2023 challenge will be to navigate economic headwinds
A global mergers and acquisitions (M&A) market comprising deals worth approximately $2.7trn over the last 12 months enters 2023 facing the economic headwinds of inflation, higher interest rates and ongoing geopolitical uncertainty.
Activity in the mid-market however promises to remain strong, offering refuge from the storm, while activity at the top end of the market is impacted by tighter lending, squeezed margins and prolonged transaction timelines.
A significant volume of dry powder remains available – more than $1trn in the private equity segment, by some estimates – which has been actively seeking opportunities across multiple sectors and often on a cross-border basis.
Shelter from the storm
Eric Fougedoire, Partner at RSM France, expects healthy activity levels to continue globally, particularly in the small to mid-cap sector, with a number of market areas escaping the drag of the economic slowdown.
"The safe havens will be companies insulated from utilities, raw materials and logistics, because price increases in those areas are inevitable and will expose margins to erosion over time. Digitalisation, software as a service, subscriptions – these are the sorts of areas where you should expect to see activity.”
And, Fougedoire, added, “While organic growth will still be possible, it may be difficult to achieve in the shorter term. That makes thinking outside of the box more important than ever; increased international footprints, a focused boost within a certain portfolio area, and strategic bolt-on acquisitions all have a role to play."
Fougedoire suggested innovative new companies will be among those actively looking to make deals.
"The current environment is a difficult one for start-ups seeking to raise finance. Money that had been previously earmarked by private equity or angel investors has now been largely committed, so that early-stage seed funding is no longer readily available. Acquisition can break the impasse and offers private equity the opportunity to bolster an existing platform."
Oliver Smyth, Partner at RSM Norway, explained how the changing shape of the market requires a higher degree of flexibility and expertise across the whole of the transactional timeline to get deals done.
"Rising interest rates are obviously impacting some sectors more than others and can make it difficult for buyers and sellers to agree on a valuation for a potential target. Increased borrowing costs have hit multiples, particularly for growth cases which are seeing heavier discounting on earnings growth well into the future. Supply chain concerns, meanwhile, continue to hit M&A activity levels in those industries most exposed."
Some parts of the market will fare better than others. Smyth said, "Deals at the smaller end, in the Nordics, for example, are less affected. As long as there is a good story to tell, a good concept and a good case, those deals can proceed as normal. And while the macro environment may be used as a reason to negotiate a sharper price, perhaps leaving a bit of a valuation gap, that has not impacted the overall level of opportunity.”
And the trend remains positive in the longer term. "M&A is always cyclical and while the sector does face headwinds, it is well positioned to weather those in the quarters ahead," said Smyth. "There is plenty of money out there ready to invest and it needs to be spent, but there is also a confidence to transact. Obviously, the Nordic countries have an advantage in that they represent safe and attractive environments that remain somewhat insulated from global macro factors, but the right opportunity can equally be found in other markets."
Building on success
Lee Castledine, Partner at RSM UK and member of the RSM Global Financial Due Diligence Leadership Team, pointed to the potential positives of the year ahead despite the obvious economic challenges.
"The market remains very active, albeit we are seeing a focus towards those opportunities most protected from the uncertainties that all of us are facing around cost of living and, in particular, energy costs. Whilst no one can ignore those impacts, the overall landscape in the mid-market sector remains robust going into 2023."
RSM is ready to build on its ongoing momentum. In Europe alone, the team advised on 624 transactions in the 12 months ended June 2022. The technology, media & telecoms sector led the charge with 151, followed by engineering & manufacturing with 113. Activity was also strong across business services, real estate & construction, healthcare and consumer markets, while transport & logistics, financial services, leisure & hospitality and education & training also contributed.
"Adaptability will be the watchword for M&A in 2023," summarised Castledine. "We are ready to facilitate that."