Global events in 2022 played out differently than expected at the beginning of the year. War, inflation, surging interest rates, and the lingering effects of the pandemic all made for a challenging year. This Year’s Litera M&A Report shows that all those factors impacted M&A performance in 2022. Last year began with a sense of optimism and momentum in M&A, but 2023 starts on a much more cautious and uncertain note. Yet the market data shows that, while 2022 performance was not as good as many had hoped, the overall result was better than one might have feared mid-year.
M&A Market Trends Heading Into 2023
Compared to years past, global M&A activity was on a comparable level with several pre-pandemic years, even if it was significantly down from 2021 (with 33,187 deals through November 2022 vs. 39,358 in 2021). Deal value, at $3.8 billion, is comparable to totals in the pre-pandemic years of 2016-2019.
Based on PitchBook data, this new report from Litera provides legal M&A teams with a roadmap to a resilient marketplace that has performed unevenly across sectors and is likely to do the same in 2023. Some of the market directions identified in the report include:
- Dealmaking Trends. Despite an overall resilient year, activity slowed considerably in the latter half. High interest rates will impact PE groups that have relied on inexpensive debt financing. In the face of higher interest rates, target companies must demonstrate profitability and strong cash flows.
- Regional Trends. North America and Europe continue to dominate M&A activity, with the two regions accounting for 88.1% of deal value globally. Europe is facing a more challenging economic environment, which could lead to increased cross-border activity with North American buyers and European targets dominating.
- Valuation Trends. EV/EBITDA multiples declined in 2022 to 9.3x, down from 11.1x in Q4 2021. The dip reflects in part the fact that equity contributions have slipped from 6x to 5x, as debt contributions remained steady. Debt considerations are more important for PE as debt financing becomes more expensive.
- PE Trends. PE investors had spent 2020 and 2021 fundraising, and investors expect them to invest that money even under economic headwinds. PE acquisitions are now 36.6% of global M&A, up from 23.4 a decade ago.
Expert Perspectives on Mergers & Acquisitions
The report includes commentary on the state of the market from Ray Fang and Tessa Agar, both partners at Goodwin Procter in London. Among other things, they note the impact inflation and rising interest rates have on the market. Here again, private equity is relatively strong and actively searching for opportunities to deploy its dry powder. Real estate is another market where - at least in theory - returns have a lower correlation to inflation, especially in Europe. But the volatility of interest rates has slowed growth costs have increased, so real estate values are under stress.
Fang and Agar also note that, despite general economic conditions, some sectors like leisure and entertainment still enjoy a post-pandemic rebound, and companies in those spaces could become appealing targets.
In general, they see 2023 as a year where clients reset pricing expectations, deal metrics, and risk appetites and will more generally reassess and refresh their business models. One possible area for increased activity is in “green deals,” transactions motivated by environmental factors, ESG, and sustainability, as those values continue to penetrate multiple industries.
These insights and more detailed analysis are available in the full Litera 2023 M&A Report, now available for download.