Recession fears and still-rising interest rates in the first half of 2023 caused global merger and acquisition activity to stay relatively cool.
Global M&A deal volumes fell by 8% from the prior quarter and 14% from the prior year (second half of 2022). By deal value, activity dropped 15% quarterly and 40% year over year, according to data from PwC and Refinitiv.
M&A deal volumes in the Americas, including the United States, rose 3% in the first half from the second half of 2022, but were 5% lower than the first half of 2022. Deal values were up 3% quarterly but down 35% compared with the same period a year ago. (See chart.)
“The macroeconomic conditions and tight financing markets have created a deal environment in which processes are taking longer, with more uncertain outcomes, more challenging business cases, and the need for deeper due diligence,” said PwC in its global M&A midyear update.
Negative-trending CEO sentiment, market volatility, inflation, and a higher cost of capital have also contributed to a slower M&A market, Neil Dhar, PwC vice chair and U.S. consulting solutions leader, told CFO.
But there are a few reasons M&A activity will pick up, as expectations about interest rates stabilize and it becomes easier to value targets based on future cash flows. “I think it'll be a choppy marketplace for the next six months, but I feel good, and I think you'll start seeing far more deal activity,” said Dhar.
Comfortable With Ambiguity
CEOs are laser-focused on growth, efficiency in their operating models, and managing risk, in part, because they are getting pressure from their boards of directors and management teams. All of that is underpinned by technology, Dhar said. “I think companies will continue to aggressively pursue technology solutions to make their businesses better,” said Dhar.
I think people have gotten comfortable with ambiguity. And people have gotten comfortable making decisions in a very volatile marketplace. — Neil Dhar, PwC
While macroeconomic uncertainty is still high, COVID-19 created a lot of exceptional corporate leaders, Dhar said. “I think people have gotten comfortable with ambiguity. And people have gotten comfortable making decisions in a very volatile marketplace.”
The variation between the price expectations of buyers and sellers is also starting to narrow, as a changed marketplace and higher cost of capital have buyers committed to not paying 2021 valuations, Dhar said. Sellers without a lot of cash have reached that realization faster, but Dhar expects some self-correction among all sellers in the next six to nine months.
A pickup in the business of performing portfolio reviews for corporations is another sign that greater acquisitions (and divestitures) activity is on the horizon. Companies are doing all sorts of analysis, Dhar said — the cost of capital, investment requirements to grow the business, the possibility of reaching a market leadership position, potential buyers that may be able to get a better return, and internal management teams' capabilities.
Value Creation Plans
When the M&A market starts to revive, corporates with strong balance sheets and sound M&A processes will likely have a competitive advantage, said PwC. “They have the cash and the ability to extract synergies and may seize the moment to make acquisitions while the tough financing environment is reducing competition for assets. However, this window of opportunity won’t stay open forever.”
The [PE] industry has become much more focused on value creation versus financial engineering. — Dhar
In the current deals climate, private equity investors have focused inward toward their portfolio companies, “performing portfolio reviews, executing bolt-on acquisitions, and investing in cloud transformation and data and analytics capabilities,” according to PwC.
But going forward, given the level of dry powder financial sponsors have, “PE firms with conviction around a specific asset will not shy away from pursuing strategic platform acquisitions, acquiring alternative asset classes within private markets, and taking advantage of public market valuations via take-privates,” according to PwC. “The [PE] industry has become much more focused on value creation versus financial engineering,” said Dhar.
Regardless of whether a buyer is a PE firm or corporate, value creation plans must be robust, Dhar said. “How are you going to drive [the] topline? How are you going to make more things more efficient? How are you going to take the costs out? How are you going to put in a great management team that can balance revenue and costs?”
Of course, those analyses may result in the sale of a business. “Selling businesses that no longer fit a company’s strategic priorities can be an important part of the reinvention process,” said PwC. “Divestitures provide capital for acquisitions that align better with long-term strategies and also free up resources."