2023 M&A Outlook

15 December 2022 Foley Ignite Blog
Author(s): Louis Lehot Brandee L. Diamond Eric Chow

There was great speculation that the decreased valuations of 2022 would lead to a surge in M&A activity; however, activity this year has been much lower than anticipated. A multitude of factors have slowed down M&A this year – inflation, unrest abroad, and rising interest rates are just a few of the issues that have negatively impacted transactions over the past few months.

Everyone is left to wonder what the M&A forecast for 2023 will look like. Will we see an uptick in activity, or will we continue to see a much more cautious approach from buyers and targets? There are many predictions for the new year, which vary widely. Below, we round up a few that are making headlines.

A Return to Normal

Many analysts are predicting we could see a return to pre-2021 activity. It is important to remember that 2021 was a blockbuster year for M&A with a historic number of transactions. That kind of activity is challenging to duplicate and exceed year after year. At some point, it will inevitably slow down. So, we might be experiencing a return to a more normalized activity level as we move into 2023.

There Could Be a Spike in Some Areas

One area where there could be a spike in 2023 is mergers among private tech companies. In an interview with The Information, Goldman Sachs bankers told the outlet that consolidation among private tech firms could pick up next year. This could be particularly true for those startups who had to alter their IPO plans. These companies are likely exploring alternative exit strategies, and decreased valuations will make mergers in this space more attractive.

There is also some speculation that the fintech industry could see higher levels in 2023. This has been an area that has seen steep drops in valuations and a roller coaster of a year. These factors could make it a prime area for mergers and large transactions.

Ernst & Young is also predicting that an appetite for tech deals will return in 2023, citing a recent EY study that found "72% of tech CEO respondents plan to pursue M&A in the next 12 months, compared with 59% of CEO respondents across all industries."  Acquisition potential could be especially true for the more innovative technology startups as companies look to take advantage of lower valuations and expand into new, highly innovative areas. 

There is also speculation that we could see an uptick in M&A activity in the energy sector as well, following the global issues that sector has faced in the past year. Larger energy producers could make a move to pursue deals with renewable energy companies as part of the increasing efforts to move toward these alternative energy sources. The healthcare sector could also be in for strong M&A activity next year, with PWC predicting a strong outlook for health services M&A deals 2023, in part due to the increased transaction volumes and large levels of corporate cash in the industry.

Interest Rates vs. Dry Powder

Borrowing money is considerably more expensive due to multiple spikes in interest rates. Gone are the days of virtually free money. We have yet to determine what the Fed has in store for the remainder of this year or next, but we know that tightening should ease by midway through 2023. That means that it will be increasingly expensive to borrow moving forward but should level off before the second half of the year.

While the higher cost of taking on debt does make acquisitions more challenging, remember that private equity firms have an unprecedented amount of dry powder in their reserves. They can also use accruing, participating and pay-in-kind dividends with a senior liquidation preference to structure around the interest.  They will be looking to use their dry powder as valuations become more attractive. The combination of these factors has the potential to bolster activity next year.

Due Diligence Will Continue to Be a High Priority

One thing that is a sure bet is that due diligence will continue to be a higher priority for buyers as they look more closely than ever into their targets. It is more important than ever for buyers to take an even deeper dive into every aspect of targets, ensuring everything is 100% in order. This means targets will need to be prepared on their end, with financials and operations ready to face greater scrutiny.

No one can predict the future, and there will be new factors that no one can foresee popping up in 2023. We will monitor and update as the new year unfolds.

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