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January 24, 2023 5 minute read

Looking Back at M&A in 2022 and Glancing at the Year Ahead

With M&A deals hitting record levels in 2021, it’s little surprise that the market hasn’t matched last year’s frenetic energy. Moreover, Russia’s surprise invasion of Ukraine in February this year added a heavy dose of worry to already rapidly destabilizing markets. 

However, some bright spots have emerged, and expert predictions for 2023 suggest a mixed forecast. The sharp contraction in deal-making has yet to impact every industrial sector and geographic region equally.  Domestic deal-making in Japan has made a welcome comeback. Meanwhile, a confluence of factors ranging from the Inflation Reduction Act to the ongoing European energy crisis has bolstered M&A deals in the energy sector.

From bumpy global markets to a looming recession, our M&A year in review will look back at the state of the M&A in 2022 before pivoting to give a sneak peek into where we see the M&A industry heading in 2023.

The Pandemic Hangover

The state of M&A today bears little resemblance to what we saw at the start of the year. In January, the economy was riding high. The S&P 500 was trading near all-time highs, and cheap money flooded the economy. With 2021’s blockbuster $5.9 trillion deals in the rearview mirror, anything felt possible.

It didn’t take long for the cracks to appear. The economy’s rebound from its early COVID woes was predicated far more on loose fiscal policy than solid fundamentals. By midyear, the stock market had officially fallen into bear territory. Despite rallies and dead-cat bounces, major indexes continued to tumble, reaching a low point in mid-October. 

The stock market has made a modest rebound since then. However, near-future fears remain far from allayed. A recent Bloomberg poll of economists put the probability of a recession in 2023 at 70%. With inflation unlikely to abate until 2024 at the earliest and the war in Ukraine still raging, likely, M&A deals aren’t going to reach 2021 levels again anytime soon.

M&A Trends in 2022

Buried in all the doom and gloom are some exciting developments in the M&A world. Not all deal types experienced the same pressures from the falling economy. Here are four of the significant M&A trends that we spotted in 2022.

Small Deals Get Big

Large deals, defined as deals involving over $1 billion in assets, dropped precipitously. However, smaller, cheaper M&A deals proved far more resilient. 

Companies may not be flush with cash anymore, but they still recognize the value to be realized from strategic deal-making. Cheaper deals allow savvy business owners to realize profitable synergies and expand into new markets without taking on enormous debt. So expect smaller deal-making to hold up throughout these turbulent economic waters.

Energy Takes the Lead

Despite the massively disruptive oil embargo on Russia, the energy sector has taken the leading edge in the M&A world this year. This is due to various factors, including the Inflation Reduction Act’s provision for $369 billion in clean energy, a recognition of infrastructure improvements in light of the recent energy crunch, and high-profit margins in the sector.

With the economy on shaky ground, smart money has fled increasingly toward the energy sector. High crude oil prices and continued interest in renewable energy have enlivened alternative and traditional energy sources.

Japan Experiences a Domestic M&A Resurgence

M&A deal-making in Japan actually increased slightly in the fourth quarter. Stagnant domestic deal-making has marked the Japanese market in recent years. After the Nikkei imploded, Japan’s once-vibrant domestic market turned stagnant. As a result, excitement over domestic deal-making gave way to capital outflows into more dynamic markets. However, the weak yen and low-interest rates have Japanese investors shifting their decision-making calculus.

Overcoming Adversity With Complexity

The final trend to emerge in 2022 has been an uptick in complex deal-making. With greater economic headwinds making traditional deal-making less financially attractive, deal-makers have had to get creative to realize risky synergies they might not deal with in better economic conditions. Investors may target undermanaged carve-outs or multiple complementary assets in a single deal. 

What to Expect for M&A in 2023

Predictions for 2023 remain mixed. Many fear the effects that a recession will have on the M&A field. Between higher interest rates that have produced headwinds for debt financing and an overall shaky economic footing, it’s unlikely that M&A deal-making will return to 2021 levels anytime soon. 

However, it’s worth pointing out that the overall value of M&A deals in 2022 hasn’t been too far out of alignment with trends from 2017 to 2020. So what we’ve seen in the past year may be less a cratering and more a return to normalcy. If that’s the case, the decline in deal-making may flatline or even rise in the coming year as central banks reign in inflation, and the Ukraine crisis concludes.

Moving beyond the macro level, several exciting trends have appeared on the horizon. Here are our top predictions for 2023. 

The Return of Web3

The recent bankruptcy of FTX, a major cryptocurrency exchange, seems like the final nail in the coffin for crypto.  Bitcoin has lost 60% of its value since the start of this year. Plus, it tumbled even further from its April 2021 all-time highs. Other Web3 phenomena haven’t fared much better. The brief NFT craze has long since popped, and Mark Zuckerberg’s Metaverse project has become an expensive boondoggle. 

With major tech companies shedding their pandemic-bloated workforce, it’s looking like a repeat of the 2001 tech recession. However, some M&A experts see the field as ripe for a turnaround. Despite well-publicized layoffs and dampened stock prices, major tech firms are still in a strong position for growth. With the explosion in machine learning and blockchain technology applications, tech could lead the charge in M&A deals for 2023.

Values-Driven Deal-Making

Recent years have seen heightened interest in environmental, social, and corporate governance (ESG), particularly in Europe. Between stakeholder activists, stricter government regulations, and increased awareness of the need for sustainable and socially conscious decision-making in the corporate world, ESG has become pivotal in M&A decision-making. As a result, expect to see serious discussions surrounding the environmental and social impact of M&A deals throughout 2023.

Distressed Sellers and Dry Powder

While a return to permissive interest rates and virtually free money seems unlikely, private equity firms are sitting on piles of cash. With economic headwinds shaking the financial timbers of otherwise attractive firms, it’s only a matter of time before private equity bankers get the opportunity to dip into their war chests. 

An uptick in distressed sellers will create new opportunities for profitable deal-making. Making matters more enticing, studies show that deals made in recessionary environments tend to perform better than deals struck during normal economic environments. With $2.5 trillion in private equity waiting to be deployed — the highest amount ever — expect to see a wave of acquisitions during the next economic downturn.

M&A Deals May Be Down, But They’re Not Out

With the necessary caveats in place, 2022 wasn’t a failure or an implosion of the M&A world. It was merely a return to Earth. With global supply chain problems a thing of the past and the price of gas edging back into normalcy, some of the worst excesses of the COVID era have already begun to fade. While the recession threat looms heavily in the coming year, private equity firms stand waiting patiently in the wings. 

It is now more important than ever to maximize your value with better visibility of your deal and progress.  Devensoft is up for the challenge, connect with one of our experts today!

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