M&A: Trends and Experience
As the second half of 2023 approaches its end, the M&A landscape is characterised by a refined strategic focus. Mega deals, the market cornerstones in previous cycles, are making way for mid-sized transactions, marking a tactical shift among executives who seek to boost strategic transformation and accelerate growth.
Slowed inflation and interest rate stabilization
Inflation, the defining factor of early 2023, is showing signs of deceleration. Parallel to this, interest rate rises could be approaching a turning point after a prolonged period of increases. This changing environment, along with the recovery of some banks and the successful avoidance of a debt-ceiling crisis in the US, offers a fertile ground for the revitalization of M&A.
Predominance of mid-cap transactions
The current climate is favouring mid-market deals. Figures show a 4% decrease in transaction volumes compared to late 2022, but still above pre-pandemic levels in 2019. This change is due to a shift in focus towards value creation through strategic acquisitions and selective divestments. Corporate groups with better liquidity still have capacity to execute larger deals, but the mid-market is gaining a new leading role, with CEOs reconfiguring portfolios for the future.
Strategic Transformation in M&A
Value creation has always been a cornerstone of M&A, but it now requires a more holistic approach. Digitalization, energy efficiency and sustainable finance are key factors which investors cannot ignore. Corporate groups and private equity funds are readjusting their strategies, investing in portfolio optimization and adapting to changing business dynamics and the sustainability imperative.
Artificial Intelligence
Generative AI and other emerging technologies are redefining the playing field, allowing CEOs to digitalise and transform their companies with unprecedented efficiency. AI talent has become a valuable commodity, boosting strategic acquisitions which aim to overcome a lack of specialised skills.
Getting ready to sell
Target companies are facing the need to readjust price and strategy expectations in order to close successful deals. Careful preparation and the capacity to respond to more in-depth analyses from buyers are critical. A common mistake is setting aggressive transaction timelines which limit the ability to optimise the business before selling.
Portfolio Reviews and Divestments
Portfolio reviews have become a hallmark of visionary leadership. Identifying sub-optimal assets to divest and recognising opportunities for strategic acquisitions are key to success. An environment with more capital controls and the need to respond to the technological revolution as well as geopolitical or regulatory dynamics have a decisive influence on such decisions.
Mid-cap transactions
Mid-cap transactions have become the foundation of the M&A market, allowing companies to gradually advance their transformation strategies. Despite a general decrease in the number of deals, the mid-market retains its vitality and relevance.
Increase in Restructurings
The first half of 2023 witnessed an increase in corporate reorganizations, and this trend is expected to continue. Financial challenges, along with inflation and supply chain problems, have led many companies to reevaluate their strategies and structures. The retail, real estate and industrial sectors could see an increase in restructurings due to the need to adapt to a moderate growth environment and to preserve viability in the long term.
Upsurge in Restructurings and Refinancing Opportunities
Corporate restructurings are gaining momentum as a response mechanism to financial tensions worsened by the increase in debt costs and restricted access to credit. Companies which fixed their interest rates during the pandemic are now benefitting from more favourable conditions, whereas those which face restructurings or have variable rate debts are feeling the impact of the increase of interest rates. Operational and financial restructurings are key moves which can improve the soundness of the balance sheet and operating profit.
Forecast for the Rest of 2023
Looking ahead, there is cause for cautious optimism. The second half of the year promises a more fertile ground for M&A, subject to the stabilization of interest rates and a renewed focus on transformation and long-term growth. Corporate groups and cash-rich companies, ready to capitalise on strategic opportunities, will be well placed to lead the market.
Mid-sized deals and divestments will continue to drive the M&A market, feeding a constant flow of activity. Buyers will need more strategic access to funds and conduct more in-depth, rigorous due-diligence in order to optimise the value of transactions. Sellers, on their part, will need to be ready to maximise their opportunities and ensure the successful completion of deals.
