Deloitte M&A Index 2023 Q2-Q3
In line with the forecast in the previous edition of the M&A Index, the market cooled further in the second quarter of 2023, with the number of transactions approaching 2020 levels.
The second quarter was marked by the ongoing geopolitical crisis, rising interest rates, increased capital costs and stricter regulatory oversight, which posed a significant challenge for investors and business owners alike; among other things, they also faced declining valuations and were hesitant to sell at prices lower than those at the beginning of 2022. In addition, the environment of rapidly rising interest rates effectively halted the capital loan markets, which significantly limited the ability to invest with leverage in LBOs (transactions in which a company is purchased by a financial investor, such as a PE fund, using borrowed funds) and thus limited the ability of investors to raise the necessary funds to carry out large transactions. In the context of overall uncertainty and limited access to investment – factors that have been actively influencing the M&A markets since the end of 2021 – the Deloitte M&A Index for Q3 2023 predicts a further, albeit more moderate, decline in the number of announced transactions to 2,810, a decrease of approximately 3.7%.
Based on data published by Capital IQ, the number of transactions fell from a total of 3,237 (recorded in the first quarter of this year) to 2,917 in the second quarter of 2023. This represents a decline in activity of approximately 9.9%. In addition, the total value of transactions, measured as the sum of the value of transactions completed in the last twelve months (LTM), also declined from the original USD 645 billion to USD 511 billion. This decline continues to reflect overall economic uncertainty, lower corporate profits and higher costs of capital.
The M&A Index predicted a decline to 2,805 transactions for the second quarter of 2023 (a difference of only about 3.8% from the actual results). The results are therefore comfortably within the predicted range.
“Despite the economic downturn, there are several potential catalysts that could boost M&A activity in the second half of this year. Well-capitalised companies are actively seeking acquisitions within their core businesses, with sectors such as healthcare, technology and energy showing promising potential.”
-Jan Brabec, Partner in the Financial Advisory Services Department at Deloitte Czech Republic
Although the predicted trend in the number of transactions remains negative for Q3 2023, it must be viewed in the context of the overall macroeconomic situation. The rapid decline that characterised 2022 and continued into early 2023 is beginning to weaken, and a gradual stabilisation can therefore be expected. This stabilisation is inherently linked to positive economic forecasts and a comprehensive improvement in the macroeconomic situation. Inflation is showing signs of slowing down and interest rates appear to have peaked. The crisis associated with the US debt ceiling has been averted, bringing relief to financial markets. The idea that the inflation crisis can be resolved through a soft landing (i.e. without the market tipping into recession) is becoming increasingly realistic. This positive development is contributing to increased confidence among investors and strategic players, particularly with regard to expanding their activities in the area of mergers and acquisitions. The markets therefore remain capable of a rapid recovery.
The general increase in investor confidence can therefore be attributed primarily to a number of factors that implicitly strengthen the market's ability to recover quickly. Joint-stock companies and private equity funds continue to hold significant reserves of unused capital (dry powder). In addition, the volatility of company valuations is gradually easing, especially compared to previous slumps, which is fuelling optimism among investors and strategic players. Despite strong resistance, strategic and financial investors continue to show strong interest in mergers and acquisitions involving significant targets in Europe. These factors significantly increase the market's ability to recover quickly, and it remains likely that investors will continue to focus on seeking investments in companies that have a significant market position, strong financial results and a functional business strategy.
‘Looking ahead, there are several factors that point to a possible improvement in the M&A landscape. Inflationary pressures are easing, and there are signs that interest rates have peaked. Optimism is also being fuelled by the buzz around disruptive technological innovations such as generative artificial intelligence.’
-Miroslav Linhart, Managing Partner, Financial Advisory Services, Deloitte Czech Republic
In today's volatile market, active portfolio management remains key to improving corporate strategies and optimising business models. Strategic acquisitions, partnerships and, above all, divestitures and carve-outs remain an essential part of risk management. Investors must continue to carefully evaluate their corporate portfolios and consider divesting non-core assets as part of ongoing transformation strategies. Such steps enable organisations to adapt and thrive in an ever-changing environment. It will therefore be these transactions – not mega-deals, which have been declining since peaking in 2021 – that will dominate developments in the M&A market. In the coming periods, we can therefore primarily expect an increase in transactions in the medium-sized and small business market due to the active implementation of strategic growth programmes. These transactions will form a solid foundation for future positive market developments.
This type of transaction will be primarily driven by factors that can alleviate the general risks associated with market realities and create new investment opportunities. These are primarily:
- Well-capitalised companies are likely to seek acquisitions within their core businesses. Sectors that could see increased activity include healthcare, technology and energy (particularly in connection with the energy transition).
- M&A activity continues to be bolstered by cash reserves; at the end of 2022, unallocated private equity fund balances (‘dry powder’) amounted to approximately USD 1.96 trillion. Financial sponsors, who currently have record amounts of capital at their disposal, are expected to use these funds for strategic acquisitions.
- Cross-border mergers and acquisitions are expected to return, indicating an increased number of transactions between companies from different countries. In 2022, the global economy faced many challenges, such as the pandemic, trade tensions between the US and China, and differing economic conditions in different regions. As a result, cross-border transactions were significantly affected and declined. However, as the impact of these obstacles gradually subsides, a recovery can be expected.
- There is an increasing emphasis on environmental, social and governance (ESG) factors, which are becoming increasingly important to both investors and consumers. As a result, companies are expected to incorporate ESG considerations more significantly into their M&A decision-making processes.
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