What does 2023 have in store for M&A?

In 2022, M&A deals of a combined value of c.US$3.8 trillion were announced on a global basis, a reduction of about 1/3 compared to 2021. It is worth noting that 2021, with almost US$6 trillion of full year global volumes, saw the strongest level of activity ever reported. As such, M&A activity in 2022 was broadly in line with the average of the past five years overall.

Similarly, EMEA announced 2022 volumes of about US$1.1 trillion, around a 1/3 reduction compared to 2021. As before, with abnormally high volumes in 2021, M&A activity in EMEA is reverting to the average level of past years.

There are two main drivers behind last year’s contraction in the deal flow.

1. A decline the deal size. Targets got cheaper, as both market and private valuations materially contracted¹. Additionally, raising interest rate have constrained financing, making mega deals rarer.
   
2. The second driver, is the virtual disappearance of de-SPAC combinations. In 2021, de-SPAC deals accounted for around 10%² of M&A global volumes, but their contribution to 2022 activity was negligible. Several SPACs that were promoted during the pandemic reached the end of their investment window and are now being wound down having found no suitable M&A target.

Once activity is normalised for the size effect and contraction of de-SPAC deals, M&A actually showed remarkable resilience in 2022, notwithstanding the volatility of the stock and financing markets.

¹ The MSCI World capitalization index decreased by 20% during 2022. MSCI: Refinitiv as of 04-Jan-23

² Dealogic as of 04-Jan-23

The M&A market is expected to continue showing resilience in 2023, with some qualifications.

First, we believe that 2023 is going to be a buyers’ market. Buyside will be dominated by corporates with strong balance sheets and the ability to use stock as consideration, which can deliver funding certainty. Valuation expectations of the boards of potential targets are still partly anchored to the record highs of end-2021 and early 2022, but the entry into the new year should put all-time-high valuations into a more distant perspective, and make boards more pragmatic when facing potential approaches. An emerging theme in the boardrooms of American corporates is to take advantage of the strong US dollar while it lasts, to seize attractive opportunities especially in Europe.

Second, we expect private equities to remain acquisitive. Un-deployed equity capital held by global sponsors reached US$3.9 trillion³, the highest level on record.

When it comes to financing, direct lending has made up for more limited supply of traditional bank financing and high yield bonds.

If financing markets were to re-open more decisively during 2023, we expect PEs to quickly turn their focus onto larger deals, including take-over of public targets.

When it comes to exit, some PEs are exploring alternative routes to a traditional sale, like continuation funds which help them extend investment horizons.

Last, in 2023 we expect renewed interested in spin-off and demergers as a means to drive value especially for diversified corporates. Demergers allow corporates to manage their business portfolios in volatile market conditions, bypassing concerns on availability of acquisition financing and offering higher execution certainty than IPOs. Also, activist intervention is no longer a pre-condition to spin-offs – we see boards more willing to take the initiative themselves, in order to retain control of the value-creation narrative.

All in all, when we compare global M&A activity to global market capitalisation, M&A remains underweight relative to market size, and significantly below past peaks. However, we must keep in mind the ongoing macro challenges, amplified by recessionary and inflationary context, which likely will impede activity in the near term.

If you would like to learn more about our view on the M&A outlook, please get in touch with your UBS contact.

³ Preqin as of 04-Jan-23