A digest of M&A trends in late 2023
Despite various more optimistic southsayers, M&A activity in Europe declined for the third consecutive quarter in Q3 2023, reaching the lowest level of deal value and count since 2013 according to PitchBook’s Global M&A Report of October 25. The drop in M&A appetite coincided with the cycle of interest rate increases by the European central banks, which aimed to curb high and persistent inflation caused by COVID-19 and the Russia-Ukraine war. Higher borrowing costs, lower valuations, and reduced attractiveness of European targets for North American acquirers contributed to the slowdown in dealmaking.
An analysis of our own PwC Annual CEO Survey highlights that technology, digital and environmental, social and governance (ESG) transformation are the main themes shaping M&A activity across sectors, as CEOs seek to acquire new capabilities, assets and markets, or divest non-core or underperforming businesses. For dealmakers the hope remains that cash-rich corporates pursue strategic deals, PE firms take advantage of public market valuations, and divestitures drive deal flow for the mid-market and contribute to an increased M&A activity in the months to come.
In challenging times as these, preparation and due diligence are critical for successful deal outcomes, as buyers and sellers face more scrutiny, uncertainty and complexity in the current market environment. For buyers, it is imperative to have a clear M&A strategy, target search criteria, financial guardrails, and playbooks for integration. My former colleagues from The Boston Consulting Group (BCG) list time-tested lessons from 20 years of the BCG M&A Report and point to the importance of building experience through regular dealmaking to create superior returns and avoid common pitfalls, but also mastering the art of timing by seeking opportunities in downturns and avoid arriving late in the M&A or business cycle.
For a small economy like Austria, there is opportunity in smaller deals that are simpler to evaluate, manage, and assimilate, rather than large-scale deals that often erode value. It is also easier to overpay on small deals while avoiding over leveraging, as BCG recommends. Smaller acquisitions are also more likely to integrate successfully. A successful transaction largely depends on its implementation, but more than half of all business transactions fail in post-merger integration (PMI).
From a legal point of view, there is not that much new going on according to CMS European M&A Study 2023. The authors find that despite all the turmoil a continuity in standard seller and buyer positions prevails, with little movement in most of the deal metrics from previous years. Of course, the use of earn-outs has continued to increase, especially for small and medium sized deals, as a way of bridging the gap in pricing expectations and sharing the potential upside in performance after closing. Environmental, Social and Governance (ESG) factors are becoming more relevant and important in M&A transactions, and the study indicates that ESG aspects are only just beginning to appear specifically as part of the due diligence process and in transaction documents. It seems likely that ESG factors will become increasingly incorporated into M&A strategy in the future.
Above all that looms Artificial intelligence (AI) that is creating both opportunities and threats for dealmakers, as it disrupts business models, enhances decision-making and increases the demand for scarce talent.
