10 April 2023

2023 M&A Outlook

Foley & Lardner


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There was great speculation that the decreased valuations of 2022 would lead to a surge in M&A activity; however, activity last year was lower than anticipated. Worldwide...
United States Corporate/Commercial Law
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Foley Forward: Trends 2023

There was great speculation that the decreased valuations of 2022 would lead to a surge in M&A activity; however, activity last year was lower than anticipated. Worldwide, deal value for M&A fell by 37% in 2022 compared with the prior year. 2022 saw the largest year-over-year percentage decline in deal volume since 2001. Inflation, unrest abroad, volatile capital markets, and rising interest rates are just a few of the factors causing the decline.

What does the M&A forecast look like for 2023? Will we see an uptick in activity, or will we continue to see a much more cautious approach from buyers and targets? Below are some of the predictions making headlines.

A Return to Normal

Many analysts have been predicting that we may see a return to pre-2021 activity. While we saw a precipitous drop in deal value and volume for 2022, this is due, in large part, to the incredible uptick we saw in M&A in 2021. 2021 was a blockbuster year for M&A with a historic number of transactions. That kind of activity is challenging to duplicate and exceed year after year. Leaving out the anomaly that was 2021, activity in 2022 was comparable to 2020. So, we may simply be experiencing a return to a more normalized M&A activity level as we move into 2023.

There Could Be a Spike in Some Areas

In 2022, tech deals accounted for approximately 20% of the value of all deals. In 2023, many expect tech to continue to drive M&A. In an interview with The Information, Goldman Sachs bankers told the outlet that consolidation among private tech firms could pick up this year. This could be particularly true for those startups who had to alter their IPO plans. These companies are likely exploring alternative exit strategies, and decreased valuations will make acquisitions in this space more attractive.


There is also some speculation that the FinTech industry could see higher levels in 2023. This has been an area that has seen steep drops in valuations and a roller coaster year in 2022. With valuations down, FinTech investors with a lot of dry powder will be more likely to deploy this capital in 2023. Many are also predicting market consolidation in the FinTech industry which may drive increased M&A for FinTech companies.

Ernst & Young is also predicting that an appetite for tech deals will return in 2023, citing a recent EY study that found "72% of tech CEO respondents plan to pursue M&A in the next 12 months, compared with 59% of CEO respondents across all industries." Acquisition potential could be especially true for the more innovative technology startups as companies look to take advantage of lower valuations and expand into new, highly innovative areas.

Interest Rates vs. Dry Powder

Borrowing money is considerably more expensive due to multiple spikes in interest rates. Gone are the days of virtually free money. We have yet to determine what the Federal Reserve has in store for the remainder of the year, but markets view interest rate increases over the next few months to be probable. That means that it will continue to be expensive to borrow moving forward. However, the Federal Reserve may hit the top of its interest rate cycle and rates could level off for the second half of the year.

While the higher cost of taking on debt makes acquisitions more challenging, private equity firms have an unprecedented amount of dry powder in their reserves. These buyers can also use accruing, participating, and pay-in-kind dividends with a senior liquidation preference to structure around the interest. They will be looking to use their dry powder as valuations become more attractive. In addition, strategic buyers have strong balance sheets relative to prior recessionary periods, and will also be looking to take advantage of attractive valuations. The combination of these factors has the potential to bolster activity this year.

Due Diligence Will Continue to Be a High Priority

Due diligence will continue to be a higher priority for buyers as they look more closely than ever into their targets. In 2022, buyers took more time to conduct diligence on their targets, and this lengthening of time for the due diligence process will likely continue through 2023. As the market swings to favor buyers, we can expect them to use this leverage to understand the impacts of interest rates and other market factors as well as its ability to implement a growth strategy and any anticipated business synergies. Target companies will need to be prepared on their end, with financials and operations ready to face greater scrutiny.

It is difficult to predict with certainty the level of M&A activity in 2023, as market conditions and other factors can change rapidly. However, if the economy remains stable and valuations remain attractive, it is possible that we could see an increase in activity in M&A for 2023.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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