Willis Towers Watson (WTW), a leading global advisory and brokerage firm, expects deal-making to remain active in 2023 despite continued uncertainty and major obstacles, and recession fears will cause a “small object effect” as larger deals lose popularity, the WTW website notes.
It also notes that the global M&A market remains remarkably resilient during a year of unprecedented uncertainty. Mergers and acquisitions in 2022 have been affected by a host of factors – geopolitical turmoil, soaring inflation, rising interest rates and fears of a global recession – that will continue into next year. In such a difficult economic environment, it’s harder for buyers, especially those who go beyond their borders, to confidently predict the profitability of potential targets.
“An unprecedented number of disruptive forces have created barriers to deals, but they also create opportunities. The fundamentals behind deal making are still in place, and with valuations dropping after the historic levels reached in 2021, both strategic and financial buyers will take advantage of better growth opportunities,” notes Duncan Smithson, senior director of mergers and acquisitions, WTW.
WTW has identified five major M&A trends for 2023. The first trend is the return of the “small item effect,” which will result in buyers increasingly focusing on smaller deals.
The second is opportunities in distressed M&A, as a challenging operating environment will lead to more companies getting rid of non-core assets in pursuit of long-term value creation. Some deals will be strategic – energy companies, for example, will continue to get rid of carbon-intensive assets – while continued economic uncertainty will force other companies to sell assets – the retail and leisure sectors often have higher operating leverage. This can create opportunities for buyers to expand product lines, services or supply chains at a reduced cost.
The third is technological mergers and acquisitions: from defense to offense. The need for the speed of digital transformation across all industries, accelerated by an era of volatility, will keep deal-making in the spotlight, and a wave of acquisitions in the artificial intelligence and machine learning markets is expected in 2023. Whether it’s introducing new technology and talent or reaching new markets, mergers and acquisitions continue to be the fastest way to transform businesses to remain relevant and sustainable in today’s fast-changing world.
The fourth is geopolitical impact. Because of the many supply chain disruptions during the pandemic, which is expected to continue into 2023, companies will consider M&A deals to improve their operational resilience. The vulnerabilities that continue to lead to problematic deal flows in the hardest-hit sectors will also be catalysts for companies to reinvent their own supply chain networks. By attracting or locating suppliers closer to production, businesses will seek greater security and resiliency.
Fifth, the focus will remain on environmental, social and governance (ESG) issues. As more investors view ESG as fundamental to financial success, businesses will face increasing scrutiny and pressure on climate risk transparency, social justice, sustainability and corporate governance. “Green” due diligence is undoubtedly on the rise.
“As we approach 2023, economic uncertainty will continue to define and challenge mergers and acquisitions, but there will also be opportunities. That same volatility will provide its own incentive for deals, as strategic buyers look to capitalize on lower-priced deals to confront current market challenges and realize transformational growth,” Smithson notes.
