Global M&A Outlook For 2023 Features Smaller Deals and Slower Pace

Last year, the global M&A market remained remarkably resilient against a year of unprecedented uncertainty. The latest M&A research by leading global advisory, broking, and solutions company WTW shows buyers outperforming the wider market as recently as the third quarter of 2022, based on share price performance of completed deals.

However, deal volume has slowed significantly compared with the record pace set last year. Multiple factors have weighed on M&A in 2022 - geopolitical turmoil, soaring inflation, rising interest rates, and fears of a global recession - that will continue into next year. Such a challenging economic backdrop makes it harder for buyers, particularly those venturing beyond their own borders, to confidently predict the profitability of potential targets.

“An unprecedented number of disruptive forces have created headwinds for dealmakers, but they are also generating opportunities,” said Duncan Smithson, senior director, mergers and acquisitions of WTW. “The fundamentals that drive dealmaking are still in place, and with valuations moderating after the historic levels reached in 2021, strategic and financial buyers alike will take advantage of better-priced opportunities for growth.”

Five M&A trends for 2023

Smithson shared his top trends for the year ahead:

1. Return of the “small item effect” - Buyers will increasingly focus on smaller deals, as recessionary fears trigger a “small item effect”: when economic downturns lead to a rise in spending on smaller, more affordable -- rather than big ticket, more expensive -- goods. For the first time in over three years, no mega deals (valued over $10 billion) were closed during the third quarter of 2022, and large deals (valued over $1 billion) were significantly down compared with the same period in 2021 (49 versus 67), according to WTW’s Quarterly Deal Performance Monitor, run in partnership with the M&A Research Centre at Bayes Business School.

2. Opportunities in distressed M&A - The difficult operating environment will drive an increase in companies jettisoning noncore assets in the pursuit of long-term value creation. Some deals will be strategic -- such as energy firms continuing to divest carbon intensive assets -- while the ongoing economic uncertainty will force other companies to sell assets -- the retail and leisure sectors often having a higher operating leverage. This can create opportunities for buyers to expand product lines, services or supply chains at a reduced rate.

3. Technology M&A - From defense to offense - the need for speed in digital transformation across all industries, accelerated by an era of volatility, will keep dealmaking front and center, with a wave of acquisitions in the artificial intelligence and machine learning markets expected in 2023. Whether adopting new technologies and talent or reaching new markets, M&A continues to be the fastest way for businesses to transform in order to remain relevant and resilient in today’s fast-changing world.

4. Geopolitical impact - Hit by multiple supply chain disruptions during the pandemic that are set to continue in 2023, companies will look to M&A transactions to boost their operational resilience. Vulnerabilities that continue to deliver distressed deal flow in the worst-affected sectors will also be catalysts for businesses to reinvent their own supply chain networks. By onshoring or nearshoring suppliers closer to the point of production, businesses will aim to achieve greater security and resilience. Cross-border M&A activity has decreased in 2022, reflecting economic and geopolitical upheaval on the world stage. The pursuit of stability and predictability is likely to lead to more deals among trusted partners, signaling a shift to more selective “friend-shoring” transactions in 2023.

5. Spotlight on ESG - Environmental, social and governance (ESG) issues in dealmaking will remain in the spotlight in 2023, especially as acquirer due diligence will be more important than ever. With increasing numbers of investors seeing ESG as a fundamental driver of financial success, businesses will face mounting scrutiny and pressure for transparency on climate risk, social justice, sustainability and corporate governance. “Green” due diligence is, without a doubt, on the up.

“As we move into 2023, economic uncertainty will continue to define and challenge M&A activity, but there will also be opportunities. The same volatility will present its own impetus for dealmaking, as strategic buyers seek to capitalize on cut-price deals in order to combat current market challenges and realize transformational growth,” concluded Smithson.