2023 Predictions: What’s on the horizon for M&A?

Having experienced unprecedented levels of M&A activity in 2021 and the first half of 2022, followed by the market uncertainty of Q3 and Q4 of 2022, what can we expect from the M&A landscape in 2023?  Here are some of our key predictions.

Our predictions for what’s hot

Rising interest rates and market volatility, arising from matters such as global influences, government instability to the war in Ukraine, will continue to drive close scrutiny of key metrics given the need for cash flow security and revenue visibility.  The increasingly nationalistic geopolitical approach by countries to protect their own national interests has also increased uncertainty on cross border deals, evidenced not least by the new UK security law (National Security and Investment Act 2022) which came into force in January 2022.

However, we think there’s plenty to be excited about

ESG

Companies with strong environmental, social and governance standards will continue to prosper, as the international focus on sustainable, secure energy supplies continues to grow.  As businesses continue to look for ways to reduce their carbon footprints, this continued shift towards clean-tech presents opportunities for acquisition growth by those looking to invest in the sustainable use of resources such as solar, carbon capture, hydrogen and battery storage, biofuels technology and floating wind platforms.  

Energy

M&A will continue to be used as a fast-track method for the big fossil fuel corporates and other companies to acquire businesses in the renewables space (such as the likes of Lightsource BP or Boralex’s week old acquisition of EDF Renewables’ stake in five wind farm businesses) as corporates pivot away from current energy supplies to renewables.  Investors will also look to prioritise investments in sustainable businesses. 

Although it should be noted that M&A activity in this area may be dampened by the low cost of fossil fuel energy supply in certain developing countries and, also, in developed countries such as the UK, by the Energy Profits Levy and the introduction of the Electricity Generator Levy, the introduction of which has undermined investor confidence resulting in a slow-down in UK investment plans in the energy sector.  Complexities around balancing grid capacity and storage should also not be overlooked. 

Supply Chain

As companies look to strengthen their supply chains following the disruption caused as a result of both Brexit and the Covid-19 pandemic, we expect to see a continuation of onshoring and nearshoring and would expect to see more suppliers being brought in-house via the M&A route.

Telecoms

Use of mobile phones shows no signs of slowing down although market research suggests some consumers will look to retain products from a sustainability perspective or to move to cheaper packages and that operators will be under increased pressure to drive down costs as the cost-of-living crisis continues.  These factors may well encourage consolidation or the growth of new businesses in repair and renewal, and we anticipate this will be a key driver for strategic telecoms M&A in 2023.

Technology

The healthcare (particularly tech healthcare) and technology sectors will continue to drive M&A activity as product development continues to develop apace and the need for more sophisticated technology to cater for an increasing aging population continues.  However as the product lifecycle shortens, the risk that a process, product or technology used or produced by a company will become obsolete increases.  Market research supports the view that acquisition focus will shift away from platform deals which provide solutions involving a variety of case uses in favour of bolt-on acquisitions of point solutions which aim to address a single use-case.

How will 2023 affect UK businesses?

Although macroeconomic growth is expected to slow in the UK and Europe, deal valuations are currently lower than the peak of 2021 (estimated to be down 15% from 2021) and early indications are that 2023 will see valuations back to historical averages. This should mean entry prices on deals are now far more palatable and cash rich buyers will be able to capitalise on the current market conditions  

The UK continues to hold significant appeal to overseas investors despite the continued uncertainty around the UK economy.  The strength of the US dollar, in particular, is expected to drive cross-border deals into territories where local currency is weak (such as the UK), especially where assets developed by businesses have global appeal.

Summary

Despite the current financial and geopolitical uncertainties we are facing, the pipeline for 2023 is not expected to fall off a cliff.  2023 could be a year of stabilisation for the M&A market following a cautious end to 2022 and we remain optimistic in light of certain trends such as the rise in ESG regulation, the increased demand for ethical investment in renewables and the continued interest by buyers for companies demonstrating profitable growth and cash flow resilience.  Everything points to a greener future for M&A in 2023.

Finally, as ever, especially in uncertain times, businesses with higher quality of earnings and growth potential will always succeed in any M&A scenario.  

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2024.

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