5 October 2023
Global merger and acquisition activity this year has been affected by high inflation, increasing interest rates and fears of a recession.
Emma Danks, head of the UK corporate/M&A group notes that aside from the global macroeconomic headwinds of rising interest rates, inflation and instability (politically plus Russia/Ukraine conflict), there has been a decrease in risk appetite from strategic buyers given the buoyant M&A market experienced in the last 2-3 years.
Emma adds: "Late 2020 and the first half of 2021 were incredible deal doing environments – with a lot of competition from PE sponsors in the M&A market. This kept valuations high (and drove the expectations of sellers) – cooling the desire of strategics to play in an overheated market. Strategics often have the edge by bidding more than PE sponsors – but this dynamic was diluted given the competitive environment."
"There will be a return to M&A activity and deal doing as the economy settles. We can see early stage preparation work taking place already for sellside processes and this indicates that within the next six months, there will be a surge. As for the next 12 months, the anticipated general election in the UK as well as the US presidential election in late 2024 means that many processes will need to have started and successfully concluded well in advance of any political change. It is harder to predict what will happen 18 months out from here – so much depends on what happens in the political environment (UK as well as internationally) including on tax changes."
"The gap between valuation expectations has been well documented and is not a new phenomenon over the last two-three years – albeit more acute given the differing trading outcomes for many businesses as a result of covid (a buoyant trading outcome being as confusing to the valuation multiples as a downbeat one, with either making it hard for a buyer to assess what the normalised position is). It is clear that the IPO market is muted, with the result that many companies are staying private for longer and seeking other forms of funding rather than the public markets. Digital transformation continues to be a driver for dealmaking but the real trend to watch out for is AI – not just for the dealmaking process itself, but the inevitable question from buyers as to the impact which this will have on the target business – will it improve a target business with greater efficiencies and margins, lead to new revenue opportunities or rebut the model and curtail the lifespan of the business."
"Good financial and operational hygiene is always a must and even more so in a lower-activity market. For PE investors, they are increasingly willing to take minority stakes – so a willingness for businesses to be flexible with their capital structure and this type of opportunity can make them more attractive to a sponsor. ESG continues to be a dominant theme – many companies are looking to M&A to achieve their ESG goals, so a business which appeals and enables buyers to meet this metric will be well-positioned in this market."
An extract of Emma's comments was published in an article in The Times via Raconteur. Read the article here.