Interview, Conference Presentation, Statement
M&A in 2023: A complex but optimistic outlook for deal-making
- Goldman Sachs economists anticipate a recession-avoidance scenario for the economy, though they forecast increased volatility and market fluctuations ahead.
- While 2022 deal volumes matched five-year averages excluding the 2021 anomaly, private equity activity experienced a significant slowdown in the second half of 2022 due to financing constraints, a trend expected to persist until lending conditions improve.
- Technology shifts and ESG considerations are projected to accelerate as primary drivers of M&A activity in 2023, alongside a continued focus on corporate simplification via spinoffs and split-offs to unlock value and eliminate conglomerate discounts.
- Liquidity in the private capital system remains at record highs, creating pressure to deploy capital and driving expectations that this surplus will catalyze a recovery in deal activity once financing markets stabilize.
- Cross-border strategic transactions face continued material pressure and are not expected to see a robust return in the near term, particularly due to pandemic-related travel and negotiation difficulties, though U.S. clients may increasingly target European public assets due to valuation gaps and currency overlays.
- Fundamental valuations are expected to decline due to rising interest rates and weighted average cost of capital, with tech sectors facing the largest downdrafts, while industrials and healthcare are forecast to maintain robust M&A activity.
- Mega-deals exceeding $10 billion involving investment-grade entities are expected to remain resilient due to access to open financing markets, whereas sub-investment grade financing remains materially more expensive, likely leading to lower leverage levels and smaller deal sizes in private equity.
- Corporate clients are expected to feel incrementally more comfortable deploying balance sheets at current lower valuations, with strategic priorities regarding repositioning and supply chains remaining paramount despite valuation headwinds.
- Activist activity is projected to continue globally with a skew toward larger campaigns on companies with market caps above $10 billion, increasingly focusing on operational improvements, balance sheet management, and capital allocation, while the universal proxy rule is seen as a catalyst for new dynamics.
- The financing market is identified as the primary determinant for whether M&A pace rises in 2023, with a feedback loop expected where stability and confidence in valuation settlement restore deal activity.
- Long-term drivers include massive investment requirements in the energy transition and infrastructure measured in trillions over the next several decades, which are expected to increase capital allocation through M&A to meet global demands.
- A robust return of deal activity is not solely contingent on interest rates returning to previous lows but rather on stability and underwriter comfort with pricing terms, with public-to-private transactions remaining infrequent until financing markets achieve predictability.
- M&A business sentiment remains bullish in the near-to-medium term as an inevitable component of capital allocation, with stability increasingly dependent on foundational drivers like supply chain resilience against black swan risks.