Will M&A Reach a Turning Point in H2 2023?

Global mergers and acquisitions (M&A) deal flow got off to a slow start in 2023, continuing the downward trend seen in Q4 2022 as dealmakers struggled against rising inflation, geopolitical tensions and stubbornly high interest rates. Then came an unexpected blow: a banking crisis in which Silicon Valley Bank (SVB), Signature, Credit Suisse and First Republic all succumbed to a flight of deposits. Shockwaves rippled across even the most robust sectors, further hindering deal financing and overall M&A activity.  

After showing signs of life with a burst of early-stage deal activity at the end of Q1 2023, M&A was again subdued in Q2. So, what’s in store for M&A in the second half of 2023? Has the deal market finally bottomed out?  

Counting on market resilience 

From my perspective in North America, a lot has changed since the beginning of the year, and we may be finally approaching a turning point in M&A deal flow. Inflation is slowing and interest rates may be nearing their peak. And while those vast stores of dry powder we’ve been hearing about for some time are still waiting to be deployed, investors will undoubtedly show more confidence as the outlook becomes clearer.  

Absent a reversal of the current macroeconomic challenges, M&A dealmakers are still looking for ways to grow inorganically and create value. Presently, we’re seeing a continued rise in mid-size deals. As the wait for credit stability continues, investors are pursuing smaller, less complicated deals that require less leverage to execute and draw less regulatory scrutiny. Middle-market transactions will continue to provide important opportunities for strategic growth and transformation, as big-ticket plays remain less viable. 

Despite the decrease in megadeals resulting from challenging borrowing conditions, recession fears and increased regulatory oversight, well-capitalized buyers are still able to finance larger deals more easily. Some of the major global transactions of H1 2023 include Pfizer’s acquisition of cancer biotech Seagen for USD 43 billion, ONEOK Inc.’s USD 19 billion purchase of Magellan Midstream Partners and Bunge Ltd.’s USD 17 billion merger with rival Viterra Ltd.  

Competition for bargain opportunities 

Investors with less cash on hand can find discounted opportunities to enter new markets and build strategic partnerships by way of lower valuations and distressed assets. The thriving private credit and direct lending industries are also helping buyers overcome financing challenges at a time when syndicated offerings are declining. But there will be plenty of competition among buyers looking for steals, especially with record levels of PE capital sitting on the sidelines.  

Evolving bidding processes are also impacting competitive dynamics on the buy-side. Rather than running an open bidding process, some sellers are engaging smaller numbers of interested parties in one-on-one discussions to create interest around their offering, which can pay off in the future if a deal isn’t consummated immediately.  

Q3 2023 outlook 

While some dealmakers are seeing green shoots, significant obstacles remain which could continue to hamper M&A transactions. Cautious investor sentiments and regulatory scrutiny are contributing to lengthy, complex diligence processes. And then there’s the matter of price multiples, on which buyers and sellers still aren’t seeing eye to eye in terms of valuations. 

Here in the U.S., the Federal Reserve’s efforts to control inflation are still vexed by strong employment numbers, and the expected implosion of commercial real estate values could cause even more tightening of credit availability as lenders are forced to become landlords.  

From a global perspective, there are plenty of storylines to track, including China’s protracted rebound from heavy COVID-19 restrictions and escalating geopolitical tensions with the U.S.  

Which regions and sectors are poised for growth in Q3 2023? SS&C Intralinks’ quarterly Deal Flow Predictor leverages early-stage transaction data from our platform to provide a highly accurate prediction of M&A deal flow. In addition to offering valuable insights for dealmakers, this quarter’s issue includes a special feature on the evolving role of environmental, social and governance (ESG) concerns in due diligence.  

I invite you to download the report here.