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Twelve months ago, we titled our M&A Report for 2023 "Headwinds, tailwinds and fog", because we didn’t have clear visibility on activity levels for the year ahead. As a result, we knew it was going to be a challenging year, grappling with the same factors which weighed on activity during H2 2022, including high inflation, rising interest rates and the fallout from the conflict in Ukraine. Could the slowdown in M&A be overcome during the course of 2023, or would geopolitical and economic difficulties continue to put the brakes on activity? We hoped that H2 2023 might prove the turning point.
That question has been answered: 2023 was a disappointing year for global M&A markets in terms of both deal volume and value. Worldwide deal value of c.US$2.7 trillion for 2023 was down around 26% on 2022, and the lowest since 2013, and down 15% by volume. Not as much M&A took off as we hoped – and, what did, flew slowly and cautiously. The outturn demonstrates that the market continued to feel the effects of inflation, interest rates and the availability of debt. Buyers struggled to overcome higher funding costs and reach the valuations expected by sellers. The greater clarity needed on economic forecasts, the peaking of interest rates and the easing of lending conditions did not emerge in time to save the year.
However, activity was not completely flat. Bright spots include M&A appetite from well-capitalised strategic buyers. After many years of private equity (PE) dominating deal headlines, the weight of activity rebalanced somewhat towards corporates, who showed continued appetite for transformational deals and carve-outs to accelerate portfolio realignment, as well as portfolio acquisitions and divestments more weighted towards the mid-market. Sovereign wealth money, in particular from the Middle East, also provided an important source of liquidity and a strong investment narrative, diversifying economies away from hydrocarbons. India, in the middle of its energy transition and tech revolution, has its own positive story. Meanwhile, activity held up in some jurisdictions, such as Australia, and recovery is expected to be quicker in others, such as the US.
On the legal side, the slower year saw a focus on due diligence, as buyers sought to verify performance and future prospects. M&A sales are typically still being initiated as auction processes, and while competitive tension has held for the right assets, the reality for some has been essentially bilateral exercises. Sale processes have sometimes stalled and aborted on valuations, or needed tools from cost-cover to contingent consideration, rollover stakes, vendor financing and other creative risk partnering on value and funding, to move the deal forward. In these less competitive conditions, buyers have had the confidence to push for additional deal protections, in some cases regaining ground from the seller-friendly deal terms that had become market. 2023 marked an end to, or at least a pause in, 'cookie-cutter' deals.
Meanwhile, public takeovers have been slowed by boards carefully navigating value expectations of shareholders and their legal duties. On the regulatory front, existing themes continue, with the proliferation of regulators and regimes – merger control and foreign direct investment (FDI) now joined by the EU Foreign Subsidies Regulation and the threat of reverse FDI – as well as increased intervention on both process and substance. Strategy to manage regulatory approvals across various jurisdictions has become a critical aspect of deal planning. Lawyers have been kept busy guiding deals through these complex regulatory paths to closing on longer timelines, and we expect this to remain a feature of M&A in the near term.
Head of Global M&A
The big secular themes continuing to drive M&A in the medium term are no less pressing: the need for capital investment in infrastructure; digital transformation; energy transition and the attention on critical minerals; and the ESG imperative. All are front of mind for boards and investment committees. Corporates still need to transform their businesses and access new technologies at pace, and M&A is a clear strategic option for that.
In our report for 2024, we consider how geopolitics is often unavoidably a part of the deal and even driving activity in key sectors and geographies; how deals will be sold, whether through auctions, bilateral processes or something else; how recommendable value, shareholder support, the presence of PE bidders, and competitive situations will be the key focuses on public M&A; and how more work will be needed on the regulatory planning side of the deal. Moreover, we look at ESG and what being a good corporate citizen implies for the deal. We also assess key areas for market activity, in particular, what types of deals private equity will be doing (and developments in their approach, from private credit to roll-up strategies), and the range of activity that will be driven by energy transition.
This year we have called our report Ready for take-off? because there are good reasons to believe that 2024 could be a busy year across global M&A. But there is wariness in predicting the timing and speed of sustained recovery in activity levels. Everyone is looking for signs to support this positive outlook, in particular for the US to lead the way; but no-one is going to call a sudden change in conditions, or a return to the remarkable levels of activity in 2021. And, as and when the market does take off again, the seatbelt signs may stay on, at least initially.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2024