The Big Picture: 2023 M&A Outlook

A look ahead to the key strategic trends expected to impact the overall M&A environment and some key sectors, presented by S&P Global.

“The volatile equity markets, rising interest rates and economic uncertainty have weighed on M&A activity. The lower equity valuations have reduced buyers’ purchasing power, and the higher cost of financing has increased the cost of making acquisitions. Escalating inflation and geopolitical turmoil stemming from the war in Ukraine have weakened executive confidence, which is a key driver to M&A. The structural headwinds have pushed many buyers in the private equity industry to the sidelines and have greatly reduced the number of large transformational transactions that led to record-setting M&A in 2021.

Overall M&A activity plummeted in 2022, and a sharp turnaround is not on the near-term horizon.  

Central banks have been raising interest rates to combat inflation. The moves hurt M&A as they led to equity market volatility and increased cost of acquisition financing. Companies have been able to absorb the increased costs on their debt because corporations were flush with cash coming out of the pandemic thanks to government stimulus efforts. However, many have been burning through reserves, and the higher cost of financing will eventually force more sellers into the market.”

Flourish of M&A Deals in the Small-Cap Software Tech Space

Australian small-cap software companies have been severely oversold and as a result have been swarmed on in a flurry of M&A deals during October, with few signs that these deals will slow down with more likely in the pipeline.

“National and international software firms, as well as private equity firms, have taken advantage of these low valuations, offering huge premiums in an attempt to secure control of the companies in question,” says Peter Milios, a research analyst for Corporate Connect Research.

Morgan Stanley to start layoffs in coming weeks as dealmaking slows

Wall Street major Morgan Stanley (MS.N) is expected to start a fresh round of layoffs globally in the coming weeks, three people with knowledge of the plan said, as dealmaking business takes a hit due to rising inflation and an economic downturn.

In Asia Pacific, the bank has drafted up a list of staff members considered redundant, who will mainly come from teams that focus on China-related business, two of the sources said. All declined to be named as the information is confidential.

Morgan Stanley last month reported a 30% slump in third-quarter profit, missing analysts' estimate as a slowdown in global dealmaking hurt its investment bank business. It hinted that some cost-cutting actions were on the radar.

"We're looking at headcount," Chairman and Chief Executive James Gorman said in a conference call last month, without providing details. “You've got to take into account the rate of growth we've had in the last few years, and we've learned some things through COVID about how we can operate more efficiently."

Healthcare M&A in 2022 – Up or Down? It Depends

In the last 10 years, we have had periods when the media has reported healthcare M&A at its highest level ever. However, when you dig into the data used, it shows one large multi-billion-dollar pharmaceutical merger is leading to those headlines. The flip side is that in some of those same periods primary middle-market portfolio company acquisitions in healthcare were flat, if not dead. What’s actually happening in 2022 is definitely an “it depends” scenario.

“As a threshold matter, private deals are not always reported publicly. So, data on exactly what is happening in the middle market isn’t always spot on. Often deal makers get a sense of what is happening anecdotally through their own experience, service providers, the media, and other sources of information. While many media outlets have reported healthcare M&A activity as flat in 2022, when you talk to investors, lenders, M&A counsel, and third-party transaction advisors, you get a very different picture. Those discussions lead to a picture of a marketplace that is extremely active, just possibly not in the ways buyers, sellers, and their advisors would prefer. Deals are happening, marketplace participants are working hard, but healthcare M&A is in a different place, with certain headwinds that historically we have known how to deal with and others that are new challenges,” says Ari Markenson, a Partner with law firm Venable LLP and a Contributor to Mergers & Acquisitions.

Is Latin America the next frontier for technology M&A?

“In a region suffering from global trade dislocations, inflation, higher interest rates and complex political cycles, dealmakers remain cautiously optimistic that the transition to digital services across the region will create significant M&A opportunities in the technology sector,“ says Rodrigo Dominguez Sotomayor from the Whitecase.

Historically, transactional activity in Latin America has been driven by energy and infrastructure transactions. In the past two decades, the region experienced significant growth as most of its largest economies enjoyed political stability and adopted market-friendly policies that attracted significant foreign direct investment. Commodities played an important role in this growth. Latin America is home to some of the world's most abundant reserves of metals and minerals. The region also has vast reserves of oil & gas, which fueled major infrastructure investments throughout the region. 

As a result, Latin America is more connected and prosperous than ever before.

Bain Capital Sees 'Golden Age' for Private Equity in Japan

David Gross-Loh, managing director of private equity at Bain Capital, discusses the firm's investments in Japan, and the opportunities he sees in other Asian markets. Bain Capital-led group succeeded in its tender offer for Hitachi Metals Ltd., a unit of the Japanese conglomerate. Gross-Loh speaks with Haidi Stroud-Watts and Kathleen Hays on "Bloomberg Daybreak: Australia.

“Japan is coming into a Golden Age for Private Equity. There’s been a tremendous amount of developments in the infrastructure to support the private equity transactions that we and others do, there’s been a serious focus on corporate governance, large corporations are trying to get more efficient and therefore divest some of their non-core business. But you also see a lot of founder-owned businesses that are looking for succession alternatives that’s creating some opportunities. So the convergence of the number of these forces is creating a lot of opportunity,” says David Gross-Loh.

World crises driving 'virtually unprecedented' complexity for insurers

The combined effects of economic and geopolitical crises are driving “virtually unprecedented levels of complexity” in the business environment for insurers and reinsurers, according to Munich Re. High inflation is having an especially profound impact on loss expectancy in many operating segments. Also driving the issue are the changing landscapes for risks like cyber and climate change, and the fallout from the COVID-19 pandemic.

In an effort to combat skyrocketing inflation, central banks have hiked interest rates, which in turn can impact the balance sheets of insurers and reinsurers as a result of fixed-interest securities losing value. Rising interest rates can also initially trigger a decline in re/insurers’ capital bases and affect their capacity, despite higher rates having a positive impact on earnings in the medium term, Munich Re said.

Mergers & Acquisitions Forum: Discussion Recap

After an extraordinarily busy year in merger and acquisition activity in 2021, the Business Courier held a forum featuring experts in that space who assessed the current environment for deals and looked ahead to what might be next given the current economic conditions.

The featured panelists were: Kevin Bruegge, a private wealth advisor and managing director of The Evelo|Singer|Sullivan Group wealth management firm; Keith Carlson, managing director and shareholder in VonLehman CPA and Advisory Firm; and Michael Hurley, a partner at Calfee, Halter & Griswold LLP, who practices in the corporate law and finance arena. The forum was held Sept. 29 at the offices of the Cincinnati USA Regional Chamber and was moderated by Steve Watkins, a Business Courier reporter who covers banking, finance, and investments.

Watkins began by noting that 2021 saw $2.6 trillion worth of deals in the U.S., a record. He asked the panelists to comment on what kind of dynamics are affecting the M&A market currently. Hurley commented that this year has still been very strong, but not nearly as much volume as last year. He usually represents companies in the middle-market range, $30 million to $100 million in revenue, who are seeking to do private deals, so broader market forces in the overall economy have not yet trickled down to that level.

“I would say it’s not last year, but it’s still a very good year,” he said.

Sixth straight quarterly drop anticipated in Bloomberg Survey

US mergers and acquisitions are poised to slide for the sixth straight quarter, to depths last seen at the onset of the pandemic, as a darkening outlook for deal-financing complicates an already bruising backdrop for the industry.

“Elon Musk’s proposal to buy Twitter Inc. for the original offer price gave the M&A market a jolt last month, but the deal also served to highlight the funding concerns plaguing the business now. A slowing economy and market volatility are dimming hopes for a significant rebound in new transactions in the fourth quarter, particularly for the large leveraged buyouts that fueled last year’s historic M&A boom,” according to a Bloomberg News survey of 18 event-driven/risk-arbitrage trading desks.

Deal flow may be limited given that Wall Street banks are nursing huge losses on buyout debt they can’t offload as rising interest rates and recession angst sap demand for risky assets. Cano Health Inc. topped the poll as the most likely takeover candidate in the next few months amid consolidation in health care.

There is No Crystal Ball: U.S. M&A Trends and Prediction

When there is unpredictability in the air, risk allocation is the name of the game when it comes to negotiating M&A transactions. While the market for M&A has been record-breaking on most accounts in recent years, geopolitical turmoil, increased inflation, the stock market turning bearish, and rising regulatory enforcement all contribute to an atmosphere of growing uncertainty. A landscape of uncertainty does not mean that buyers’ appetite for strategic acquisitions will dry up entirely, but rather that buyers will look for techniques to employ to allocate risk and increase their scrutiny of target companies.

The article published by Foley talks the current legal and deal landscape and discuss a potential shift in the market. It also analyzes potential techniques and deal terms that may become more popular as we enter an unknown future regarding mergers and acquisitions.

Legal and Economic Landscape 

For dealmakers (and their attorneys) 2021 was the best year on record for global M&A, with more than 60,000 publicly disclosed deals and the aggregate deal value breaking $5 trillion for the first time. Since then, M&A activity in 2022 has slowed from its rapid pace in 2021. The value of the global M&A market fell by nearly 20% to $2 trillion in the first half of 2022 compared to the same period in 2021. The total deal market is likely to fall further as economic fallout is reflected in global markets, according to PwC’s “Global M&A Industry Trends: 2022 Mid-Year Update” report. Looking forward, M&A deals are facing the most uncertain and complex environments in recent memory. 

Global M&A market slows in 2022 first half — but shows signs of strength

After soaring to an all-time peak in 2021, the global M&A market has hit the pause button. Early 2022 saw the value of large deals (more than $25 million) fall 24 percent from a year earlier, on a 12 percent drop in deal volume.

But the 2022 numbers match healthy, prepandemic levels and are especially notable in a time of great uncertainty. Geopolitical instability, spiking inflation, supply chain issues, skittish capital markets, regulatory changes—all these factors, and more, are fueling uncertainty.

And as Andy West, global coleader of McKinsey’s M&A Practice, says, “Uncertainty always weighs on decision making, and M&A is a big decision for deal makers. So naturally we’re seeing a bit of a slowdown.”

According to the McKinsey M&A Practice review of the global M&A market, 2022 activity has declined, but only slightly. Deal makers in the Americas have been the most active traders, delivering almost half of worldwide deal value (48 percent, versus 52 percent for all of 2021). Europe, the Middle East, and Africa’s share is up slightly (28 percent, versus 26 percent), as is Asia–Pacific’s share (24 percent, versus 22 percent).

‘Everything in the UK is on sale,’ says US private equity executive

The plummeting value of sterling means that “everything in the UK is on sale”, according to a top executive at US private markets giant Ares Management.

Blair Jacobson, co-head of European credit at Ares, said he “absolutely” expected to see US investors doing more deals in the UK to take advantage of the weak currency.

“It’s a pretty big difference if you have US dollar-denominated funds,” he told the FT’s Due Diligence Live event in London on Wednesday.

A pioneer in private lending, Ares has financed a number of buyouts of listed companies after banks stepped back from the market. Traditional lenders retreated after struggling to sell on debt for deals that they committed to finance early this year.

How ESG Is Changing the M&A Landscape

Understanding the growing importance of environmental, social and corporate governance (ESG) in the world of mergers and acquisitions requires looking no further than social media.

Countless posts on these social platforms demonstrate society’s rising concerns around sustainability standards and corporate accountability. In fact, Elon Musk’s recent attempt to acquire Twitter is the perfect example of the reach that ESG has in today’s M&A market and the broader business world.

Twitter is the most high-profile acquisition on the rocks right now. While the primary reason Musk has cited for backing away from the deal is his allegation that the social media platform is infected with bots that impact fake news and, ultimately, the company’s valuation, he has pointed to diversity concerns.

“Musk has tweeted frequently about Twitter employing workers who are insufficiently diverse in embracing a wide variety of viewpoints and perspectives,” says Dr. Michael Kraten, an ESG expert and professor of accounting at Houston Baptist University. “Ironically, the lack of diversity that he mentions involves a lack of conservative and libertarian representation.” He suggests Musk’s concerns represent issues around the G in ESG.

All M&A Market Segments Saw Q3 Drop in Deal Volume

Q3 dip in global M&A volume isn't a surprise here:

“Last quarter’s mergers and acquisitions market results illustrate that heightened uncertainty continues to hinder M&A activity. Q3 saw a notable dip in global M&A volume compared to recent quarters, and no market segment was immune to the fall.

The degree to which Q3 2022 deal activity is down is striking. Last quarter had the second-lowest total deal volume ($504 billion) for controlling-stake transactions of any quarter from Jan. 1, 2017 to Sept. 30, 2022. Only Q2 2020—when the reality of the Covid-19 pandemic started to truly hit—had a lower quarterly deal volume ($225 billion). And Q3 2022 had the lowest total deal volume among all other Q3s since 2017”, says Bloomberg Law.

Savvy Investors Find Value in Cross-Border M&A

Economic headwinds and geopolitical uncertainty tied to the war in Ukraine, rising interest rates, inflation, market volatility, supply chain issues and a fear of an impending recession have created uncertainty that has adversely impacted valuations and deal volume. Despite these concerns, cross-border M&A continues to outpace domestic dealmaking. 

“Despite the uncertainty in the current global climate, cross-border transactions continue to offer compelling opportunities for strategic buyers seeking diversification and market expansion opportunities,” says Enrique Martin, partner and managing partner of Winston & Strawn‘s Miami office. “Global instability will continue to produce opportunities for the savvy investors where others can only see high levels of risk. Investors with higher risk tolerance will see the current market conditions as an opportunity to acquire attractive targets at discounted prices.” 

Martin tells Mergers & Acquisitions that industries that will see the most cross-border deals include those that are considered recession proof. Industries like FinTech, including the payment processing and digital payment industries, energy, healthcare and telecommunications, are expected to see the most opportunities 

Rising inflation and interest rates in the U.S. are influencing dealmaking by causing debt financing to be more costly and asset divestment to become increasingly more difficult. These increased levels of inflation also yield higher costs of goods and services which will as a result, drive valuations down. Such a volatile environment is expected to present opportunities for strategic investors with cash reserves or access to other capital. For example, multinational firms seeking investment opportunities in new markets or firms with a higher tolerance level of risk looking to capitalize on undervalued targets. 

“These strategic transactions tend to be less price sensitive because they are motivated by reasons other than an opportunity to buy at the lowest possible price,” says Martin. “Demand for M&A is expected to remain consistently high among buyers looking for targets that represent opportunities for growth or international market expansion.” 

How to Find the Right M&A Advisor

Finding the right M&A advisor is a task worth spending time on. The right advisor can make or break your business transaction, and there are lots of options to choose from. Here’s why it’s so important to get this right, and how to maximize your chances of connecting with the perfect M&A advisor.

Selling a business is not a one-person job. It’s a highly complex, time-consuming process with incredibly high stakes, and it requires a team of people all working together in close alignment.

One of the most important players on your sell-side team is the M&A advisor. This role is often criminally overlooked and underrated, but it’s no exaggeration to say the right M&A advisor can make or break your transaction.

In this article, we’ll look at why M&A advisors are so valuable, what they bring to the transaction process, and the steps you should take to connect with the perfect M&A advisor for your business and goals.

What does an M&A advisor do?

Your M&A advisor is your trusted guide, helping you navigate the murky and treacherous landscape of selling your business. The best M&A advisors combine experience, connections, and skill to ensure you get the best possible outcome, aligned as closely as possible with your goals.

Here are some of the key responsibilities of an M&A advisor:

• Be a constant source of advice and guidance as you go through the sale. Your M&A advisor should be someone you can always get in touch with to share their wisdom and expertise at any point during the sale.

• Draw on their pool of connections to bring you in contact with all the right people. This ranges from obvious connections, like potential buyers, all the way to niche specialists who can help you work through specific areas of your sale.

• Understand what makes your situation unique and tailor their approach accordingly. Selling a business is not something to take lightly — it may very well be the single largest financial decision you ever make. As a result, it’s crucial for your M&A advisor to understand your specific situation, help you avoid mistakes, and be someone you can place a great deal of trust in.

• Make sure your company is valued correctly. Valuation is one of the most important aspects of an M&A transaction. It involves striking a careful balance between many factors to ensure you get a fair price for your business without scaring off all potential buyers.

• Help you beyond the sale. A good M&A advisor will get to know your long-term goals, including what you plan to do next after your business is sold. This allows them to give you more relevant guidance and advice, ensuring your company changes hands in a way that’s aligned with your goals and the goals of your team.

What makes a good M&A advisor?

A good M&A advisor combines a number of key skills. Here’s what you should look out for when choosing your advisor:

• Relevant experience. Your M&A advisor should have a solid base of experience assisting in the sale of businesses like yours, in similar industries, with similar transaction types.

• A strong track record of getting results for their clients. You should spend time researching your advisor’s past achievements before working with them, and don’t be afraid to reach out to their previous clients for testimonials.

• Trust. Your M&A advisor will be guiding you through one of the biggest business transactions of your life, with an enormous amount at stake. It’s essential to have a strong rapport with your advisor and the ability to trust them with the sale of your business.

How much do M&A advisors charge?

M&A advisors all charge different amounts, and the amount your advisor will charge will depend on a number of factors like the size of your business, the value of the deal, the time involved, the experience and reputation of the M&A firm, and many others.

Usually, M&A advisors will charge a fee upfront, usually ranging from a few thousand dollars to the high five figures and beyond.

After that, fee structures are often based on a percentage of the total sale amount, for example, 5%. It’s well worth taking the time to discuss pricing with your M&A advisor early on to establish whether it’s worth it for you and to avoid any unpleasant surprises later.

What do you need to know from your M&A advisor?

There are some key questions you should ask your potential M&A advisors as soon as possible while getting to know them. Getting these questions answered allows you to work out if an M&A advisor is right for you and your needs, and avoid any future issues. Here are some questions you should ask:

• “How will you find the value of my company?” — ask your potential M&A advisor about the methods they typically use to value companies and how they would approach yours.

• “Is now the right time to sell my business?” — A good, trustworthy M&A advisor will give you a clear and honest answer to this question. The answer may be “no”, and they might advise you to wait for a better opportunity.

• “What similar deals have you worked on?” — This question allows you to get a feel for your potential advisor’s experience and how it compares to your circumstances and specific goals.

• “What does your process typically look like?” — Ask about things like time frame, marketing strategies, and typical milestones to gain an idea of how the transaction process will look and how you can prepare and set your expectations.

• “How will my business operations be impacted?” — The M&A process is long and often complex, and your business operations could be affected. Ask your potential advisor how this could happen and the steps they will take to help you focus on your business.

How to find the right M&A advisor for your transaction

Finding the right M&A advisor won’t be a quick process. You should take your time here, and you’ll probably talk with a number of potential advisors before settling on the right one for you. Here are the steps to follow when seeking out your M&A advisor.

1. Start early

It’s not uncommon for business owners to start building their relationship with their M&A advisor years in advance of the sale. Even if you don’t have concrete plans to sell your business any time soon, it’s still wise to make connections with M&A advisors ahead of time and start laying the foundations for a relationship.

Starting early gives you time to get to know your advisor, and for them to get to know you and your business. This way, when the time comes to sell, they already have a firm understanding of who you are, what you do, your goals and future plans, what a successful outcome looks like for you, and much more.

2. Research, research, research

It’s impossible to understate the importance of research when it comes to choosing an M&A advisor. Spend as much time as possible learning as much as you can about a number of different M&A advisors.

There are many resources you can use to research advisors. Their own websites and social media profiles are a good place to start — browse the content they share and read about their backgrounds and past accomplishments. 

Once you have narrowed down your search to a handful of promising advisors, get in touch and open a relationship with them to learn more and hone in on the best fit. Prepare questions in advance and try to learn as much as you can about their previous work and how they have helped businesses like yours.

3. Ask others in your industry for their recommendations

Your personal network is an invaluable resource for connecting with your ideal M&A advisor. Reach out to fellow business owners, attorneys, accountants, investors, and more. These people will all likely know several M&A advisors and can point you in the right direction of someone who could be a good fit.

Ideally, you know someone who successfully completed a transaction similar to yours and got results that match your goals.

Work with BizNexus

Finding the right M&A advisor is a challenging task. It’s something that often takes months or even years, and it’s a task that deserves serious time and effort. The right M&A advisor can make or break the sale of your business, so it’s well worth investing heavily in the search for one.

The BizNexus community is home to many M&A advisors, from various backgrounds and with a range of skill sets and specializations. It’s a great place to connect with advisors, grow your network, and possibly get in touch with the advisor who can make your transaction goals a reality.

Funding When Capital Isn’t Cheap

"When capital becomes more expensive, how do you evaluate and decide on the best financing option for your company?”

Asks Shangda Xu, Alex Immerman, and David George from a16z.

There is (or at least there should be) a VC industry saying: “Give me your headline price, and I’ll give you a deal.” The idea here is that founders tend to think in terms of valuation and dilution, while an investor might be more interested in knowing their minimum guaranteed return on the downside and the size of potential returns on the upside.

In a normal market, investors sometimes, but less frequently, use contract terms—such as liquidation preferences that are greater than 1x, warrants, and anti-dilution clauses—to invest at the valuation a founder wants, but with terms that make sense for the investor. In a down market, when capital is more expensive and valuations are down, these structured deals—that is, a deal with non-standard clauses—become more common, as founders look for ways to avoid raising money at a lower price per share than your previous round (i.e., a down round). "

Despite Recession Jitters, M&A Dominates a Robust Cybersecurity Market

Funding has been somewhat lower than last year, but investment remains healthy, analysts say, amid thirst for cloud security in particular. 

The cybersecurity industry continues to remain largely unaffected by the uncertainty surrounding the rest of the economy.

Though funding activity this year is somewhat slower than in 2021 and market valuations of cybersecurity firms have taken a hit, mergers and acquisitions activity has remained strong through the year, as has investor interest in the sector.

So far in the third quarter, there have been multiple major transactions that, according to analysts, highlight the overall robustness of the sector amid broadening concerns of a recession. 

Says Jai Vijayan from darkreading.com.

Current valuation markdowns may lead to incredible investment opportunities

Adrian Mendoza, Mendoza Ventures founder and general partner, joins 'The Exchange' to discuss whether the slowdown in markets is a good thing for venture capital and why deal making could be stronger in the next 3-5 years.

“We'll start seeing valuation markdowns in the next 3-5 months. And really that is an opportunity for investors to come in and buy well-known start-ups at a low valuation,” says Mendoza Ventures' Adrian Mendoza, “In our view the M&A market is going to be incredible in the next 3 to 5 years.”

Recent Trends In Canadian M&A

ESG is an acronym that has turned into a buzz word. Nevertheless, its components – Environmental, Social and Governance – remain critical as companies engage in business transactions, such as M&A, or develop business strategy. 

“We serve a range of clients, and they span Canadian business sectors. At the most sophisticated and largest public companies such as banks, mutual funds and pension funds, ESG topics occupy centre stage within the investment committees, within the CIO's office, and within the C Suite. At smaller and medium-sized enterprises as well as private companies, you tend to see businesses that are less burdened from a regulatory landscape, which results in a lower degree of urgency toward ESG. However, this is changing. There are very few clients that are entirely indifferent to or not apprised at all as to ESG topics, and the projections are that every business, small and large, is going to be impacted by ESG in the future in a meaningful way,”

Says Jason Kroft, a senior corporate lawyer in Miller Thomson's corporate practice with specialization in structured and alternative finance.