Four key M&A dealmaking trends to watch in 2023

We interviewed twelve leading M&A dealmakers across regions and industries to get their predictions and trends to watch for the year ahead.

By AnsaradaWed Dec 21 2022Due diligence and dealmaking, Industry news and trends, Environmental Social and Governance

Investors’ nerves were tested in 2022 and they will need to keep their wits about them over the next 12 months. The effects of monetary tightening in capital markets are immediate, however these more stringent conditions can take time to fully manifest in the real economy in the form of higher unemployment and weakening demand.
Central banks around the world will continue to closely monitor inflation metrics to decide for how long they need to stay on their current course. Operational performance will be under pressure and financing will remain harder to access amid higher interest rates and lower growth. This should see deals stabilize at lower levels.
In what remains a challenging environment, acquirers are assessing risks more intently than ever and stress testing their investment theses. At the same time, authorities are paying closer attention to deals and increasing their enforcement scope. Corporates, financial sponsors and deal targets alike should keep the following in mind and be prepared for deal timelines to be more drawn out:

1. Comprehensive and incisive due diligence

Dealmakers are running the rule over companies with renewed intensity. Operations are being scrutinized for potential fragilities and weak supply chain links. Buyers are looking for resilient financial performance and businesses that have pricing power and a firm handle on elevated input costs. IT due diligence is also becoming more critical, from both a performance and a security perspective. Companies that can proactively demonstrate these strengths with transparency will be in high demand and benefit from smoother sale processes.

2. Sanctions exposure

Geopolitics were thrust to the fore in 2022 thanks to Russia’s invasion of Ukraine. Cross-border transactions have been complicated by potential sanctions exposure and investors have had to unwind and review ownership structures for any risks. Indirect ownership may not always be immediately obvious and adds to the depth and complexity of due diligence reviews. Investors will need to continue assessing the scope and nature of target group operations and their shareholder structures, while staying on top of the changing reach of sanctions regulations and guidance.

3. Emergent merger enforcement

Geopolitics are also playing into merger controls. Governments have been strengthening their powers to scrutinize investments on national security grounds to protect their interests, some jurisdictions implementing new regimes and others strengthening existing ones. Most EU countries have now embedded active foreign direct investment screening mechanisms. In the US, CFIUS remains as hawkish as ever towards inbound Chinese investments.

It is not just foreign investment that is under the microscope. The European Commission and national authorities continue to intensely scrutinize deals on competition grounds, while in the US the Department of Justice and Federal Trade Commission have been demonstrating aggressive enforcement. There are also discussions and consultations in some Asian jurisdictions about introducing merger regimes, as certain countries consider bringing their competition law in line with international best practice.

4. ESG as a value driver

ESG has become a core ingredient in the due diligence mix. Investors are not only risk assessing basic compliance, but looking to identify material progress and a willingness to engage in areas including energy efficiency, emissions, supply chain sustainability and social aspects such as diversity and inclusive career progression. High-profile blow-ups in 2022 have also brought basic governance back into the spotlight. Without the foundations of rigorous board oversight, as well as basic financial and other risk controls, unseen malfeasance can take root. Any governance deficit or lack of senior management integrity will also mean that ESG reporting is more likely to be unreliable. Investors now see ESG as a point of differentiation between companies and a means of driving equity value from their investment. 

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Get the insights from the experts

We turn to twelve leading global M&A dealmakers for their predictions in the year ahead. Download 2023 M&A Outlook: Q&A with the twelve top Global M&A Dealmakers to see what they had to say.
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