We’ve all read plenty of headlines about the 2H22 M&A activity downturn, rising Fed interest rates, the European energy crisis, markets crashing, inflation rising... We could write you another article explaining what happened and how everything looks difficult and unpredictable in 2023. Instead, we’d like to offer an alternative view on current markets and the M&A outlook.

Yes, the slowdown in M&A was tough and global, with North America seeing the worst plunge in activity, down 63% y/y, APAC 51% y/y and Europe 41% y/y. Despite these declines, North America still had the highest M&A activity across all markets, with 3,340 deals closed worth over $227B, followed by EMEA and APAC.

All About the Fed

In North America, all eyes were and are on the Fed and rising interest rates (up from nearly 0.0% last March to 4.5% currently). As a result, debt financing is more expensive, affecting those Private Equity investors most dependent on leverage to invest.

European Trifold

In Europe, while interest rates aren’t rising nearly as fast as in the US, an inflationary crisis is being exacerbated by geo-political tensions and an energy crisis, both of which are driving costs up and profits down - even for businesses that are managing to grow their revenues organically.

How Do We Turn This Around?

This said, what do we do now? How does the current $1.2T of dry powder get deployed, for instance?
While it might look like the easiest and safest solution is to wait out the crisis, the smartest investors are using these headwinds to their advantage. With valuations crumbling all around them, cash investors are managing to seize opportunities and lock in deals at heavily discounted rates, especially in the TMT space. One recent example was the $7B discount rate of Zendesk acquisition by Hellman & Friedman and Perima.

For leveraged buyers, the cost of debt presents challenges when trying to lock in a decent ROIC; on the other hand, declining multiples in some of the ‘more secure’ tech industries can still allow for strong investments (e.g. EdTech, MarTech, Legal Tech, Health IT, etc.).

Strategics that can issue stock to finance M&A and/or have strong cash-heavy balance sheets with low debt, will be in an advantageous position to secure deals in 2023: they won’t have to take cost of debt into their equation, making them more competitive than during the Pandemic and prior years.

In terms of areas of focus, we expect tech and data to continue to be among the main drivers of M&A activity in 2023, particularly vertical offerings. Additionally, for more risk-averse investors, recession-proof industries such as Consumer, Healthcare and Financial Services will likely be areas of growing interest.

So, despite the gloomy backdrop of inflation, recession, and market volatility, current market conditions can still offer ample opportunities for successful M&A for the more creative, diligent investor.

‍