M&A Forecast: Dealmakers Prepare For A Strong Finish To 2023

M&A activity will increase globally in Q3 and Q4 of 2023, according to Norton Rose Fulbright’s latest global M&A trends and risks report. However, dealmakers should be aware of the obstacles on the road to a successful deal.

The survey findings show that the majority of respondents expect an increase in appetite for M&A in 2023, especially in the U.S. and Canada. Further, dealmakers should prepare for a competitive market as most respondents expect to be buyers rather than sellers in 2023 with the deployment of pent-up dry powder cited as a key feature to deal-making in 2023.

The U.S. takes the lead as the highest projected growth in inbound M&A activity in 2023, with respondents pointing to digital and physical infrastructure, the size of the U.S. market and the quality of targets.

• Companies may need to rely on cash reserves in the continuing tight financing environment

CEOs looking to deal should be aware that while activity may rise, financing is a concern for dealmakers everywhere. The survey results suggest that the increasing cost of financing globally will impact the dealmaking capabilities of parties and lead executives to rely on non-traditional banking sources. More than 40% of respondents expect securing deal financing to continue to be difficult in the U.S. and Canada, citing that the ability to secure financing will depend on the extent of regional economic risks while highlighting the heavy losses that financial institutions are facing as a hurdle to lending. However, while conditions in the U.S. and Canada are expected to be tighter in 2023, the environment will not be as tricky to navigate as some regions like Europe and the Middle East. Respondents, however, are hopeful that the U.S. Federal Reserve will begin trimming rates before the end of this year.

• Regulatory challenges expected in M&A activity globally

Additional obstacles for dealmakers on the road to a successful deal in the near term include stricter regulatory environments, local risk and inflation. Political risk and the concern over potential sanctions has been heightened due to the Russia-Ukraine war.

Survey respondents expect stricter regulation to be one of the biggest impediments to dealmaking in 2023. In the U.S. and Canada, cybersecurity-related regulations are expected to most suppress M&A activity in 2023, which can likely be attributed in part to the increasingly stringent line on cybersecurity due diligence taken by deal parties in U.S. transactions in the wake of recent and well-publicized security breaches.

The increased prevalence of data protection and privacy regulations since the establishment of Europe’s General Data Protection Regulation and the California Consumer Privacy Act has put a laser focus on diligence in those areas, and thus data protection and privacy regulations are expected to have an impact on dealmaking, particularly in developed regions as this factor is cited most frequently in respect of M&A in Europe and the Middle East, Australia and the U.S. and Canada.

Executives should be cautious in their market expansion strategies as antitrust regulations are seen as a significant obstacle to M&A in all regions globally, most notably in Asia and the U.S. and Canada. Moreover, 94% of respondents mention the U.S. in forecasting an increase in antitrust-related scrutiny in 2023.

The vast majority of respondents expect the level of ESG-related scrutiny to increase in 2023 across all regions as greenwashing – the act of making misleading or unsubstantiated claims about the environmental credentials of products and services – is at the front of mind for many respondents.

• R&W insurance to increase in most sectors

While the use of representations & warranties (R&W) or warranty & indemnity (W&I) insurance is well established in the U.S., respondents still expect it to increase in all markets in 2023. The survey findings indicate that respondents expect to see the greatest increase in the use of R&W/W&I insurance in the technology sector in 2023, followed by the life sciences and healthcare sector. The prevalence of W&I insurance for technology deals is expected to grow, particularly as multiples come down and the gap shrinks between what sellers are expecting and what buyers are willing to pay.

Further, insurers have expanded the industries they cover as they gain exposure and grow comfortable with the deals, such as the energy and healthcare sectors.

• ESG, digital transformation and supply chain are major deal drivers for the near future

The survey findings indicate that some dealmakers are turning tougher ESG-related regulations to their advantage — particularly when it comes to renewables. Therefore, dealmakers should monitor regulatory changes closely to assess the impacts as early as possible and adapt to take advantage of them before they get priced into valuations. The perspective on the ESG landscape is transitioning from risks dealmakers should avoid to opportunities to capture long-term business value — a trend that is visible across all M&A markets globally.

Additionally, respondents believe digital transformation, and especially the rapid adoption of artificial intelligence and metaverse infrastructures, is putting pressure on companies to be early adopters or risk falling behind the curve. Respondents predict the sectors, excluding technology, that stand to benefit the most from greater investment in digital transformation in 2023 include: a) financial institutions, b) business services (e.g. consultancy, education, recruitment), and c) consumer markets. Executives must prepare for the digital world as respondents believe that business services corporations and financial institutions have to be digital-ready. Respondents note that there is usually no time to anticipate changes in client expectations, therefore, companies would benefit from being proactive in incorporating technology.

Another factor mentioned is the need for resilient supply chains as recent geopolitical factors have added difficulties in efficiency for many businesses. Some respondents see deal opportunities through supply chain challenges to be solved. Respondents expect to see an increasing number of vertical acquisitions as businesses race to shore up their supply chains. Respondents also believe onshoring, or reshoring, is more likely to increase in the wake of geopolitical and trade tensions.

Read the full M&A trends and risks report here.