Deloitte M&A Index 2023 Q4

Based on data published by Capital IQ, the number of transactions fell from a total of 2,917 (recorded in the second quarter of this year) to 2,436 in the third quarter of 2023. This represents a decline in activity of approximately 16.5%. 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 511 billion to USD 487 billion. This decline continues to reflect overall economic uncertainty, lower corporate profits and higher capital acquisition costs. The Deloitte M&A Index predicted a more moderate decline to 2,810 transactions for the third quarter of 2023.

“Amidst the dynamic situation in the area of mergers and acquisitions, where market multiples are falling, there is a unique opportunity to acquire assets at more favourable prices. Experienced investors and companies can thus consolidate, diversify and optimise their portfolios.”

-Jan Brabec, partner in the financial advisory department at Deloitte Czech Republic

Given the changing market situation, there are compelling reasons why strategic investors should consider acquisitions. A clear indicator of this opportunity is the downward trajectory of EV/EBITDA market multiples, particularly for strategic investors. The record value of 18.2 in 2021 fell to 17.5 in 2022 and further to 11.5 in 2023. In contrast, market multiples for private equity investments have also fluctuated, moving from 18.2 in 2021 to 21.6 in 2022, but this year's decline to 14 underscores the general shift towards financial transactions. For companies and investors who are able to decode these trends, the situation is clear. The market downturn is an opportunity for M&A activity, as companies can take advantage of current developments to consolidate, diversify and expand their portfolios, all while optimising costs.

According to the latest data, inflation in the eurozone has fallen to a two-year low, while the European Central Bank has raised rates to their highest level since 2008 and indicated that rates are nearing their peak. Supply chains have largely recovered, and PE firms continue to hold record amounts of dry powder. These positive factors may contribute to increased confidence among investors and strategic players, particularly with regard to expanding their M&A activities. Markets therefore remain poised for a gradual recovery.

"The market is affected by a number of negative factors, particularly inflation, interest rates and geopolitical uncertainty. As a result, many companies are focusing on cost reduction and financial resilience. The third quarter of this year was slower in terms of mergers and acquisitions, but given several current positive factors, there is potential for a market recovery in the last quarter of this year. The Deloitte M&A Index predicts favourable growth at the end of the year, which I see as a glimmer of optimism in these uncertain times."

-Miroslav Linhart, Managing Partner, Financial Advisory Services, Deloitte Czech Republic

In the current 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 companies to adapt and thrive in an ever-changing environment. In the coming period, we can therefore expect to see primarily an increase in transactions in the medium-sized and small business market, driven mainly by the active implementation of strategic growth programmes. These transactions will form a solid foundation for future positive market development.

This type of transaction will be strengthened in particular by factors that can alleviate the general risks associated with market reality and create new investment opportunities. These include: 

• M&A activity continues to be strengthened by cash reserves; in the middle of this year, the unallocated balances of private equity funds (‘dry powder’) amounted to approximately USD 2.49 trillion. Investors who currently have a record amount 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 lingering pandemic, the war in Ukraine, trade tensions between the US and China, and differing economic conditions in different regions. As a result, cross-border transactions were significantly affected and saw a sharp decline. However, with several of these factors gradually subsiding, 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 aspects more significantly into their M&A decision-making processes.

You can download the new Deloitte M&A Index 2023 Q3-Q4 here.