M&A in 2023: A complex but optimistic outlook for deal-making

2022 M&A Market Performance and Drivers

• Global M&A activity declined sharply in the second half of 2022 following record highs in 2021, driven by rising interest rates, inflation, and geopolitical uncertainty.
• Overall deal volume in 2022 remained on par with five-year averages, excluding the exceptional 2021 performance.
• Private equity deal activity experienced a "tremendous slowdown" in the second half of the year, dropping from its traditional 30–40% share of the market due to tightened leveraged finance conditions.
• Strategic M&A activity remained robust throughout 2022, supported by companies with strong balance sheets and significant cash reserves.
• Structured transactions, including spinoffs, split-offs, and corporate simplifications, became prevalent as investors sought to invest in single-sector entities and conglomerates sought to unlock value by separating businesses trading at disparate multiples.
• Cross-border deal activity suffered the most significant decline, impacting long-negotiated international transactions, while regional strategic transactions gained relative prominence.
• Valuation declines created a divergence between public and private market values, widening the gap specifically in Europe and challenging deal execution.
• The valuation paradigm shifted, with boards placing greater emphasis on the cost of capital and a single dollar of earnings rather than pre-pandemic growth multiples.
• Sector-specific trends emerged: large downgrades in valuations within the technology sector contrasted with continued robust M&A in industrials and healthcare, particularly in big pharma refilling drug pipelines.
• Mega-deals exceeding $10 billion, such as Microsoft's acquisition of Activision Blizzard, remained resilient, driven by investment-grade financing availability and long-term strategic positioning.

2023 Outlook and Future Trends

• Goldman Sachs economists expect the global economy to avoid a recession in 2023, though market volatility is projected to persist.
• Underlying drivers for M&A in 2023, including technology shifts and ESG focus, remain strong and are arguably accelerating compared to 2021 levels.
• Private capital liquidity is at record highs globally, creating a structural imperative for capital deployment despite financing headwinds.
• Market recovery hinges on stability and predictability within financing markets, specifically the ability to price and syndicate debt without "hung deals," rather than a return to historically low interest rates.
• US corporate buyers view current valuations as attractive, with some boards feeling more confident deploying capital at today's levels than they did 12 months prior.
• US private equity funds are increasingly targeting European assets for the first time, driven by valuation gaps and the purchasing power of the US dollar.
• Activism activity reached record levels in 2022 despite market volatility, with a distinct skew toward large-cap companies and campaigns focused on operational improvement and capital allocation.
• The "universal proxy" rule implemented in September 2022 is cited as a catalyst for evolving activist campaign dynamics.
• Future activism is increasingly incorporating ESG themes as a core element of attacks on management and strategy.
• CEO confidence is being redefined to assess foundational resilience against "black swan" events (e.g., supply chain, geopolitical instability) rather than just near-term earnings forecasts.
• Long-term capital allocation needs, particularly in the energy transition and global infrastructure, are projected to require trillions of dollars in investment over the coming decades.
• Goldman Sachs remains bullish on the medium-term M&A outlook, anticipating that the need for capital reallocation and strategic repositioning will drive deal volume as financing markets stabilize.

Financing Landscape and Market Mechanics

• Investment-grade financing markets are described as "well-functioning" despite higher costs, providing a key advantage to large strategic acquirers.
• Sub-investment grade corporate financing remains materially more expensive, restricting deal-making capacity for smaller entities.
• Private equity transactions in 2022 increasingly utilized bespoke capital structures, including lower leverage ratios, direct lending markets, and all-equity funding with plans for future refinancing.
• Private equity deal sizes have trended smaller, allowing for higher equity mixes and reduced reliance on complex leverage structures.
• Public-to-private transactions, which typically require long-duration financing, declined significantly in volume during the second half of 2022.
• Corporate clients with high cash balances relative to historical norms have gained strategic flexibility to execute buybacks or M&A without immediate external financing.
• The "risk" profile of the market has shifted from purely cyclical to structural, with boards prioritizing scale, infrastructure, and supply chain fortification to withstand long-term instability.