The Main M&A Trends and Tendencies Analysis for 2023

What should Ukrainian companies pay attention to become popular in the international private capital market?

“Global M&A activity has significantly declined”, “For the first time since 2019, no mega-deal was concluded during the quarter”, and “M&A companies are no longer willing to take risks” — these were the headlines that appeared one after another in 2022. The hint was obvious: the entire sector is going through difficult times. However, is the M&A market truly in a crisis?

Short answer: No. Substantive answer: What was yesterday's sign of crisis is now impacting trends. To get the long answer, it is enough to read our full report.

The thing is that once you start to examine the situation closely, something else will open up: the resilience of the M&A market to geopolitical tensions, recession-related issues, and a whole array of preconditions for the 2023 trends.

The beginning of the year is usually the best time frame to dive into all possible forecasts and outliers, and the M&A sphere is no exception. We have analyzed the main trends that will influence the market and our activities both in Ukraine and in Europe and other countries and are ready to share them with you.

M&A and IT trends in 2023

1. “Smaller deals and slower pace” – the smaller the deals, the greater the chances of success. Medium-sized companies with 200+ employees are more interesting to acquire.
2. “Now is not the time to fall out of love with M&A” (according to PwC) – M&A will remain the basis of expansion of new customers and sales from the local market to the global one.
3. A challenging but optimistic year – a forecast of deals that will be smaller in value, but possibly more in number.

The M&A market in both global and local contexts can intersect and influence one another, yet tendencies tend to form differently. What will be the prevailing trends in the global context?

The primary driving force of change in the market is a substantial slowdown in deal volume compared to the record-breaking pace set last year. In 2022, M&A was impacted by numerous factors such as geopolitical shocks, a sharp increase in inflation, and higher interest rates, all of which will remain in effect in 2023.

According to Duncan Smithson, Senior Director of the M&A division at WTW, 5 key M&A trends for 2023 are:

1. Return of the 'small item effect' – meaning a return to small deals (up to $1 billion).

2. Opportunities in troubled M&A.

   A challenging operating environment will cause a growing number of companies to shed non-core assets in pursuit of long-term value creation.

3. Technological M&A:

   In 2023, a wave of acquisitions is expected in the artificial intelligence and machine learning markets. Whether leveraging new technology and talent or entering new markets, mergers and acquisitions remain the fastest way to transform businesses.

4. Geopolitical influence.

   After the military aggression of russia in the attack on Ukraine, almost everyone gave up on the market of the Asian aggressor. Therefore, Ukrainian companies have a chance that after the end of the war and the victory of Ukraine, the M&A market here will shine bright. Even during the war, we at Mergewave Capital were approached by many buyers and sellers who wanted to buy or sell businesses from Ukraine.

5. Focus on Environmental, Social, and Governance (ESG)

   An acquirer's due diligence will be more important than ever, businesses will face mounting scrutiny and pressure for transparency on climate risk, social justice, sustainability, and corporate governance. “Green” due diligence is, without a doubt, on the up.

Considering the number of mergers and acquisitions in the United States fell about 43% to $1.53 trillion, while in Europe and Asia Pacific, it decreased by 27% and 30%, respectively, with volumes just over the $900 billion mark, we expect the increase in activity of American companies.

European M&A market and the impact of Scandinavian countries

As for the European market, CMS, together with Mergermarket, highlight the following possible events:

1. M&A expectations are high:

   73% of deal participants expect the level of M&A activity in Europe to increase over the next 12 months. Almost everyone is now considering M&A;

2. The biggest driver on the Buy-side is expected to be the presence of undervalued target deals, while on the Sell-side it will be complex situations and negotiations;

3. The cost of raising financing will increase:

   87% of deal participants expect financing to be tighter compared to 2021/2022. This is due to the difficulty of finding relevant companies;

4. ESG is moving up the M&A agenda:

   90% of respondents expect ESG to increase focus on their deals over the next three years. Take the processing sector, which aims to close the economic loop for other industries such as packaging. This explains the high level of M&A activity in this processing sector. Market participants are aware that there will be a high demand for secondary raw materials on the market.

The Scandinavian region is traditionally a major influence on the global market situation. What were the results of Scandinavian countries in 2022?

• In the first half of 2022, 962 deals worth 56.3 billion euros were concluded in the Scandinavian region. This was a significant 11% drop in volume compared to the previous year, although the value was up 7%. In comparison, overall European M&A also got an 8% decline in volume and a 1% increase in value.
• There was an encouraging recovery in M&A in the Nordics, which contrasted with weakness in capital markets, where we could see fewer IPOs due to high-interest rates, inflation, and more expensive capital.
• Private equity still leads the region, with PE firms strongly represented in the top 20 acquisitions in the Nordics during the first half of the year. Many of the leading Nordic PE players have been actively raising money and have seen large deals involving them (e.g. Axcel in Denmark, EQT in Sweden, and HitecVision in Norway).

How did the volume of deals change and what to expect in 2023?

In its annual report, PwC provides data on CEOs of companies that do not plan to delay M&A deals:

We can see that the 2 largest sectors are Technology, Telecom, Media (Marketing), and Financial Services (Fintech, Neobanks) with 64% and 65% respectively. For us [Mergewave Capital], this means that we are moving in the right direction, as most of our sell-sides are from these industries. As for the volume of deals, a decrease in both the value and the total number of deals was observed in the European region ($255 billion (not including mega deals) for the II half of 2022 by 8,976 deals), i.e. the average deal was at the level of $28.4M.

As Reuters notes, “Some sellers are still hoping for yesterday's price, and some buyers are still hoping for yesterday's financing, even though those things are no longer available. That's why we're seeing smaller activity,” said Dirk Albersmeier, co-head of global M&A at JPMorgan.

At the same time, S&P Global Market also confirms the hypothesis of a decrease in the average value of transactions. For example, the average value of IT sector deals is $11.2M, but the financial sector gives a higher value of $120.5M due to the complexity of the business and the value of financial institutions' assets. The energy sector is also becoming interesting, especially in connection with the bombing of the critical infrastructure of Ukraine by russian missiles. A certain increase in interest in this area and alternative energy sources (solar, wind, hydro, etc.) is predicted to be $130.7 million.

Conclusion

Given the cautious forecasts for the M&A market on a global and local scale, we can say that our hypotheses regarding development, tendencies, and trends in 2023 are confirmed, including by well-known giants.

Based on the fact that the M&A market is decreasing in terms of value, but not the number of deals, we assume that the IT, financial, energy, and service sectors will be heard in deals this year.

Technical – since the average cost varies within $10M and technologies are just developing, in particular blockchain and Web3, AI, and ML – and this is quite an optimal cost for companies with 50-200+ people (depending on their financial indicators and technology stack); financial – because there is always a demand for fintech, neo banks, and payment services for large market giant banks; energy – because it is an infrastructural component that is unmanageable to do without (Internet, lighting, food, etc.).

Therefore, Ukrainian companies can create synergy and add value in this M&A market precisely in these sectors.

The M&A market is rapidly changing, leaving behind the trends of past years. If mega deals used to be the foundation of the market’s ‘’health’’, we now see the opposite situation: a shift towards smaller deals that promise stability. This is the situation and “standard” that must be taken into account to maintain the “health” of a company and keep favorable positions.

If you are unsure of the timing of a deal or its structure, contact us at Mergewave Capital. We are an M&A brokerage with expertise in the IT, FinTech, and Blockchain sectors. Our team has already closed over 60 deals, including those that emerged in crisis. We will help you properly build your M&A strategy, conduct scouting, structure the deal, and provide advice on any aspect of the process.

References:

Global M&A Outlook 2023: Smaller deals and slower pace – WTW (wtwco.com)

A study of European M&A activity in 2023 | Boom & Gloom? CMS Outlook

CMS | Spotlight on M&A in the Nordics

Global M&A Industry Trends: 2023 Outlook: PwC

Dealmakers brace for slow 2023 recovery after global M&A sinks | Reuters

The Big Picture: 2023 M&A Outlook | S&P Global Market Intelligence (spglobal.com)