A:

1. At the initial proposal stage, conduct early reviews to identify any ESG-related 'fatal flaws'

2. Specialist due diligence undertaken to assess material ESG risks and opportunities

3. Where material risks are identified in due diligence, seek ESG-focused warranties, indemnities and covenants in deal documents

4. During the integration stage or asset management phase, address ESG due diligence findings

5. At exit, sellers may consider a responsible exit approach by ensuring, to the extent possible, that good ESG practices remain in place following the sale

Antony Crockett Hong Kong

Rebecca Perlman London

Silke Goldberg London

Timothy Stutt Sydney

//11

HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

How effective is the growing shareholder voice in public M&A?

Boards should not assume that shareholders will follow their recommendations

We saw a slowdown in deal activity in the second half of 2022 as the global markets felt the impact of the continuing conflict in Ukraine, the onset of macro-economic headwinds and more challenging debt markets. We also saw fewer of the more traditional activist M&A campaigns in 2022 as compared to recent years. However, the uncertainty these factors (and the emergence from the pandemic) created led to greater investor/shareholder opposition to some of the M&A deals or deal terms proposed in 2022, illustrating again that intervention in M&A is no longer limited to formal activist campaigns pressuring companies to generate value by disposing of business units via spin-offs and carve-outs, or by engaging in change of control transactions. A number of deals saw investors making their views heard after announcement, either to encourage a sweetened offer or to argue that the deal should not be pursued. Such tactics are no longer limited to the traditional cast of activist shareholders minority shareholders, even those who have long been supportive of the board, have found their voice and will not hesitate to publicly challenge a transaction and board's recommendation or put forward M&A proposals of their own. It is fair to say that there is no guarantee that minority shareholders will follow a board recommendation.

Sweetening the bid

Schneider Electric's 9.5 billion offer for UK software developer Aveva, which was the largest UK deal of 2022, was met with strong opposition from Aveva's shareholders who voiced their disappointment that the board had recommended an "opportunistic bid" to investors. The French group, which already owned nearly 60% of Aveva, subsequently announced an increased final offer of just under 10 billion in an attempt to win over investors, which was approved by shareholders.

Just say no

Capricorn Energy abandoned its proposed 1.4 billion all-share merger with Africa-focused Tullow Oil following strong public opposition from over one-third of its shareholders with large investors calling for a strategic review of the business. In response, Capricorn announced a proposed combination with Israel's NewMed Energy LP, to create one of the largest independent upstream energy producers listed in London. At the time of writing, that combination is also facing mounting opposition from shareholders, including Palliser Capital who believe the deal undervalues Capricorn and has requisitioned a shareholder meeting seeking changes to the Capricorn board of directors.

Shareholders setting the M&A agenda

In May 2022, AGL Energy, an Australian listed company, terminated its demerger plans following lobbying by Mike Cannon-Brookes, the billionaire cofounder of Atlassian who became the largest single shareholder in AGL Energy with his purchase of 11.28% via Grok Ventures. Cannon-Brookes subsequently succeeded in his attempts to install four nominees to the board at AGL Energy's AGM in November 2022.

Retail investors in Hong Kong are lending support to a campaign for HSBC Holdings to spin off its Asia operations put forward by one of its largest shareholders, Ping An Insurance Group. HSBC management held an informal meeting of Hong Kong shareholders in August 2022 seeking to engage with investors and set out the board's objectives.

In France, the government is looking to buy out the 16% of Electricit de France (EDF) that it does not already own. EDF minority shareholders are forcefully challenging the proposed transaction. The 12 share price offered is much lower than the 32 per share of EDF's IPO in 2005. After a vain attempt to challenge the EDF board decision which issued the reasoned opinion (avis motiv) recommending the public tender offer to the shareholders and bondholders, a group of shareholders has filed another claim before the Paris Court of Appeal to challenge the French Financial Market Authority (AMF)'s decision to approve the public tender offer. Consequently, on 7 December 2022, the AMF extended the offer (which initially should have closed on 22 December 2022) pending the Paris Court of Appeal's decision, which is required to be given within five months.

Moving forward

Dealmakers may be facing the most challenging environment for M&A since the financial crisis of 2008/2009. Minority shareholders are well aware that these volatile conditions may lead to opportunistic bids and are ready and willing to speak out and use the full spectrum of tools at their disposal to oppose deal terms or indeed the transaction as a whole.

Now, more than ever, it is critical that bidders and target boards have a proactive and effective strategy to convince shareholders of the merits of the transaction, not only to secure the requisite voting majority but also to avoid a public dressing down from shareholders

Caroline Rae London

Philippa Stone Sydney

Hubert Segain Paris

Tommy Tong Hong Kong

//13

HERBERT SMITH FREEHILLS

Trends in M&A

What are the main themes we are seeing in transactions and their terms?

2022 was a tale of two halves for M&A activity. The year started strongly before war, inflation, interest rate rises and political uncertainty slowed the relentless pace of dealmaking we saw from the middle of 2020 onwards. See our regional insights for further reviews of M&A activity in 2022 by jurisdiction. As we enter 2023, we see a number of themes continuing to impact and influence M&A transactions and their terms.

Financing a deal is more challenging Over the last year, interest rates have increased dramatically across a number of key jurisdictions central bank interest rates increased from 0.25% to 4.5% in the US, 0.25% to 3.5% in the UK and 0% to 2.5% in the Eurozone, in each case the highest they have been in more than a decade. A more challenging financing environment means that in 2023 we expect to see buyers, in particular private equity sponsors, being more selective and needing to put more equity into deals. This may see valuations adjust as lower leverage and higher cost of financing make internal rate of return targets more challenging to achieve.

Deal terms have been favouring sellers With the increasing dominance of private equity buyers in the M&A market, 2022 saw a noticeable shift in deal terms that affected all participants in the market in certain situations. Private equity sponsors, particularly in competitive auction processes, were increasingly willing to rely on their due diligence and seek less protection from sellers to make their bids more attractive. This has led to sellers demanding fully 'no recourse' terms and pushing to delete warranties that have traditionally been accepted by sellers. This shift made life difficult for strategic buyers, particularly listed companies, who wanted to participate in auction processes but may have a more risk averse approach to M&A. As we move into 2023, a more difficult M&A market may reverse this trend.

M&A REPORT 2023

M&A REPORT 2023

Bridging the gap The Covid-19 pandemic and government actions to mitigate it led to buyers needing to take a hard look at their gap covenants during 2020, and they came under further scrutiny during 2021 and 2022 as enforcement actions for 'gun-jumping' appeared to be a priority for the European Commission.

A number of the trends highlighted in this report point to gap covenants continuing to be a focus for both buyers and sellers: lengthening timelines between signing and closing due to increased regulatory, FDI and antitrust scrutiny; reputational concerns around ESG matters; and the need for targets to protect their businesses in a volatile geopolitical environment.

As with other deal terms, the competitive M&A landscape has left buyers often needing to accept less protection on gap covenants than they would wish for. If buyers find themselves with increased bargaining power over the coming year, it is likely they will capitalise on that by asking for terms that give them increased confidence in the operation of the target business between signing and completion. In addition to more granular covenants, buyers may look for greater rights of consultation and involvement in decision-making with respect to the target business, but with no voting control or board voting rights to ensure they stay on the right side of antitrust authorities.

Distress and special situations are on the rise Inevitably in any downturn marginal businesses will be vulnerable to the combination of a slowdown in consumer spending and higher borrowing costs. We saw some high-profile insolvencies in the second half of 2022 and we expect that trend to continue in 2023.

These situations present opportunities for well-funded buyers to capitalise on the availability of businesses that may be fundamentally good in the longterm at significantly reduced valuations. With private equity funds, special purpose acquisition companies (SPACs) and certain strategic buyers still flush with cash, we expect them to look to deploy this by taking advantage of distressed or special situations, whether by participating in full acquisitions or providing more creative funding solutions to distressed businesses.

De-SPACs will continue but to a lesser degree Even with multiple US, and a more limited number of European, SPACs looking for targets, 2022 was nevertheless a challenging year to complete de-SPAC transactions following the boom of 2021. Fewer than half the number of de-SPAC transactions that were announced in 2022 were completed. Market conditions and other developments affected this trend, most notably: post de-SPAC performance for many deals that did get done; the difficulty in finding funding through the private investment in public equity (PIPE) market, particularly to fund high levels of investor redemptions; the market impact of proposed regulatory reform in the US; and a general re-examination of the de-SPAC product as a route to the public markets in light of all of the above and the perceived costs of sponsor participation.

Notwithstanding this, we expect de-SPACs to continue to complete in 2023 albeit in diminished numbers, especially since so many SPACs have approaching deadlines to deploy their capital. Transaction structuring in the expected ongoing absence of a robust PIPE market will be paramount, with high levels of investor redemptions expected to continue, particularly in the US.

HERBERT SMITH FREEHILLS

Malika Chandrasegaran Sydney

Christoph Nawroth Dsseldorf

Greg Mulley London

Charles Steward London

//15

HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

Regional perspectives

Africa Australia France Germany Greater China India Indonesia Italy Japan Middle East Southeast Asia South Korea Spain UK US

HERBERT SMITH FREEHILLS

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HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

A view from Africa

2022 was an up and down year for M&A in Africa

Activity

2022 M&A deal values were down from 2021, but 2021 was a record year for M&A in Africa. Deal volumes were closer to 2021 levels, with overall activity exceeding pre-Covid levels and seemingly on an upward trajectory. Although there was an increase in private equity investment and activity across the Continent, with an increase of up to 40% of overall investment in Africa (outside of South Africa) from 2021, Africa's share of private equity investment is decreasing and some analysts say it is below 1% of the global private equity market.

In Sub-Saharan Africa M&A transactions reached US$21 billion during 2022, substantially less than 2021's record US$87.2 billion. However, the number of deal announcements in the region remained at similar levels to 2021 and higher than pre-Covid levels.

In African M&A generally there is increased focus on getting a handle on corruption, fraud and sanctions-compliance issues during pre-deal due diligence, with walk away rights if these are not satisfactorily dealt with. We are seeing more and more focus on post deal protections for the seller, including on ESG issues.

Outlook for 2023

The ongoing worldwide uncertainty and its economic effects will continue to have an impact on M&A transactions in Africa. We expect the upward trend of M&A transactions to continue, especially from private capital investors, but the impact of the global uncertainty remains to be seen.

South Africa and Egypt continue to be the most active target nations; the third most active country in Africa by both volume and value was Nigeria followed by Kenya. The US was the most active inbound acquirer by volume, followed by the UK.

Sectors

Materials, healthcare and financials were the most active sectors by value in 2022, with healthcare making the list because it included the largest deal of the year on the Continent, being the Remgro SA Shipping Agencies Services acquisition of South African hospital operator Mediclinic for US$4.8 billion.

Renewable energy and power transactions were also very active with deals targeting energy and power companies accounting for 12% of 2022 transactions in Sub-Saharan Africa. Other sectors such as TMT also continued to be active, with IHS's acquisition of MTN's towers an example of a strategic TMT transaction in South Africa.

Huneiza Goolam Johannesburg

Legal trends

The global trend of more active involvement of regulatory authorities in M&A is also present in African transactions. In South Africa the Competition Commission now regularly imposes conditions that are not competition law related, such as retaining a particular black economic empowerment ownership level.

Ross Lomax Johannesburg

Rebecca Major Paris

Rudolph du Plessis Johannesburg

A view from Australia

In 2022 M&A in Australia resumed a pre-Covid pace, down from the frenetic heights of 2021, with deal value exceeding US$83.5 billion and volume reaching over 1,700 transactions

Activity

The slowdown in activity is unsurprising given the global deterioration in macro-economic conditions and surge in volatility seen in rising inflation and interest costs as well as increasing challenges around factors such as energy security.

Sectors

Despite the challenging outlook, industry-defining deals continued to be done in 2022, notably in the financial services sector where ANZ Banking Group agreed to acquire Suncorp Bank for A$4.9 billion and Perpetual agreed to merge with Pendal Group in a deal valued around A$2.3 billion. Outbound M&A also remained above pre-Covid levels, exceeding US$42 billion, and the mining sector continued to perform strongly, with transactions focused on both energy security and energy transition.

Legal trends

The focus on hard to replace `privileged' assets was a theme that continued from 2021 and resulted in heightened competition for such assets. This showed up in an increase in tactical moves for public companies, including bear hugs to pressure boards to engage, bidders going direct to shareholders to gain their support without obtaining board backing first (including financial sponsors willing to launch takeover bids without due diligence and no certainty of acquiring control) and nil premium bids to create blocking stakes.

In scrip mergers, the usual fixed exchange ratio approach, where parties are exposed to the risk of swings in a bidder's share price, have been examined closely following the acquisition of Afterpay by Square, which started at an approximately 30% premium and ended in a 30% discount. When Qantas Airlines agreed to acquire Alliance Airlines, a floating exchange ratio was used. With continuing market volatility coupled with increased deal execution periods, due in part to lengthening regulatory approval processes, we expect this trend to continue.

Outlook for 2023

Market participants are adjusting to increasing market volatility and a more challenging interest rate environment and we note that plans for 2023 transactions have a heightened focus on preparation to manage deal execution risk.

We expect that financial sponsors and strategic offshore buyers with the scale to ride out short-term market shocks and the need to continue to deploy capital will initiate the standout transactions of 2023. In the resources sector, copper is well-placed to feature strongly, along with other future-focused minerals such as nickel.

Paul Branston Perth

Jason Jordan Melbourne

Nicole Pedler Sydney

Melissa Swain-Tonkin Brisbane

//19

HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

A view from France

After a record year in 2021, the French M&A market gave mixed signals in 2022

Activity

2022 was a year of mounting headwinds for French M&A, in particular the Ukraine crisis, rising commodity and energy prices, surging inflation and the drying up of the debt market. The first quarter remained relatively robust but M&A activity then contracted. During the first half of the year, private equity buyers were especially active and even closed more deals than over the same period of 2021. The private equity market, however, saw a sharp downturn over the second half of the year. The fall in deal size in 2022 was particularly striking, with a 47% decrease compared to 2021.

Sectors

The energy sector remained robust and accounted for almost a quarter of deal values (17 billion), with notable transactions including the acquisition of Reden Solar by Macquarie for 2.7 billion and KKR's 2.5 billion buyout of Albioma.

Consumer, industrial and tech were leading sectors by deal volume over 2022. The Eutelsat-OneWeb merger is a good example of a high-profile technology transaction which was also an outbound deal (an exception to the general domestic M&A trend of 2022).

Legal trends

In line with trends observed over previous years, French regulatory authorities continued consolidating their presence in the dealmaking landscape, as exemplified by the merger between TF1 and M6, which was thwarted by the demands of the French competition authority.

On the M&A practice side, 2022 brought about longer due diligence processes with fewer pre-emptive deals, more frequent negotiations of earn-outs to try to bridge the widening valuation gap between buyers and sellers and a continued rise in the use of W&I insurance.

Outlook for 2023

2022 was a challenging year for French M&A. However, benchmarking activity against 2021 is a misleading comparison given that year's glut of M&A and, although there are many uncertainties which will likely continue to impact bid appetite, recent history has shown that dealmakers have become accustomed to working in uncertain times. If the difficulty to recruit M&A professionals (lawyers and bankers) and upward remuneration pressure for these roles is any indicator, the market does not seem to think that a long-term downturn is inevitable.

Christopher Theris Paris

Laurence Vincent Paris

A view from Germany

M&A in Germany in 2022 was impacted by global economic and political uncertainty but remained robust

Activity

In line with the trend in many other geographies, M&A activity in Germany in 2022 was down from the record heights seen in 2021 but remained robust and above pre-Covid levels. While the number of transactions involving German companies fell (down 20% compared to the previous year) deal value surpassed 100 billion, down 25% compared to the previous two years years but slightly above 2019 levels. Many drivers suggest that the slowdown in German M&A activity seen in 2022 will continue into 2023, and that levels of activity will be comparable to 2022.

Sectors

While tech and industrials remained the sectors with the highest overall activity, the energy industry saw the largest single deal in a move explicitly aimed at ensuring the long-term stabilisation of one of Germany's biggest energy players following the energy crisis, the Federal German government decided to acquire Uniper SE (valued at 18.99 billion). Other major deals included Volkswagen's sale of a 25% stake in Porsche to the Porsche family (valued at 10.1 billion) in connection with Porsche's IPO, and Abu Dhabi Investment Authority's and Global Infrastructure Partners' joint acquisition of a 72.5% interest in VTG, Europe's largest private wagon hire company (valued at 3.04 billion). Also significant was the sale of an 8% stake in RWE to the Qatar Investment Authority (valued at 2.42 billion) and Rheinmetall's acquisition of Spanish Expal Systems (valued at 1.25 billion). In contrast, M&A activity in the real estate sector was at a record low (in particular, compared to 2021) due to valuation gaps and a difficult financing environment.

outside the EU. Further, under the EU Digital Markets Act any transaction between large 'gatekeeping' digital platform providers and other digital platform providers must be notified to the EU Commission before closing. We have also seen regulators intensify their review and scrutiny of transactions under their existing and new powers. A tightening net of regulations and intensified regulatory scrutiny will likely impact transaction timetables and security.

Outlook for 2023

We expect that strategic acquirers with cash reserves, private capital and special purpose acquisition companies (SPACs) will continue seeking to invest in 2023. Sectors such as energy, infrastructure, technology and defence may also buck the generally subdued trend and so may see a significant share of transaction volume. Another driver for the German M&A market in 2023 will be transformative acquisitions, in particular those aimed at decarbonisation and/or digitalisation, especially in energy-intensive manufacturing sectors. We anticipate there will be increased levels of activity in the public and private real estate sector, including the disposal of property assets to reduce debt. Distressed M&A may also play a role.

Legal trends

Regulatory changes affected M&A activity in Germany in addition to economic and political uncertainty. Apart from tightening FDI controls (which notably prevented the 4.3 billion public takeover of Siltronic by Taiwanese GlobalWafers) the European Parliament and the Council agreed in June 2022 on rules which will enter into force by mid-2023. These rules are intended to create a 'level playing field' and will affect bidders in M&A transactions in the EU that have received financial contributions from non-EU governmental bodies or state-owned companies

Snke Becker Dsseldorf

Julius Brandt Frankfurt

//21

HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

A view from Greater China

The M&A market in Greater China experienced a slowdown in 2022 but is embracing opportunities created by the drive to modernise the PRC economy

Activity

M&A activities in Greater China experienced a slowdown in 2022 after reaching a historic high in 2021, with a slight decline in the total deal volume and a steep drop in total deal value. However, Greater China still plays a central role in the APAC deal market, accounting for over 40% of APAC transaction value for the first three quarters of 2022.

Affected by slowing economic growth, pandemic lockdowns and a tightened regulatory environment, investors are taking a more conservative approach towards mega-deals. However, motivated by PRC government policies promoting industrial upgrades and high-tech development, medium and small-scale transactions remained active.

Foreign direct investment into China continued to show strong growth, achieving a 20.2% year-on-year increase for the first eight months of 2022. Foreign investment in services and high-tech sectors increased by 8.7% and 33.6% respectively. Investments from South Korea, Germany, Japan and the UK led the way, achieving increases of 58.9%, 30.3%, 26.8% and 17.2% respectively.

Domestic deals continue to dominate the M&A landscape in Greater China, accounting for 90% of deals by value and volume. Reorganisation and reform of state-owned enterprises remain potent drivers for domestic M&A.

In contrast, China outbound M&A dropped sharply, largely due to headwinds including geopolitical tensions and pandemic travel restrictions. The US remains the top investment destination for China outbound M&A, albeit with smaller deal sizes.

Legal trends

With the PRC government's ambitions in industrial upgrades, digital transformation and carbon neutralisation, and the focus on 'common prosperity' and wellbeing, we expect sectors such as clean energy, artificial intelligence, semiconductors, 5G, Web 3.0, robotics, healthcare and life sciences to benefit from government policies and attract more investment in 2023.

Outlook for 2023

We expect domestic deals will continue to drive the M&A market. Despite the headwinds, market surveys show investors are still looking to future-proof their assets and mitigate risks by investing in strategic and emerging industries. With the reversal of the 'zero covid' policy, lifting of travel restrictions and renewed focus on economic growth in the PRC, it is expected that activity level will pick up in the second half of 2023.

Hong Kong will continue to play a key role as an M&A hub to structure investments both in and out of mainland China. In addition to expansion opportunities in the fast-growing Greater Bay Area, we expect Greater China corporate and financial investors looking to expand to seek quality targets across Southeast Asia and India. Hong Kong's ambition to be Asia's crypto hub, coupled with recently announced measures to promote the virtual asset industry, will also create investment opportunities.

Private equity and venture capital investment also slowed, coming off record activity in 2021, with investment value in 2022 of US$89 billion representing a 55% drop from 2021. Private equity/venture capital deal volume also dropped, despite robust activity in technology, industrials, healthcare and energy. Chinese government guidance funds are playing an increasingly key role in the PE market, directing investments to high-tech and strategically important sectors such as semiconductors, artificial intelligence and 5G.

Sectors

National industrial upgrade policies generated high demand for reorganisation in the industrials sector which accounted for nearly a quarter of deal value (US$81 billion) and more than 20% of bid volume in 2022. Activity in the tech sector was also strong with total deal values exceeding US$49 billion. Energy deal values fell by 8% in 2022, but still accounted for 11% of deal value.

Gavin Guo Shanghai (Kewei)

Tommy Tong Hong Kong

Nanda Lau Shanghai

Angela Zhao Shanghai (Kewei)

A view from India

The Indian M&A market remained resilient in the face of global headwinds

Activity

With a total M&A deal value of US$151 billion compared to US$110 billion in 2021, India's growth appears to be a bright spot in the current macro-economic landscape, helped by geopolitical tailwinds, but there are indications of a looming slowdown in dealflow.

2022 saw some mega-deals, most notably HDFC Bank's US$60 billion merger with Housing Development Finance Corporation. The technology sector (including non-traditional tech activities) continues to be buoyant with deals including the US$7.1 billion merger of L&T Infotech and Mindtree, but valuations are undergoing stricter scrutiny during commercial discussions.

Foreign investment continues to be a focal point, with the US being the top inbound acquirer by both value and volume, followed by the Netherlands and Japan. 2022 also saw much activity from the Adani Group, with Adani's US$6.4 billion acquisition of ACC and Ambuja Cements (Swiss cement manufacturer Holcim's India division) being a prominent example.

Private capital investments continue to be strong in India, at a value of US$35 billion in 2022 across 953 deals. Historically, international sponsors have not had many successful and profitable exits in India, but this has changed in the last couple of years. The likes of TPG and Blackstone have enjoyed success (eg, TPG's exit from e-commerce marketplace app Nykaa and Blackstone's exit from the Mindspace REIT via an IPO). And more international private capital players such as Copenhagen Infrastructure Partners and OTPP have forayed into India.

ESG-focused investments is illustrated by regulators looking to liberalise rules on green bonds, the securities regulator providing ESG ratings to companies and the launch of a stock exchange purely for social investments.

However, not all regulatory action is facilitating deals. Recent amendments by the government contemplate mandatory competition approvals if the deal value is above a threshold and involves an Indian nexus. This will likely result in more deals needing competition approvals, particularly deals by highly-valued tech start-ups.

An IPO has been the preferred exit route for private equity investors in India. However, after some start-up tech IPOs faltered post-listing, this route is being carefully watched by the market regulator who has in some cases demanded a rationale for exceptionally high valuations for listing. This has not, however, undercut the PE growth story in India.

Outlook for 2023

India continues to emerge as a strong alternative to China as an investment and growth destination. Global supply chain realignment coupled with India's focus on technology, renewables, start-ups, investment in infrastructure and demographic advantage puts India centre stage for new businesses and continued investment activity. The impact of a global funding slowdown would likely enhance acquisitions and consolidation deals within existing Indian players in 2023. Overall, India continues to be a bright spot in the global economy but while macro-economics have not dampened India's M&A story so far, it may be difficult to sustain robust activity if the global market further slows.

With Indian businesses increasingly demonstrating global ambitions, outbound investments have increased year-on-year (eg, Biocon Biologics's US$3.3 billion acquisition of Viatris in the US), although not all outbound transactions are necessarily reflected in deal tables thanks to India's outbound investment regulations and acquisition structures.

Sectors

The Indian financial services sector accounted for the largest share of deal values in India (over 50%). The technology sector (including non-traditional technology players) was the most active by volume and second to finance by value. Recent deals also indicate a telecom and pharmaceutical focus.

Roddy Martin London

Alan Montgomery London

Legal trends

India's focus on climate change and commitment to reduce greenhouse emissions by 45% by 2030 has influenced M&A growth, with significant green investments across the spectrum and enhanced ESG requirements. The rise of

Chris Parsons London

Siddhartha Shukla London

//23

HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

A view from Indonesia

2022 was another solid year for deal making in the key Southeast Asian economy

Activity

Deal volume in 2022 was higher than the previous two years and up nearly 40% from 2021. Following a technology-fuelled boom in deal value during the pandemic, deal value in 2022 was closer to levels seen in pre-pandemic years. Overall value still exceeded US$15 billion in 2022, down 25% from 2021 but higher than 2020.

Significant deal activity was driven by the financial services sector particularly insurance, banking and fintech with the digitalisation of services continuing to be prominent. TMT deals again played a major role, with telecom tower transactions, data centre developments and other digital infrastructure projects continuing apace nationwide. Infrastructure was a major growth area in 2022 as Indonesia's new sovereign wealth fund, INA, facilitated transport and infrastructure investments by international consortia in the toll road and airport sectors, among others.

Domestic deals accounted for more than half of deal activity by value and half the volume of deals. Investors continue to use Singapore-incorporated vehicles for their investments into Indonesia, explaining why such entities were the most active by value, accounting for nearly 44% of national deal values (US$6.7 billion in 2022).

Start-ups continued to raise funds from both local and international investors. While this activity fell year-on-year, new investors were brought in, albeit adopting a more cautious approach and requiring the investee companies to demonstrate a more sustainable business model and a clearer path to profitability. While streaming service Vidio (Emtek Group) raised further funding in 2022 from local and regional investors such as Affinity, Grab and Sinarmas, others such as coffee chain Kopi Kenangan and e-commerce platform Bukalapak further expanded their business through bolt-on acquisitions, alongside organic growth. In the fintech payments sector, payment platform DANA (Emtek Group) obtained an additional US$554.5 million in funding from Ant Financial and regional e-commerce platform Lazada, as well as from local conglomerate Sinar Mas.

US$351 million and Axiata Group acquiring a 66% stake in LinkNet, an Indonesian internet service provider, from CVC and First Media for US$610 million. Following the US$18 billion Tokopedia-Gojek mega-merger and US$1.3 billion pre-IPO fundraising in 2021, GoTo Group held its IPO in April 2022.

In the infrastructure space, the INA established international consortia to invest in toll road assets of state-owned construction companies PT Waskita Karya (Persero) Tbk and PT Hutama Karya (Persero).

A significant project currently ongoing is the Bali Sanur Project, a government-led development involving 42 hectares of land designated as a special economic zone for the healthcare and wellness sector, which aims to provide world-class healthcare facilities including cardiology, oncology and neurology. Mayo Clinic is one of the partners in this project, which will afford opportunities in the areas of plastic surgery, aesthetics and wellness, geriatric care, stem cell research and fertility treatment.

Legal trends

As is the case across the tech sector globally, the recent correction in valuations has brought more discipline to the implementation of transactions.

Outlook for 2023

While 2022 did not match the exceptional deal values seen in 2021, the market in Indonesia shows no sign of slowing. However, in 2023 Indonesia will feel the impact of political positioning ahead of the 2024 general and presidential elections, which are likely to affect certain sectors. Consequently, planned and ongoing deals will come under pressure to complete before the end of 2023.

Meanwhile, we look forward to seeing further development of INA's role as the gateway to long-term foreign strategic investment in various development and infrastructure projects.

Sectors

TMT, financial services, infrastructure and industrials were particularly active in 2022. Indonesia's financial sector was the most active by volume of deals. After financials, the industrials and materials sectors were the most active by volume. Materials was also the most active sector by value.

Major TMT deals included Edgepoint Indonesia selling its stake in telecom tower company PT Epid Menara AssetCo to Centratama Telekomunikasi Indonesia Tbk (CENT) for

Cellia Cognard Jakarta

David Dawborn Jakarta

Stephanie Jakarta

Vik Tang Jakarta

A view from Italy

While M&A around the world generally declined in the second half of 2022, Italy held up in the face of global challenges

Activity

In contrast to global trends, the Italian M&A market demonstrated remarkable resilience despite sustained global uncertainty. Indeed, the number of deals closed during 2022 (nearly 1,300 announced transactions) meant it was the most active year on record. Deal values reached US$88 billion, just shy of those recorded in 2021 and the highest since 2007, thanks in part to Blackstone's US$52 billion takeover of Atlantia in October.

as is the case elsewhere, but market expectations are rebounding for the second half of 2023. In this scenario, the TMT sector has the potential to attract investments due to robust demand for digital services and stability of evaluations.

Private equity funds confirmed their leading position in deal markets, with an increased market share in volume (33%) and value (77%). It is also worth noting the increase in the number of cross-border transactions (555, compared to 549 recorded in 2021), demonstrating the increasing interest of foreign investors in the Italian market.

Sectors

The Atlantia takeover was also responsible for transportation & logistics commanding over 60% of last year's market share by value, followed by consumer markets, which accounted for over 10% of market share by value (with deals worth US$8.8 billion). There were three mega-deals (>US$1 billion), with Advent's acquisition of IRCA, Farfetch's acquisition of a 47.5% interest in Yoox and the JV between Autogrill and Dufry.

The financial and TMT sectors were also busy, recording nearly 10% of deal value and over 20% of deal volumes, respectively.

Legal trends

On the legal side, we witnessed a broadening application of the FDI regime and increasing state intervention in strategic sectors, with some transactions being vetoed and others having restrictions or terms imposed upon them. In addition, a law has been recently passed allowing the Italian antitrust authority to scrutinise below-threshold transactions for up to six months after closing. This shows an interventionist approach in transactions which may hinder competition in the Italian market.

As a result, greater attention will be paid by investors to regulatory and competition issues related to M&A.

Outlook for 2023

The M&A market in 2023 will depend on several factors, such as the spiking inflation rate, soaring energy prices, increasing debt costs and the war in Ukraine. These conditions are causing a reduction in M&A activity in Italy,

Giacomo Gavotti Milan

Francesca Morra Milan

//25

HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

A view from Japan

Despite the easing of restrictions on business travel to and from Japan, various macro-economic events in 2022 had a noticeable impact on Japanese cross-border M&A activity

Activity

Factors impacting cross-border M&A, as for many other jurisdictions, include the war in Ukraine, rising inflation and the depreciation of the Japanese Yen. There was a significant reduction in outbound M&A activity relative to 2021, both in volume and value. The US remained one of the most active target nations by volume and value for corporate Japan, while certain EU countries, such as Ireland, were the beneficiaries of some high-value, Japan-driven deals, due in part to deals such as Mitsui's acquisition of a 27.5% stake in the Dublin-based Mainstream Renewable Power.

Inbound M&A deal volumes also recorded levels below recent years, but values remained resilient. The trend of inbound deals outstripping outbound deals in recent years therefore continued, with the majority of cross-border deals now being inbound deals by foreign players into Japan. The trend of foreign private equity buyers targeting Japanese companies undertaking carve-out transactions also continued in 2022.

Sectors

Tech remained one of the top sectors for outbound M&A activity from Japan; however, in line with the overall trend for outbound deals, deal values for the sector were down significantly. Industrials was the second most active sector for outbound activity by volume of deals, but, unlike the case for the tech sector, deal values were resilient. One of the largest outbound deals recorded in 2022 was Sony's US$3.7 billion acquisition of US game developer, Bungie.

In terms of inbound and domestic M&A activity, tech deal value was down in 2022; however volumes almost doubled compared with 2021. The industrials and materials sectors saw activity increase by both value and volume of deals in 2022. For example, in 2022, the materials sector accounted for approximately 32% of the total M&A deal activity by value.

Outlook for 2023

We expect to see an improvement in overall levels of M&A activity throughout 2023. The weaker Yen and other economic challenges may continue to inhibit the growth of outbound M&A deals in the short-term, but we are hopeful that Japan Inc. will regain its appetite to tap into foreign markets to drive growth, particularly as Japan's ageing population and reduced domestic demand remain relevant. We otherwise expect the rate of inbound and domestic deals to continue to outstrip outbound deals, at least in the short-term, as the weak Yen and low interest rate environment persists.

Joseph Fisher Tokyo

Emma Stones London

Graeme Preston Tokyo

A view from the Middle East

Deal activity in the Middle East continued well into 2022, driven by the UAE, Saudi Arabia, Kuwait and Oman

Activity

Despite fluctuating crude prices, economic uncertainty and global market disruptions, domestic deal activity in the region was significantly driven by involvement of private equity and sovereign wealth funds. UAE-based entities represented both the most targeted and the most active acquirers by value and volume in 2022.

We saw an increase in the participation by the private sector in regional deals, while noting that there was a decline in government-related entities' involvement in Middle Eastern deals, from an average of 60% for 2019-2021 to less than 30% in 2022.

Domestic M&A remained resilient in 2022, recording deal values and volumes slightly above 2021 levels. Outbound M&A activity surged in 2022, recording volumes and values not seen since 2007/08 reaching US$35.1 billion across 325 deals. The region's inbound M&A continues to be very active by deal volume, with North-American entities being the most active investors. For example, Canada's Caisse de dpt et placement du Qubec (CDPQ) acquired a 22% stake in various assets of DP World valued at US$23 billion.

on foreign investment to align with the UAE's initiatives to promote inward investment.

Outlook for 2023

Middle Eastern economies are set for robust growth, with regional GDP growth predicted to outstrip most economic regions globally in 2023. Despite the fears of recession in the US and UK, we have seen healthy levels of overseas investment, with the region a favoured destination for overseas buyers within the technology, transport and sustainable infrastructure sectors.

We anticipate that key deal themes including continued investments by government-related entities, digitalisation and technology and portfolio optimisation will continue to drive growth and M&A activity in 2023.

Sectors

Despite the volatility of commodity prices and inflationary pressures, the region continued to diversify from its oil and gas business. Investments were focused on sectors such as financials, TMT, transportation, consumer and real estate. Private equity investment has led the growth of M&A in the Middle East, illustrating the attractive fundamentals, abundant liquidity and rerating of longer duration growth companies.

Legal trends

ESG remains a key driver and priority for senior executive board members. Across all sectors there has been a strong desire to invest in assets that accelerate sustainability strategies.

The unprecedented economic growth driven by governmental policies, crude oil demand, and investment in tourism, sports, infrastructure and technology are playing a major part in cementing an attractive market to investors and dealmakers, particularly in Saudi Arabia.

The UAE continues to stand at the forefront of development in the region in relation to the legal and social landscape. The latest development has been the introduction of the corporate tax, effective from 1 June 2023. However, in light of recent easing of foreign ownership restrictions in the UAE, it remains to be seen whether there will be a potential tax relief or tax reduction

Joza Al Rasheed Riyadh (in association with the Law Office of Mohammed Al-Tammami)

Anna Szyndler Dubai

Chris Walters Dubai

//27

HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

A view from Southeast Asia

Despite challenges caused by global economic and political uncertainty, deal making across Southeast Asia remained resilient in 2022

Activity

After a year of dramatic growth in dealmaking in Southeast Asia in 2021, 2022 saw a continuation of the robust M&A activity. Region-wide, total deal value exceeded US$84 billion in 2022. Deal volume remained stable and largely in line with the levels seen in 2021. Activity in the region has been sustained by significant levels of M&A in Singapore in particular, which accounted for more than 40% of total regional deal value and 38% of deals by volume, driven in part by the increasing focus of private capital players looking to expand their portfolios in the region.

Along with Singapore, the most targeted nations by value were Indonesia, Malaysia and the Philippines the first time in recent years that the Philippines has featured in the top four nations. This is partly due to the boom in telecoms deals. Notably, the sale by PLDT of 6,000 telecoms towers in the Philippines to edotco Group and EdgePoint for US$1.47 billion was reportedly the largest ever acquisition of assets in the Philippines and the sale by Globe Telecoms of over a thousand telecoms towers for US$340 million was reported to be the largest sale and leaseback ever in the country.

Other major deals in the region included the sale by Indosat Ooredoo Hutchison of a majority stake in its Indonesian data centre business and United Overseas Bank of Singapore's US$3.7 billion acquisition of Citigroup's consumer banking business in Indonesia, Malaysia, Thailand and Vietnam.

Development Plan 8). For further information on M&A in Indonesia, see our separate View from Indonesia.

The role of private capital in Southeast Asia could be key to driving resilience and growth in the M&A market, as it continues to make its mark in the region. Given volatility in capital markets we expect to see secondary private equity sales as a preferred method of exit, which should drive activity in this space.

Outlook for 2023

Dealmaking in the past two years was expected to be hampered by the effects of Covid-19 but 2021/2022 turned out to be a record period for bid volumes. There is reason to believe similar resilience will be demonstrated in 2023, although there are now significant headwinds facing global economies.

The International Monetary Fund noted in its latest outlook report that Asia remains a relative bright spot in the global economy with economic growth predicted at over 4%. With Southeast Asia insulated from some of the headwinds facing Europe and the US, there is optimism that dealmaking will not slow significantly in 2023.

Sectors

Once again, the TMT sector has been a hotbed of activity, with a particular surge in bids relating to digital infrastructure such as data centres and telecom towers and, in Thailand, the proposed merger of True and DTAC. Technology was also one of the most active sectors for outbound M&A by value, with deals such as Singtel's NCS Holdings' acquisition of Australia's largest private IT services firm Dialog for US$325 million driving this.

Other areas of buoyancy include the financial services and consumer sectors, both of which have been particularly busy in Indonesia. The energy sector also remained strong with an uptick in renewable deals. Across the sector, we are seeing buyers investing earlier during the development and construction phases to drive greater returns.

Legal trends

The strength of the energy sector is striking against the backdrop of regulatory change and uncertainty (for example relating to Indonesia's carbon regime and uncertainty around Vietnam's adoption of Power

Irina Akentjeva Singapore

Jamie McLaren Singapore

Glynn Cooper Singapore

Nonnabhat Paiboon (Niab) Bangkok

A view from South Korea

South Korea saw resilience in growth sectors and robust cross-border activity

Activity

While M&A values in 2022 saw a significant decline compared to 2021, the US$72.7 billion recorded value across 1,900 deals, was above pre-Covid levels, and some decline over the unprecedented levels of 2021 (which was the highest year on recent record) is unsurprising. The IPO market was also subdued, with several listings delayed or shelved (including Hyundai Engineering, Kakao's Lionheart Studios, the online retail platform Market Kurly and the health and beauty retailer CJ Olive Young).

Although domestic M&A still made up the vast majority of deals, we saw critical outbound M&A decisions made by Korean businesses to broaden market reach. For example, SD Biosensor, Korea's leading diagnostic testing company, bought a stake in Meridian Bioscience for US$1.53 billion for its US expansion, and Naver, Korea's top search portal, acquired Poshmark, an e-commerce marketplace, for US$1 billion. Foreign private equity firms also took advantage of a strong US dollar and snapped up promising Korean businesses, for example we saw Carlyle acquiring Korea-based Medit Corp, the world's third-largest 3D dental scanner manufacturer, for US$2.1 billion in a consortium with Korea's GS Group.

secured US$1.3 billion from Hahn & Co. and Coller Capital to fund its expansion into waste management, making it the largest GP-led transaction in the APAC region.

Outlook for 2023

Although there has been a decline from the exceptional highs in 2021, and despite an uncertain outlook, optimism can be found as deals in growth sectors such as clean tech, renewable energy, TMT and bio-tech look set to continue in 2023. Private equity with ample dry powder will remain active as opportunities to pick up non-core assets arise with Korea Inc.'s continued drive to streamline its business portfolio and transition to a post-carbon economy.

Deep-pocketed Korean blue-chips are also looking for growth via strategic deals. For example, Samsung Electronics is reported to be considering a bid for UK-based semiconductor design company ARM, which could result in a mega-deal of around US$66 billion as indicated by Nvidia's previous offer.

Sectors

The materials sector emerged as a key sector in 2022, with market players competing to secure raw materials for clean energy and tech. SK Group's chemical materials arm, SKC, sold its plastic film business to private equity house Hahn & Co for US$1.3 billion to invest into SK Nexilis, South Korea's largest manufacturer of copper foil, used to make EV battery and semiconductor materials. Lotte Chemical also acquired SK Nexilis' rival, Iljin Materials, for US$1.9 billion.

The pharmaceuticals and healthcare sector saw the largest deal by value, with Samsung Biologics' buy-out of JV partner Biogen's entire stake in Samsung Bioepis, for US$2.3 billion.

Legal trends

In the face of global economic headwinds and supply chain disruptions impacting the trade-driven economy, 2022 saw Korean corporates shifting focus to streamlining business portfolios and investing in future growth engines such as clean tech and energy, sustainable materials and healthcare.

Korean companies are also aligning deals with their ESG policies, such as recently re-branded SK ecoplant (formerly SK Engineering & Construction) acquiring Singapore-based electronics waste management company TES for US$1 billion. Cement company Ssangyong C&E also

Ken Nam Seoul

//29

HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

A view from Spain

Coming off a record year of M&A, the Spanish deal market showed staying power through 2022

Activity

Despite more challenging macro-economic conditions, 2022 deal volumes exceeded those of 2021 and deal values reported only a relatively small decline, with rising inflation and energy prices making it increasingly difficult to agree on valuations of assets.

Surprisingly, 2022 private capital activity in Spain, both domestically and through inbound investment, showed a level of deal flow far greater than the same period in 2021 and private capital fund raising showed no sign of slowing.

Sectors

The emergence of the private capital sector was particularly relevant for foreign private equity firms, which continued to benefit from corporate Europe's decision to strip out non-core assets, as demonstrated by IVI-RMA's disposal of its fertility business (IVI) to KKR for 3 billion and Rolls Royce's sale of its subsidiary ITP Aero to Bain Capital and a Spanish consortium for approximately 1.7 billion.

Investor focus was also on sectors such as healthcare, TMT, energy and infrastructure and e-learning and education.

Legal trends

Almost three years have passed since the new FDI regime came into force in Spain. So far it has not come to light that any FDI clearance has been denied or that any application has not been resolved within the deadline. Exceptionally, a few jumbo deals (such as IFM's takeover bid for Naturgy) have been cleared but subject to certain operational conditions. The result is that FDI has been assimilated into the bid process without impacting market activity or M&A players' confidence to any significant degree.

Due to the recent reform of the Spanish insolvency act brought about by the delicate position faced by some Spanish business sectors, a new ecosystem has emerged that will give rise to increased deal activity in 'loan to own' transactions. We are already seeing how M&A players (with private capital players at the fore) are starting to look for prepacked productive units in the context of pre-insolvency scenarios.

Outlook for 2023

With so much capital available, while an economic downturn is widely anticipated across the market, we are optimistic that deals will continue to take place, albeit alongside a reconsideration of terms in light of the new dealmaking environment.

Marcos Fernndez-Rico Nez Madrid

Alberto Frasquet Madrid

A view from the UK

After a strong start, we saw a slowdown in activity towards the end of 2022

Activity

Whilst M&A activity levels in the UK dropped off slightly in 2022 compared to the dizzying heights of 2021, they remained relatively strong in the first nine months of the year, persisting even as potential threats (such as higher interest rates and higher inflation) became more evident. However, the last three months of the year saw something of a slower pace, possibly as a knock-on effect of the political turmoil over the summer and early autumn. Inbound M&A returned to the levels of values and volumes seen in 2017-2019, down on the highs of 2021. On the domestic M&A front, volumes remained resilient, but values declined significantly. That said, the number of deals over 1 billion, whilst again not reaching the level seen in 2021, was still high compared to historic levels.

Sectors

Energy and power was the most active sector by value, due in part to the acquisition by Macquarie Asset Management and British Columbia Investment Management Corporation of a 60% stake in National Grid's gas transmission and metering business. The sector is likely to remain active into 2023 as the energy crisis and energy transition each play out in the market. Real estate also remained a resilient sector, recording more deals in 2022 than 2021, the only major industry to do so. It also saw the announcement of the high profile 5 billion merger of Capital & Counties Properties and Shaftesbury.

and when making statements about the financial position of a company in the course of negotiating a transaction. This was the first claim of its type to go to trial but we expect to see more in future.

We have seen an increase in public M&A transactions involving some form of paper consideration (16 announced in 2022 compared with 11 in 2021 and 9 in 2020). This may be a result of the higher cost of borrowing and may also be reflective of companies seeking transformational deals as they adapt to the evolving business environment. We have also seen a significant increase in companies launching a formal sale process under the Takeover Code (whereby companies in effect announce that they are up for sale), as well as a rise in distressed and special situations M&A a trend which may well continue in 2023 if the challenges facing the economy do not abate.

Outlook for 2023

The value of sterling, particularly compared with the US dollar, means that UK targets are very cheap at the moment for overseas, particularly US, buyers. However, we have to balance against that the rise of interest rates, and so the cost of borrowing to finance an acquisition, a certain degree of political instability and the prospect of recession. So far these headwinds do not seem to have had a significant impact on M&A levels, but it remains to be seen if that continues to be the case.

Finally, whilst we didn't see as many mega-deals in the tech sector in 2022, it remained the most active sector by deal volume. A highlight deal was the Eutelsat-OneWeb merger.

Legal trends

We saw the first orders under the National Security and Investment Act, which came into force in January 2022 these began to emerge in the summer and autumn, suggesting that, whilst straightforward deals may be cleared fairly quickly, deals where remedies are required will likely take considerably longer. See our piece 'National security or nationalist sentiment?' for further information on the regime and the orders that have been made under it.

A claim for US$5 billion was brought against the directors of Autonomy, following its takeover by Hewlett Packard in 2012. Whilst the damages payable are yet to be determined, HP was successful in its claim that Autonomy was liable for releasing false or misleading information and that the CEO and CFO were both reckless as to whether that information was false or misleading. They were also found liable for making misrepresentations about the company's financial performance in the negotiations of the takeover. Whilst this was an extreme case, it is a useful reminder of the need to take care around the accuracy of information, both on an everyday basis as a listed company

Mark Bardell London

Antonia Kirkby London

Julie Farley London

Stephen Wilkinson London

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HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

A view from the US

The post-pandemic M&A overheat cooled in 2022

Activity

The unprecedented overheated US M&A market of 2021 cooled down in 2022, bringing M&A activity back to pre-pandemic levels. Record inflation figures, increased/ increasing interest rates not seen in decades, and global supply chains impacted by the Russian invasion of Ukraine have been the major factors in the slowdown of M&A deals.

Despite the comparative slowdown, M&A in the US was still active in 2022 resulting in a total deal value of US$2.02 trillion which, although down from US$2.94 trillion in 2021, remains a competitive figure compared with 2016-2019 values. Deal volumes were also lower than 2021, but higher than historical trends.

Outlook for 2023

With the imminent signs of macro-economic stress, decision-makers may well take more time and slow down their M&A decision making process, reducing the pace at which M&A deals are conducted and only pursuing more carefully analysed and considered transactions. M&A will still be used as a fundamental means to pursue business and strategic goals but will likely be undertaken with a more measured mindset to prepare for the difficulties a global recession may bring.

The US M&A market continues to represent a significant portion of the global market, making up about 25% of the world's deal volume and about 45% of the global deal value in 2022.

We also saw private equity firms' activity go back to pre-pandemic levels, especially among those more leveraged firms given the increasing cost of borrowing, but they are still active and taking advantage of the market volatility and lower valuations of assets that had previously sky-rocketed due to the pandemic effect.

Sectors

The constant need to enhance efficiency, and to seek to reduce labor costs in a shrinking job market and dependency on single supply chains, has kept the IT and technology sector as the most active sector for M&A; it also saw the largest deals in the US of 2022 such as ADM's acquisition of Xilinx, a semiconductor company, for US$35 billion (an all stock deal), and Elon Musk's acquisition of Twitter for US$44 billion.

Sectoral insights

Automotive Energy and natural resources Pharma/ healthcare

Consumer Insurance Tech

James Robinson New York

Lina Velez New York

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M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

Automotive

Electric and digital revolutions still drive M&A

The automotive sector is currently experiencing two inflection points at the same time:

an electric vehicle revolution, as the industry transitions from the internal combustion engine (ICE) to zero emission vehicles (ZEV) including battery electric vehicles (BEV) as part of the wider decarbonisation agenda; and

a digital revolution, particularly as the connected software stack in the vehicle (and increasingly in the cloud) becomes as important as the mechanical ICE used to be.

While much of this change is happening organically within automakers (original equipment manufacturers or OEMs) and their Tier 1 & 2 suppliers, many are turning to M&A to acquire technology, software and skills that they don't possess and to collaborate to obtain economies of scale and share high R&D and production costs.

Activity

Deal values and volumes cooled in 2022, as the number of de-SPAC transactions in the sector dropped off markedly, after US$20 billion+ deals for each of BEV makers Lucid and Polestar in 2021.

We also witnessed continued consolidation in distribution and retail channels aimed at driving efficiencies and scale, including Inchcape's 1.3 billion acquisition of Derco, the largest independent automotive distributor in Latin America by volume, and D'Ieteren's US$1.7 billion acquisition of Parts Holding, the Western European distributor of spare parts.

Outlook for 2023

The global industry faces strong economic headwinds, particularly in Europe with soaring energy costs and high inflation throughout the supply chain. Coupled with rising interest rates and tough conditions for fund raising for the myriad of technology and BEV start-ups, 2023 looks set for further consolidation and some distressed M&A.

Meanwhile, the twin revolutions will continue to drive M&A, particularly as the BEV transition is assured, with the EU, California and New York in the process of approving bans on sales of new non-ZEV cars by 2035 (following bans already announced by Japan and the UK).

However, the twin revolutions still drove substantive M&A. In technology, Aptiv agreed to buy Wind River, a software company, for US$4.3 billion and ECARX, a mobility tech company with close connections to Geely, became the subject of a US$3.4 billion SPAC acquisition.

In EV transition, Cummins bought component maker Meritor, including its electric powertrains business, for US$3.7 billion and two Chinese OEMs developing BEV models, Chijet Motor and CH-Auto (Qiantu Motor), were the subject of US$1 billion+ SPAC deals. In this context, there is a heavy focus on the US due to the significant impact of Biden's Inflation Reduction Act.

Joint ventures have always been popular in the industry and 2022 was no exception, particularly in the fields of new BEV development and the EV battery supply chain. Honda and Sony agreed a 50/50 JV to establish Sony Honda Mobility to develop a joint premium BEV with a new Sony developed software system; and VW Group's PowerCo and materials technology firm Umicore announced a 3 billion 50/50 JV to produce EV battery materials.

Meanwhile, the industry was materially impacted by the war in Ukraine and continued supply chain disruptions, particularly in semiconductors. This backdrop impacted deal values, as particularly evidenced by Plastic Omnium's acquisition of Varroc Lighting Systems, where the price was revised down from 600 million to 520 million to close the deal.

Amid a challenging year for the industry, it was unsurprising to see distressed M&A, including the KG Group-led consortium's US$700 million acquisition of OEM SsanYong Motor from receivership.

Joseph Fisher Tokyo

Roddy Martin London

Nanda Lau Shanghai

Consumer

2022 was a challenging year compared to 2021

M&A in the consumer sector slowed throughout 2022 as compared to the buoyant trends in 2021. Macro-economic issues and global headwinds have meant a tougher environment for consumers, particularly with record-breaking inflation adding to the cost of living and turning the screws on household budgets. Weakening consumer spending power diminished the appetite for bigticket M&A projects (although there were exceptions), and corporates instead focused on streamlining portfolios through divestments.

2022 challenges: supply chains and inflation

Exceptionally high and persistent inflation, combined with continued rate hikes, have meant consumer-focused companies are more likely to be tightening budgets and steering their strategies away from portfolio expansion. The same companies are also facing challenges in the increased cost of commodities, utilities, freight, packaging and labour, which would usually drive an increase in prices (and has done in many jurisdictions). However, the inflationary squeeze on consumer spending power means that the available flex in pricing changes is more limited than many would like. This has led certain corporates to shore up supply chains and acquire logistics and distribution businesses; a good example being JD.com's US$1.3 billion acquisition of Deppon, a company providing transportation, delivery services and warehousing management in China.

'Picon' and 'Archers' drinks brands to slim down its liqueur portfolio, as well as its Guinness Cameroon business and Ethiopian Meta Abo brewery. Unilever finalised its US$4.7 billion sale of tea company Ekaterra to CVC Capital Partners, and Adidas completed its carve-out of Reebok from its global business as it no longer fitted Adidas's emphasis on brand credibility, consumer experience and sustainability. We would expect this to continue into 2023 while global headwinds remain challenging and corporates sharpen their focus on core businesses, while always being on the lookout for the megabrands of tomorrow.

Deal terms and transitional periods

With supply chain difficulties and increased costs at the forefront of counterparties' minds, usually unproblematic deal terms have been under the microscope recently. Standard contractual qualifiers and conduct obligations which rely on a mutually acceptable definition of the "ordinary course of business" have been challenged given the exceptional market context, and there has been a laser focus on the minutiae of working capital adjustments in consideration negotiations. Accounting provisions likely shifted throughout the course of the year, making estimating working capital at completion more complicated. Furthermore, the terms of transitional run-off contracts to facilitate integration have been hotly negotiated, as sellers look to limit the extent and duration of their exposure to divested businesses, and seek to pass through as much of their inflated costs as possible to purchasers while the contracts are in force.

Divestments and reshaping portfolios

Ongoing market challenges have yielded opportunities for more traditional consumer-centric companies to reshape and refine their assets as they cut costs and boost efficiencies. 2022 saw General Mills continue its 'Accelerate' strategy and divest its European dough business to Crlia, while Diageo sold both its

Heidi Gallagher London

Nanda Lau Shanghai

Alex Kay London

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HERBERT SMITH FREEHILLS

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

Energy and natural resources

Ukraine disruptions meet net-zero imperatives to power strategic deals

While decarbonisation remains the headline structural issue, the war in Ukraine triggered immediate and urgent energy security issues, felt most in the UK and Europe, which will have a long-term impact on the sector. Following a multi-year global M&A boom, these dynamics mean energy transactions will remain active for the foreseeable future.

We continue to see considerable consolidation in the EU and UK energy sector as groups rethink strategies, particularly in terms of investments in renewables companies, but also in firms with green technology such as hydrogen, battery storage and electricity charging. We are also seeing strategic joint ventures, as groups with different expertise join forces to adapt to the new energy paradigm. Meanwhile, new players among them start-ups, funds and private equity are flocking to the market.

In relation to the energy transition, the mining sector in 2022 began its push toward future-facing commodities such as copper, nickel, lithium, cobalt and rare earth elements. This is the beginning of a substantial wave of activity and growth in this part of the sector. Mining companies large and small are shifting their commodity profile toward commodities needed for net-zero energy. Unlike the last mining boom, growth will be seen around the world, and in some jurisdictions which are not traditional mining jurisdictions. Examples of such transactions include South32's bid for the Sierra Gorda copper mine in Chile (2022's largest copper transaction).

Many EU and UK-based heavy industrial businesses, data centres and other energy-intensive firms are also rethinking their global strategies. These groups are closing, relocating or suspending certain projects in the EU and the UK and expanding into the US, Asia and elsewhere. This is triggering disposals, acquisitions, reorganisations, restructurings and greenfield projects.

In Australia, global issues have had a two-fold impact. Energy security issues have buoyed oil and gas and LNG companies as they see increased demand for exports to Asia and Europe. Following the two 2021 mega-mergers of BHP Petroleum and Woodside and Santos and Oil Search, there has also been renewed interest in upstream and LNG assets. We expect this to continue as Australia's transition from an economy based on coal and oil and gas generation accelerates. The market is characterised by a surge of new entrants (eg, Iberdrola's acquisition of Australian renewables firm Infigen) and financial sponsors focused on building development platforms and disrupting existing 'Gentailer firms', ie, those that span generation and retail (seen in the proxy battle at AGL).

In Asia, the volatility in global markets in 2022, following on from general trends of decarbonisation and energy transition in the last few years, has seen some significant re-assessments made in the energy markets. Global energy security concerns initially led to significant activity in the LNG sector which has now given way to concerns over economic slowdowns globally, and in China in particular. In North Asia, M&A activity in the energy sector remains down from the heights of the last few years but pockets remain active, particularly in greenfield renewables. Southeast Asia remains a bright spot as M&A activity throughout the energy spectrum continues to remain active with further market consolidation in both traditional upstream oil and gas as well as new energy renewables sectors.

Nick Baker Melbourne

Rebecca Major Paris

Jay Leary Perth

Lewis McDonald London

Insurance

Challenges in quickly changing markets

All over the UK and Europe, in line with other business sectors, insurers are facing radically changing economic parameters. Significant changes in interest rates, the impact of the war in Ukraine and, in some cases, a turbulent political environment are all contributing factors. This is before one considers longer term challenges such as climate change and post-Covid issues. Many of these factors are coming together to cause inflation to reach levels not seen in decades.

Aside from increasing cost bases generally, inflation brings various challenges to the insurance industry, particularly for the life insurance sector. Depending on asset classes and structures, values of assets can be significantly (positively or negatively) impacted by inflation, even on a short-term basis. That brings significant challenges from asset-management and risk-evaluation perspectives.

Insurance companies' investments are increasingly taking into account the strategic and structural challenges brought about by climate change and broader ESG issues. In addition, new technologies and InsurTech remain significant drivers for M&A activity in the insurance sector, especially in the insurance distribution space. While the challenges facing the industry may impact on the valuation of potential targets, insurers have recognised the strategic importance of investing in new technologies and distribution models.

On the liability side, challenges arise due to inflation-linked components in policies and potentially reduced overall net return expectations for policyholders. These, in turn, may ultimately lead to changes in policyholder behaviour, possibly even resulting in policyholders preferring other forms of investments and protection altogether. Whilst higher interest rates may, to a certain extent, alleviate the challenges the industry had to face in the long-term low-interest-rate environment of the past years, the quick pace and drastic nature of the shift brings about significant work for those involved in asset management and product design alike.

The non-life insurance sector is also facing considerable challenges. This can include an increase in risk exposure, which is augmented by all of the aforementioned factors at the same time. Inflation, climate change, disruption of supply chains and rising instability all lead to potentially higher exposure of insurers. For aviation insurance, the war in Ukraine has the potential to cause a significant market dislocation, including material premium increases.

Reinsurers are, of course, not immune. The effects of these challenges will impact on the economic model and profitability of the reinsurance sector, both directly through challenges on reinsurers' own balance sheets and indirectly as some of the issues in the life and non-life markets are ceded.

It will be interesting to see the mid-term impact of these issues on transactions in the insurance sector. So far, the industry has seen a stable number of transactions in the UK and continental Europe. The life insurance sector has again seen run-off portfolio transactions, such as Phoenix's acquisition of Sun Life's business in the UK and, in Germany, the sale of large life insurance portfolios by both Zurich and AXA. These transactions once more underlined the importance of run-off as a business model to address regulatory and market-driven changes in the insurance industry.

Jan Eltzschig Germany

Grant Murtagh London

Geoffrey Maddock London

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HERBERT SMITH FREEHILLS

Pharma/healthcare

Bridging the value gap

Pharma and healthcare M&A remained strong in 2022 but did not match red-hot 2021 levels. While there remain challenges to the market returning to levels seen in recent years, there are potent fundamentals that mean big pharma and healthcare will likely focus on growth through acquisition or merger in 2023.

Though rising interest rates and reduced debt market liquidity both act to cool M&A, these constraints could be offset by the strong dollar, giving companies heavily exposed to the vast US healthcare market added firepower for foreign-based targets whose share price and revenues are more reliant on weaker currencies.

Moreover, most large pharma/healthcare firms and private capital funds targeting healthcare are sitting on large cash pools which they must deploy under investment mandates or simply to avoid surging inflation eroding their value.

With valuation multiples remaining high it is increasingly challenging for companies to bridge the value gap. However, the need to replace pipelines and demonstrate growth, even when it may have stalled organically, means we can expect more innovative structures in pharma and healthcare M&A.

Given the uncertain nature and long regulatory and trial periods of new drugs and products, the industry is used to structuring acquisitions or long-term licensing deals to bridge otherwise unassailable value gaps, for instance via milestone payments, escrows, hold-backs and deferred/contingent consideration.

All-share transactions, stub equity deals and asset/portfolio swaps (another favourite tool of an industry where companies often shift focus between areas) are all methods for companies to grow or change direction without investing large upfront cash reserves or incurring new debt. We expect to see an increasing number of these deals in the next 12 months. In addition, US biotech valuations still command a premium over the rest of the world, further helping US buyers wishing to deploy paper over cash.

Forecasting deal hotspots for 2023: big pharma acquiring bolt-ons and portfolios to replace pipelines with impending loss of patents and continued consolidation and corporatisation of disparate groups of clinics/medical service providers are high on the agenda. MedTech innovators also continue to be desirable for traditional drug and healthcare companies looking to broaden their offering.

Alan Montgomery London

M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

Robert Moore London

Tech

Continuing to dominate M&A activity globally, despite slowness

Activity

Whilst the last 12 months did not see a repeat of 2021's record deal activity, technology transactions remained strong and continued to dominate the deal space. The share of tech deals as a percentage of total global M&A value rose from 19% in 2021 to 21% in 2022.

The US remained a focal jurisdiction, unsurprisingly producing some of the highest-value deals such as the US$68.7 billion acquisition of Activision Blizzard by Microsoft (pending regulatory approval at time of writing) followed by the UK/ Europe. There was also strong activity in the US-UK/Europe corridor.

Deal valuations lost some of their buoyancy as compared to 2021. However, big-ticket outliers such as Adobe's US$20 billion acquisition of Figma or the US$16 billion acquisition of Nielsen Holdings by the Evergreen and Brookfield-led consortium continued to crop up.

Intensifying regulation: Governments continued to react to these widening geopolitical fault lines by giving regulators increasing powers and discretion. The new UK National Security and Investment Act came into force on 4 January 2022, giving the government broad powers to review both foreign and domestic investments in 17 sensitive sectors. In recent years, we have seen interventions occur both where there was a genuine security dimension, and where the regulators have given national security a broader interpretation. SoftBank's aborted sale of ARM to Nvidia was a notable casualty of regulatory intervention in 2022. In the UK, the foreign investment regulatory authority has in a short span of 12 months reviewed 16 transactions (see our piece 'National security or nationalist sentiment?' for further information). And in Germany, the government (through the Federal Ministry for Economic Affairs and Climate Action) has made a series of interventions, notably halting Chinese investments into two semiconductor companies, including the Dortmund-based Elmos.

Market volatility made public-to-private (P2P) acquisitions more favourable as corporate/private capital institutions capitalised on the falling valuations of public tech companies. Noteworthy P2P deals include Elon Musk's US$44 billion takeover of Twitter and Broadcom's US$68.3 billion acquisition of VM Ware.

Principal drivers and issues

Continued investment in digitalisation: The market continued to have confidence in digitalisation, and deals in the tech sector continued to be driven by tech companies looking to grow, private capital looking to add tech sector assets to their portfolio and non-tech companies looking to enhance their offering with tech capabilities. This was despite the post-pandemic contraction of the online world which began to squeeze businesses such as digital entertainment, logistics and remote education. The sustained belief in the expansion of automation/artificial intelligence and digital infrastructure was evident in deals such as the merger of OneWeb and Eutelsat Communications, and the US$7.6 billion merger of Viasat and Inmarsat.

Geopolitical disruption and economic uncertainties: Market volatility created by geopolitical instability and uncertainty in energy markets has caused investors to observe caution and pause investments as interest rates sky-rocketed, dragging down the high valuations of tech companies. Whilst private capital institutions continue to sit on dry powder, the pace of dealmaking is staggered and indeed strategic and leveraged investors have taken a step back.

Outlook for 2023

The year ahead will not be without its challenges. The buyer's market is likely to become more entrenched as the valuation gap between buyers and sellers widens due to economic uncertainties. Market volatility is likely to result in greater scrutiny on deals which will translate into buyers/investors seeking greater deal protections (eg, conditionality and MAC clauses, stricter gap covenant controls, and earn-outs).

This may result in slower dealmaking. Investors may also seek to mitigate market risks through taking strategic minority stakes in technology companies at the current lower valuations or exploring partnerships/commercial collaborations or alliances instead of acquisitions.

We also expect to see more all-share mergers (eg, the OneWeb/ Eutelsat merger) and carve-out deals in light of the difficulties in raising debt.

We expect to see an increase in the trend of mature tech start-ups delaying investor exit by way of IPO or sale in order to wait for favourable market conditions and focus on continuing to invest and build core capabilities.

Malika Chandrasegaran Sydney

James Robinson New York

Hubert Segain Paris

Siddhartha Shukla London

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M&A REPORT 2023

M&A REPORT 2023

HERBERT SMITH FREEHILLS

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