Mergers and acquisitions have always been influenced by market conditions, and the current landscape is no exception. While uncertainty and market volatility tend to slow down M&A activity, these headwinds can also present attractive valuations and opportunities for strategic deals. This double-edged sword has Prodinity’s Theunis Viljoen optimistic about the M&A prospects for the remainder of the year, with one major warning: Don’t sleep on due diligence.
In 2022, M&A deal volumes were slightly lower than the record-breaking year of 2021 but remained 9% above pre-pandemic levels. Despite concerns over a global recession, rising interest rates, geopolitical tensions, supply chain disruptions and regulatory scrutiny, the current market conditions present something of a sweet spot for M&A.
The reset in valuations, reduced competition and the availability of distressed assets create opportunities for companies to achieve better returns and significant growth through strategic acquisitions.
However, there are thorns among the roses.
Cross-border M&A faced challenges in 2022, with factors such as increasing borrowing for U.S. buyers, declining Chinese overseas investment and geopolitical and financial turmoil impacting confidence in UK and foreign assets. Despite these challenges, cross-border deals still accounted for a significant portion of transactions, as foreign acquirers capitalized on currency arbitrage — for instance the weaker British pound — and viewed cross-border M&A as a quick route to enter new markets.
How Can Boards Respond to M&A Risk in 2023?
Although deal activity during 2022 and early 2023 has slowed compared to a record-setting 2021, many companies are assessing their options for M&A to drive growth and increase resilience.
Read moreDetailsStrong performance of tech M&A
The tech sector continues to lead in M&A activity globally. The need for businesses to digitize and adopt technological solutions to stay competitive drives the strong performance of tech M&A. In 2022, tech targets’ valuations held up well, and there was a steady flow of startups available for acquisition. Private equity sponsors, known for their interest in tech businesses, have also been driving investment interest in this sector, where their interest in other sectors has slowed somewhat.
Meanwhile, earn-outs have also become increasingly popular as a means to bridge valuation gaps in M&A transactions. Earn-outs are particularly prevalent in the sale of tech and new businesses that may lack tested financial data or revenue streams. With a declining market, purchasers are cautious about overpaying, while some sellers’ expectations have yet to adjust to lower valuations. Earn-outs provide a compromise, giving sellers the hope of achieving their desired valuation while providing purchasers with reassurance that they are paying the right price based on market conditions.
Several other trends are shaping the M&A landscape. Conditional deals and asset deals are increasing to comply with regulatory notifications or bypass mandatory notification rules.
Deeper due diligence is back in vogue, driven by a focus on ESG matters, sanctions and export controls, cybersecurity, supply chains and increased scrutiny by warranty and indemnity insurers. Deal timetables have lengthened, negotiations have become more challenging, distressed deals have risen, and non-traditional financing sources, such as private debt and joint ventures, are being deployed.
Looking ahead to the rest of 2023, analysts predict a slow uptick in M&A activity by the third quarter, bolstered by forecasts of stabilizing economic conditions in the UK, Europe and U.S. toward the end of the year. That said, some sellers and acquirers are likely to hold off on deals until the market stabilizes in a more concrete way as we head into 2024 (in the absence of further economic shocks and volatility). This may result in a shortage of acquisition targets.
Several sectors are expected to see stronger M&A performance in H2 2023, including tech (metaverse, Web3, cloud, fintech, telehealth, etc.), logistics, energy, renewables and infrastructure, life sciences and healthcare, mining and raw materials, recruitment, ESG and net-zero businesses, and targets with certain long-term revenue streams. These sectors present attractive opportunities for companies to pursue strategic acquisitions and contribute to their growth and success.
Achieving post-acquisition value
Thorough due diligence is essential for identifying potential risks and ensuring a smooth integration process. Achieving post-acquisition value requires a delicate balance between the urgency of the integration process and winning the hearts and minds of the people involved. Integration should go beyond simply combining two entities and should include robust business insights, clear direction and the right technology.
Companies can choose different integration approaches, from fully integrating acquired businesses onto core systems to maintaining them as separate entities. However, regardless of the chosen approach, data migration and combination play crucial roles in successful integration.
When it comes to due diligence for deals the rest of this year and into 2024, companies must prioritize comprehensive investigations that cover financial, environmental, social and governance matters, as well as cybersecurity and supply chains.
The M&A landscape is being shaped by various trends and market conditions, but it is no longer being actively eroded by the economic headwinds and pandemic impacts that characterized the past three years. That said, despite the challenges posed by uncertainty and volatility, there are exciting opportunities for companies to pursue transformative deals that contribute to their long-term success. By understanding the current trends, conducting comprehensive due diligence and prioritizing effective integration processes, companies can navigate the M&A landscape successfully for the rest of 2023 and unlock the potential for growth and value creation going forward.
Theunis Viljoen is founder and CEO of Prodinity, a data analytics provider with offices in London and Krakow. Theunis is an experienced and leading architect and designer of data warehouse and innovative business insight solutions delivered to the insurance intermediary, legal and other sectors. He is a qualified chartered accountant with board-level CFO, COO and CIO experience. 
