How do you think the headwinds we face globally will affect M&A deals and volume this year? 

Global M&A has slowed from its record-setting 2021 pace, with economic headwinds stunting deals in the first half of 2022. However, activity has really just returned to pre-pandemic levels and we expect dealmaking to play an important role in corporate growth strategies. M&A is increasingly viewed as a key way to deliver growth and build sustained shareholder value. 

While each region is facing a varying set of challenges – inflation, rising interest rates, less liquidity in the capital markets, supply chain disruptions, slowing economic growth, to name just a few – we expect M&A to remain a key lever. Through a combination of both defensive and offensive M&A strategies, we expect companies to build greater resilience into supply chains to strengthen and protect their businesses, and to acquire much-needed technology to transform business models and grow market share. 

Now is not the time for companies to sit on the sidelines, but instead to reassess – even reset – their M&A strategies. We expect to look back at 2022 to find the successful dealmakers of tomorrow who will be defined as those who boldly execute their M&A goals today and overcome the current market challenges. 

How do you see the pricing of deals changing and the receptiveness of the market to that? 

We believe that the current environment, as challenging as it may appear, creates opportunities for investors to generate healthy returns, especially as valuations come down. 

The desire to pursue value opportunities will bring dealmakers back to the table. Valuations in both public and private markets are under pressure. In particular, the decline in stock market performance has resulted in many high-quality companies now trading at significant discounts to recent highs. This is likely to result in more public-to-private transactions and, once valuation gaps between sellers and buyers realign, we expect to see several private deal processes reaching a satisfactory conclusion. 

How will the changing approach to ESG affect the drivers for M&A strategies? 

Environmental factors are increasingly taken into account in M&A decision-making and strategy, as investors use environmental, social and governance (ESG) criteria to assess risks and to identify value creation opportunities. In our Global Private Equity Responsible Investment Survey 2021, we discovered that more than half of all respondents had either refused to enter an agreement with a general partner or turned down a potential investment on ESG grounds. 

Looking specifically at climate, with increasing commitments being made by companies and PE funds to reduce carbon emissions, we anticipate increased capital will be mobilised for transition to greener sources of energy, creating opportunities for M&A not just in the heavier carbon-emitting sectors, but also in those that innovate to develop the new technologies for the future. 

We also expect to see increased M&A in industries that are transitioning to new business models, such as the major oil and gas companies, as they pivot to invest in renewables and hydrogen, or in the technology industry, where companies are innovating around energy storage or solutions to create a more sustainable circular economy. 

How will private equity change its approach? Bolt-ons? Hold periods? 

In the near term, the challenges in the credit markets may put some private equity dealmaking on hold in favour of smaller bolt-on type deals. Rising inflation and interest rates have made it significantly harder to generate returns that, when combined with an environment of contracting multiples, may see some private equity firms seeking to hold onto assets for longer. 

But in the longer term, private equity will continue to deploy vast amounts of dealmaking capital and expand by investing into alternative assets and executing on larger, more complex deals.  

PE firms are also making greater use of cloud technologies and data-driven insights to both speed up and better inform their deal processes, and to broaden their investment profile in new sectors and asset classes. 

How big a part will stressed or distressed M&A play in strategies going forward? 

As economic headwinds are tipping several economies into, or to the brink of, recession, we are likely to see more restructuring activity and potential for more distressed M&A. In sectors where there is distress, this creates turnaround opportunities. Forward-thinking investors will use market dislocations as a chance to revisit how they operate and to focus on portfolio optimisation. We expect to see more carve-out divestitures, as management redirects resources away from non-core businesses to focus on high-growth ones instead. 

How can M&A help to address workforce strategies? 

Whether companies buy, borrow or build to meet their workforce needs, our research has found that workforce is the number one risk to growth, driven by the highest wage inflation in decades, the ‘great resignation’ skills shortages, and an increased stakeholder spotlight on employee diversity and inclusion. 

M&A is increasingly being used as a means to find the right talent, making workforce matters a growing priority for dealmakers. Earlier research we carried out revealed that 82% of transactions have had significant value destroyed in their latest acquisition, where they’ve lost more than 10% of their staff. 

Diligence topics such as workforce composition, compensation and benefits, and future organisation design and culture all impact future business performance. As workforce strategy also plays an outsized role in post-deal integration, questions not often at the top of the dealmaking agenda become more important than ever. What is the right culture to cultivate? How do you drive better results in recruiting, retention and development? Do your compensation, benefits, flexibility and other programmes create incremental motivation and harness workforce longevity? Putting people at the heart of your deals is a key component of any value creation strategy. 

How big a role will tech acquisitions continue to play for corporates? 

On the corporate side, we expect the strategic shift to digital, innovative and new disruptive business models to continue to drive M&A decision-making. Demand for much-needed technology will see tech acquisitions and alliances remaining high on CEOs’ agendas and an essential part of corporate strategy and transformation. 

First published in Corporate Financier, Issue 247, November 2022