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The Deal in Focus: headwinds aside, M&A future looks bright

18 AUGUST 2022

Following an extraordinarily robust M&A market in 2021, corporate M&A leaders remain upbeat about their deal-making prospects – in spite of significant economic and geopolitical challenges.

Releasing the fifth edition of Deloitte’s annual survey – The Deal in Focus: Heads of M&ADeloitte National M&A Leader, Ian Turner, said: “Last year, we saw M&A bounce back to record levels from the darker days of COVID. Now, in 2022, the market is being offered new opportunities (and risks) from the ongoing disruptive and evolving landscape.

“But with an eye to the next 12 months, there will be continued deep pools of capital availability, for high quality inorganic targets, and we certainly remain optimistic that the glass of opportunity will remain half full. M&A will continue to be a fundamental part of the corporate arsenal, helping businesses to build resilience to withstand evolving economic conditions and assisting growth drivers, while also continuing to accelerate business transformation.”

Key survey report points (and with New Zealand M&A leaders also surveyed for the first time):

  • 83% expect the number of deals to increase or remain stable in the next 12 months, down slightly from 95% in 2021
  • 80% still believe current economic conditions are supportive of M&A activity
  • 89% are at least moderately confident that credit will be available at favourable conditions
  • 80% listed valuations as the greatest challenge to M&A success
  • Nearly 50% are re-evaluating or planning to re-evaluate their portfolio to acquire or divest through the lens of ESG.

Deloitte M&A program leader, Jamie Irving, said: “The low interest rate environment and buoyant equity markets, coupled with strong company balance sheets, resulted in phenomenally high deal volumes in 2021, and there was little evidence that anyone was battening down the hatches.

“The strong run of deals is far from over, but twelve months later, the market has evolved yet again. We’re still seeing large cash reserves on balance sheets, plenty of private equity dry powder and strong debt markets – albeit with higher borrowing costs – but the competitive deal environment has also increased the focus of M&A on delivery of the deal thesis, including the importance of integration and the realisation of synergies.

“Corporates are looking to M&A to grow their core portfolio, accelerate transformation and combat disruption, but the uncertain economic outlook is making valuation of assets a challenge, which may affect the speed of the transaction process.”

Spotlight remains on ESG

“From target selection to integration or separation, there is a growing understanding that ESG factors are crucial to the M&A process,” Irving said. “It’s already being considered in more deals than not. Looking ahead, value creation is likely to become the dominant motivator for embedding ESG in M&A strategies.

“ESG has also become an influence in portfolio rebalancing and redesigning, with many M&A leaders re-evaluating or planning to re-evaluate their portfolio to acquire or divest through the lens of ESG. Despite this progress, the market is still grappling with the relationship between ESG and value, and quantifying the value of ESG in a deal remains a real challenge for many.

“We’re certainly seeing a continual maturing in the market on what embedding ESG in the context of a deal entails; and how it is connected to core business priorities. As ESG data becomes increasingly standardised, it is expected that quantification practices between ESG and value will continue to evolve.”

And the outlook?

“M&A has long been a smart tool to help companies grow and reach their potential, especially in challenging markets. The year ahead is set to prove that reality once again,” Irving said.

“Deal activity is forecast to remain strong, and there will still be a deep pool of money available for good quality transaction targets.

“M&A leaders are well aware of risks over the economic and geopolitical outlooks, but a high proportion are also confident there will be growth opportunities in their sector.

“Expediting synergy capture and the value realisation that comes with this is seen as a higher priority, and cross-border M&A is also still on the cards for many, with the Asia Pacific region remaining the most attractive geography for acquisitions.

“In this environment, one clear message to emerge from this year’s survey is that M&A leaders should be prepared, meaning knowing what targets they do and don’t want to acquire and those that they don’t want their competitors to acquire. The challenge will be to maintain deal momentum and focus on the long-game in a market facing a myriad of distractions.”