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Q4 2021 MARKET PREDICTION
Contents
Foreword
Foreword.....................................2
Key Findings................................3
Market Sentiment and
the M&A Environment.................. 7
M&A Expectations......................13
ESG: Preparation and Process....20
The Road Ahead
for M&A in 2023.........................28
Key Takeaways..........................34
In 2021, as the global economy roared back
the course of the year added to the likelihood
from COVID-19 shutdowns, the mergers
of a slowdown, while an array of headwinds
and acquisitions (M&A) market went into
gathered strength.
hyperdrive. Deals held over from the previous
year, combined with huge demand for new
Against the backdrop of this shifting
transactions amid the bounceback, powered
landscape, we surveyed 300 M&A dealmakers
M&A to all-time highs.
globally to get a picture of their current
sentiment, where they see the market heading
After such a period, 2022 was predictably
and the challenges and opportunities they
more restrained — and the economic and
expect along the way.
geopolitical challenges that developed over
About this research
In the second quarter of 2022, Mergermarket surveyed
Chemicals, Energy, Mining and Chemicals, and Financial
300 mergers and acquisitions (M&A) dealmakers from 225
Services. Among these corporates, 46 percent have an
corporate and 75 private equity (PE) firms. These included
annual turnover greater than USD three billion. Among PE
100 respondents headquartered in North America, 75 in
respondents, 53 percent have assets under management
Europe, the Middle East and Africa, 75 in Asia Pacific and
of less than USD 10 billion.
50 in Latin America. Overall, 21 percent of corporates
describe their main sector of focus as Technology, Media
All charts show overall figures, except when figures based
and Telecom, with 18 percent in each of Industrials and
on region or corporate/PE are statistically significant.
2
KEY FINDING 01
01
01
02
03
04
Optimism
Persists
62%
expect overall levels of
M&A activity to increase
over the year to come.
All respondents are expecting to undertake deal activity over the
next 12 months — and 42 percent expect to do four or more deals.
The mid-market is expected to dominate. More than three-quarters
of respondents (78 percent) expect to undertake a mid-market
transaction (worth less than USD two billion) in the next 12 months.
3
KEY FINDING 02
01
02
02
ESG in the
Spotlight
In last year’s study, we reported on the growing importance
of environmental, social and corporate governance (ESG)
factors in dealmaking and deal processes. This theme has
03
04
72%
accelerated over the past 12 months.
now expect ESG issues to receive
more scrutiny in M&A processes over
the next three years, compared to 62
percent who said the same last year.
4
KEY FINDING 03
01
02
03
03
04
Disruptive Trends
Continue to Emerge
68%
say deal automation will
affect M&A processes in
the next 12 months.
This is in contrast to last year's report, in which only 42 percent of
respondents felt the same way. Meanwhile, other disruptive trends
observed in last year’s report — notably, the growing importance of
data analytics and cybersecurity protection during deal processes —
have also gained momentum.
5
01
02
Private Equity
Leads the Way
PE
KEY FINDING 04
While corporate dealmakers are increasingly preoccupied
with the slowing global economy, increasing inflation and
geopolitical risks, private equity investors are still sitting
03
on unprecedented amounts of dry powder. As a result,
private equity dealmakers are notably more optimistic
64%
expect to undertake four or more
deals over the next 12 months,
compared to 34 percent of corporates.
Cor
p
04
04
ora
tes
about their deal activity.
6
Market Sentiment and
the M&A Environment
Despite rising headwinds and a more difficult environment for dealmaking,
market sentiment remains broadly optimistic.
After a record-setting year for M&A activity
many countries prompted central banks
growth profile since 2001 except for the global
in 2021, it would have been challenging
to tighten monetary policy sharply, with a
financial crisis and the acute phase of the
to maintain dealmaking momentum at
series of interest rate rises increasing the
COVID-19 pandemic.”
such a pace even in the most auspicious
cost of capital. Moreover, the fallout from the
of circumstances. As it turned out, 2022
COVID-19 pandemic continued, causing ongoing
Inevitably, as the mood darkened, appetite for
provided a much less supportive backdrop
disruption to global supply chains — with China,
M&A eased. There were 20,056 deals in the
than the previous year. M&A activity dropped
in particular, imposing further lockdowns.
first three quarters of 2022, down 12 percent
from the same period the previous year,
back as a result, though it remained resilient.
In combination, these factors have lowered
according to Mergermarket data. These deals
Challenges came quickly and in large numbers
expectations of global economic growth. The
were collectively worth USD 3.1 trillion, which
over the year: The conflict in Ukraine,
International Monetary Fund (IMF) pared back
is around 26 percent lower than in the first
which began February 20, 2022, prompted
its growth forecasts over the year. In October,
nine months of 2021.
a significant escalation of geopolitical
the IMF predicted global growth of 3.2 percent
uncertainty and tension. In the economic
and 2.7 percent in 2022 and 2023 respectively.
In addition, the slowdown appeared to gain
sphere, the return of rampant inflation in
The IMF described the outlook as “the weakest
steam during the third quarter. Worldwide
Page A7
MARKET SENTIMENT AND THE M&A ENVIRONMENT
M&A activity during the third quarter of the
year reached just USD 731 billion. Transactions
decelerated at every level of the market, from
megadeals to small and mid-market M&A, and
every region slowed.
Holding on
This is not to suggest the global M&A market
There are so many political uncertainties and policy
changes which cannot be predicted accurately — this is
a hindrance for dealmakers.
Vice president of strategy, Latin American consumer business
is grinding to a halt. Activity in 2022 compares
well to pre-pandemic levels of dealmaking —
and comparisons with the record year of 2021
were always going to look underwhelming.
demanding. Mergermarket’s data points to
23 percent who forecast a significant increase.
Moreover, many of the drivers of that record
early evidence of this; indeed, lower public
And despite the considerably different market
year remain in place. Corporates continue to
market valuations saw USD 216 billion in
conditions, this result is notably similar to last
focus on improving supply-chain resilience,
public-to-private transactions up to the end of
year, when 24 percent of those polled said
optimizing their portfolios, reflecting on ESG
the third quarter in 2022 — a 24 percent year-
they expected activity levels to rise
themes, and, perhaps above all, securing
over-year increase.
significantly and a further 40 percent
expected it to rise somewhat.
digital transformation. PE has USD 3.2 trillion
of dry powder available to it, according to
Maintaining hope
estimates, down from record highs but still
Against this backdrop, respondents to this
Still, the regional picture is more nuanced.
elevated by all historical comparisons.
research remain broadly optimistic about
Asia Pacific (APAC) respondents are
the outlook for deal activity for the next 12
particularly upbeat, with 76 percent expecting
However, a slowdown in the frenetic pace
months. Almost two-thirds of respondents (62
to see M&A activity rise, including 31 percent
of dealmaking brings new opportunities.
percent) expect overall levels of M&A activity
who expect a significant increase; North
Most obviously, valuations may become less
to increase in the year to come — including
American (NA) respondents are more upbeat
8
MARKET SENTIMENT AND THE M&A ENVIRONMENT
than the average too, with 73 percent saying they expect an
What do you expect to happen to the level of M&A activity over the next 12 months?
increase. The EMEA region was also positive, albeit less so —
56 percent expect a rise in M&A. By contrast, in Latin America
Total 2%
19%
17%
39%
23%
(LATAM), only 32 percent of respondents think M&A activity will
accelerate — and the same number predicts a decline.
In fact, Latin America is the only region of the world where
positive expectations are matched by negative forecasts. One
explanation for this was the considerable uncertainty caused by
Asia Pacific 3% 9%
Europe,
the Middle East
and Africa
12%
25%
Latin America 6%
31%
45%
19%
31%
26%
36%
25%
30%
2%
a tight election race in Brazil in the autumn of 2022, which was
won by left-wing former president Luiz Inácio Lula da Silva. There
North America 1% 16%
10%
46%
27%
is further political upheaval expected in 2023, with an election
in Argentina. As the vice president of strategy at one Latin
American consumer business puts it: “There are so many political
uncertainties and policy changes which cannot be predicted
0%
Decrease significantly
Increase somewhat
20%
40%
Decrease somewhat
Increase significantly
60%
80%
100%
No change
accurately — this is a hindrance for dealmakers.”
These regional variations also play out in respondents’
expectations of their deal activity. While all respondents expect to
pursue M&A opportunities over the next 12 months, those based in
North America (60 percent) and APAC (47 percent) are much more
likely to anticipate undertaking four or more deals. Most Latin
American respondents, by contrast, expect to be less busy — only
10 percent say they expect to undertake four or more deals over
Almost two-thirds of respondents (62 percent)
expect overall levels of M&A activity to increase
over the year to come — including 23 percent who
forecast a significant increase.
the next year, compared to 42 percent of all those surveyed.
9
MARKET SENTIMENT AND THE M&A ENVIRONMENT
There is also a split between corporates and PE in this regard.
Almost two-thirds of the latter respondents (64 percent) —
doubtlessly conscious of their dry powder mountain and perhaps
hopeful of reduced competition as the market slows — expect
to undertake four or more deals over the next 12 months. Only a
third of corporates (34 percent) say the same.
How many M&A deals do you expect to undertake over the next 12 months?
(Select one.)
100%
80%
10%
33%
42%
47%
60%
60%
90%
This is not to suggest PE investors are not becoming risk-averse
too. A Brazilian PE partner explains the firm’s appetite for deals:
40%
67%
58%
53%
40%
20%
“Our current portfolio companies are struggling due to supplychain challenges; we want to pursue add-on opportunities that
0%
Total
Asia Pacific
will help stabilize their operations.”
1-3
4 or more
Europe,
the Middle East
and Africa
Latin
America
North
America
Overall, respondents are set to embark on more transactions
in the next 12 months than in the past year: Last year’s survey
found that only 18 percent of corporates and 36 percent of
How many M&A deals do you expect to undertake over the next 12 months?
(Select one.)
PEs expected to undertake four or more deals. Not only that,
13 percent of those polled last year said they did not expect
to embark on any M&A deals in the coming year — whereas no
66%
34%
36%
64%
respondent this year said the same.
Corporate
1-3
Private equity firm
4 or more
10
MARKET SENTIMENT AND THE M&A ENVIRONMENT
Mid-market to the fore
This survey also suggests the M&A market is less likely to see
megadeals over the next 12 months. Rather, most respondents
are focusing on the mid-market (deals worth less than
USD two billion). Overall, more than three-quarters of
What size of M&A deals do you expect to undertake in the next 12 months?
(Select all that apply.)
100%
80%
respondents (78 percent) expect to undertake deals in this
60%
range, compared to just 52 percent anticipating doing a large
40%
deal (worth USD two billion to 10 billion) and only 15 percent that
20%
think a megadeal (worth more than USD 10 billion) is possible.
0%
Respondents in every region of the world are broadly aligned on
this issue.
89%
78%
76%
75%
52%
61%
53%
47%
40%
20%
15%
Total
73%
20%
9%
Asia Pacific
Europe,
the Middle East
and Africa
4%
Latin
America
North
America
Middle-Market (worth less than USD 2 billion)
Large (worth between USD 2 billion - USD 10 billion)
Transformative/Megadeals (worth more than USD 10 billion)
81%
77%
80%
100%
PE firms share this view. Indeed, 81 percent expect to do a
mid-market deal, compared to 77 percent of corporates. That
said, in a marketplace where PE firms generally expect to be
more active M&A players over the next 12 months, one in five
anticipate undertaking a megadeal, compared to only 13 percent
of corporates.
This suggests that dealmakers feel more risk averse amidst
growing macroeconomic challenges as well as more difficulty
64%
60%
48%
40%
20%
20%
13%
0%
Corporate
Private equity firm
Middle-Market (worth less than USD 2 billion)
Large (worth between USD 2 billion - USD 10 billion)
Transformative/Megadeals (worth more than USD 10 billion)
accessing financing for deals.
11
MARKET SENTIMENT AND THE M&A ENVIRONMENT
Which deals is your company most likely to be involved in in the next 12 to 18 months? (Select top three.)
60%
50%
40%
50%
54%
47%
39%
37%
33%
34%
37%
30%
36%
33%32%
23%
40%
29%
26%
32%
28%
23% 25%
17%
20%
33%
31%
17%
22%20%
22%
18%
10%
0%
Total
M&A
Buyout/
Add-on
Corporate
Joint venture/
Strategic
alliance
Distressed
Refinance
Minority
stake
Co-investment Carve-outs/
as minority
Spin-offs
partner
Exit
14% 14%
11%
Secondary
sale
8% 9%
6%
Special
purpose
acquisition
company (SPAC)
Private equity firm
Pursuing different options
our revenue streams while managing risk,” adds the chief financial officer
It is worth noting that respondents expect to undertake a broad
of a U.S. transport company.
range of corporate activity over the next 12 months. Overall,
half (50 percent) say they will likely be involved in a traditional
Moreover, PE respondents have a different outlook than their corporate
M&A transaction, but significant numbers also expect to be
peers. Almost half (47 percent) expect to do a buyout or add-on, with
conducting joint ventures or strategic partnerships (34 percent)
40 percent anticipating conducting refinancing activity — a result of a
and distressed M&A activity (33 percent).
more unstable market. “The intent here is to focus on co-investment
opportunities. We anticipate market risk will increase, so pooling
“We are keen to use M&A to strengthen our technology across
resources and expertise will help with stability,” says a partner of a French
the entire business,” says a senior director of M&A at a Canadian
PE firm.
media group. “Joint ventures can be a good way to strengthen
12
M&A EXPECTATIONS
M&A Expectations
Digital transformation and capturing synergies are set to be among the top drivers
of deal activity in 2023.
Despite the M&A slowdown in 2021 and the
What size of M&A deals do you expect to undertake in the next 12 months? (Select all that apply.)
uncomfortable headwinds now facing the
Europe
global economy, both corporates and PE firms
10%
9%
26%
20%
26%
19%
North America
anticipate doing more deals over the coming 12
10%
13%
months. As part one of this research revealed,
Asia (excluding China and Japan)
7%
the majority of respondents expect overall
3%
21%
12%
The U.K.
12%
levels of deal activity to increase — and many
15%
11%
11%
Japan
are planning to undertake significant numbers
6% 2% 3% 4%
The Middle East
of transactions themselves.
9%
10%
3% 6%
China
16%
20%
Where deals will get done
Respondents to the survey expect Europe
3%
12%
Africa
7%
6%
2%3%
Latin America (excluding Brazil) & The Caribbean
6%
and North America to be the strongest
8%
2% 5%
Brazil
sources of M&A growth over the next 12
10%
11%
2% 4%
Australia & New Zealand
months; 26 percent of respondents chose
7%
3% 1% 4%
both of these two regions as the one where
they expect to see the highest growth. Asia
Second-lowest growth
Lowest growth
Highest growth
Second-highest growth
(excluding China and Japan), the first choice
13
M&A EXPECTATIONS
of 21 percent of respondents, is the next most
Korean business services company. “We
technologies and digital transformation, both
favored region.
have to think about geographic expansion
as a driver of new growth and as a source of
in a very systematic and practical manner,”
increased efficiency. The COVID-19 crisis has
At the other end of the scale, one in five
the executive warns. “Given global market
only accelerated the existing trend toward
respondents (20 percent) select China as the
challenges, we are only sourcing opportunities
digitalization. Certain parts of the sector are
country where slower dealmaking growth can
in markets that have a favorable foreign
likely to be particularly active. The demand for
be expected. Still struggling from pandemic-
investment environment.”
improved cybersecurity, for example, is a clear
deal driver; so too is the increased reliance of
related disruption as the government sticks
many businesses on data and analytics.
with a “zero-COVID” policy, China’s economy is
Sector outlook
also threatened by a global slowdown, reduced
M&A activity looks set to be concentrated in
demand for its exports and the impacts of
particular areas of the market over the next 12
The business and financial services
political tensions with the West.
months, with Technology, Media and Telecom
industries are also set to see a healthy level
(TMT) once again expected to be especially
of dealmaking over the next 12 months,
The U.K., picked as likely to deliver slower growth
dominant. These expectations naturally reflect
with 23 percent of respondents expecting
by 15 percent of respondents, is another area of
the different dynamics of individual sectors of
this area of the economy to see the highest
potential weakness for M&A expectations. The
the economy.
growth. One part of the equation here is the
desire by corporates worldwide to secure
country saw political turmoil throughout 2022,
promoting currency weakness and rising fears
Over a third of respondents (38 percent) pick
greater efficiency and cost control, with
over levels of public borrowing. The U.K. also
TMT as the sector which will see the highest
business services providers benefiting
continues to struggle with the impacts of its
growth in deal activity in the next 12 months,
from outsourcing and new contracts. In
departure from the European Union.
with an additional 28 percent expecting the
the financial sector, consolidation remains
sector to see the second-highest growth.
an ongoing theme and rising interest rates
finally offer the prospect of improving returns
These are issues that dealmakers are weighing
more seriously than ever before, says the
This reflects the ongoing pressure on
head of investment strategy at a South
businesses worldwide to embrace new
on capital for banks.
14
M&A EXPECTATIONS
Pharmaceuticals, Medical and Biotech
(PMB), previously considered as a potentially
Which sectors will see the highest growth in the next 12 months?
(Please select the two most affected, 1 = highest growth, 2 = second-highest growth.)
hot area for M&A activity, is now forecast
Technology, Media and Telecommunications
to deliver the most growth by only six
percent of respondents. While the COVID-19
28%
Business and Financial Services (including Computer Services)
pandemic drove demand for pharma assets,
and excitement about digital health further
38%
2% 1%
6% 3%
23%
23%
Industrials and Chemicals (including Automotive)
contributed to the sector’s allure, enthusiasm
11%
now appears to have waned and the healthy
8%
15%
14%
Consumer and Leisure
cash position of many biotech businesses
8%
made it easier for them to reject takeover
9%
12%
11%
Pharmaceuticals, Medical and Biotech
approaches. The largest deal announced in the
14%
first three quarters of this year in the sector
13%
6%
12%
Energy, Mining and Utilities
was Pfizer’s USD 11.6 billion acquisition of
12%
19%
Biohaven — a far cry from megadeals like the
5% 5%
Real Estate and Construction
Takeda/Shire, AbbVie/Allergan and Celgene/
10%
17%
BMS deals, all of which were announced in
1% 5%
Agriculture
8%
recent years and were each worth USD 70
billion or more.
10%
1%
Transportation
14%
The ups and downs of the energy commodities
9%
Defense
15%
market over the past few years have created
11%
1%
unfavorable conditions for M&A. As a result,
nearly one in five (19 percent) of those surveyed
Second-lowest growth
Lowest growth
Highest growth
Second-highest growth
say they expect the energy, mining and utilities
15
M&A EXPECTATIONS
(EMU) sector to see the lowest growth in the next year. The sector
is highly cyclical, meaning that a slowing global economy is a likely
What will be the key drivers of your M&A activity over the next 12 months? (Select
the top three and rank 1-2-3 by order of significance, where 1 = most significant.)
depressive factor. Previously soaring energy prices now appear
to have peaked. And the ongoing conflict in Ukraine is driving
Capturing synergies between
the businesses
20%
15%
14%
uncertainty about the short to medium-term outlook for large parts
of the sector.
Similarly, the real estate and construction sector is tipped as a
fast-growth area for M&A by only one percent of respondents.
15%
Pursuing digital transformation
Opportunities for restructuring
and turnaround of a
distressed business
16%
14%
14%
14%
16%
18%
13%
Rising interest rates, higher raw materials costs and slowing
economic growth all represent substantial headwinds for the
Increasing market share
12%
Expansion into new geographies
12%
sector, with 17 percent seeing this area of the economy as the
one which will experience the slowest growth in the next year.
10%
9%
31%
Reasons to transact
Supply-chain optimization
10%
13%
11%
Almost half of the respondents (49 percent) describe a desire
to capture more synergy as likely to be among their three most
Disposal of non-core
units/streamlining
important drivers of M&A activity over the next 12 months. This
includes 20 percent who believe that this will be the top driver —
an increase on the 13 percent from last year’s survey.
The need to reduce costs and secure greater efficiency is
4%
Pursuing diversification of 5%
products and services
5%
Completing transactions before
tax and regulatory 5%
conditions tighten
5%
significant. As the director of development at a Scandinavian
energy company explains: “Major cost synergies can really reduce
7%
0%
Rank 1
Rank 2
10%
10%
7%
6%
20%
30%
40%
50%
Rank 3
the burden on our financials — we can optimize our processes and
service distribution more seamlessly.”
16
M&A EXPECTATIONS
Similarly, 44 percent of businesses cite
opportunities for restructuring and turnaround
of distressed businesses as likely to drive
their M&A activity in the next 12 months.
In last year’s report, only 34 percent of
respondents said the same; the implication
We want to source targets that would be useful for
accelerating growth in the next couple of years.
Head of new markets development, Swedish pharmaceuticals company
is that respondents expect that the number
of businesses set to face difficulties in the
coming year has risen.
“We have the talent and expertise to pursue
inflationary environment or where demand is
artificial intelligence, machine learning and
opportunities for restructuring a distressed
falling. At a Swedish pharmaceuticals company,
cloud computing, reflects the huge potential
organization,” says the managing director
the head of new markets development says:
of these tools to drive more rapid growth,
of one U.S.-based PE firm. “It is not an easy
“We will be increasing our market share — we
over both the short and long term.
task but when we have the resources to build
want to source targets that would be useful for
a company from scratch, we can drive more
accelerating growth in the next couple of years.”
The pressure to transform continues to grow.
If anything, a more difficult market landscape
profits from these opportunities.”
Indeed, of the drivers of M&A activity seen
makes it even more imperative for businesses
The desire to increase market share — seen
as most pressing for the year ahead, only
to reinvent themselves. “We are focusing on
as a driver of M&A activity by 43 percent of
the desire to pursue digital transformation
digital development in M&A because bringing
respondents — could be reflective of similar
— cited by 45 percent of respondents —
innovative solutions to the market depends
imperatives. Businesses with a more dominant
feels like a more advantageous strategy.
on constantly pursuing non-traditional growth
position in their sector can secure greater
Businesses’ desire to harness new
strategies,” says the director of acquisitions at
pricing power, protecting their margins in an
technologies, including data analytics,
a Chinese financial services company.
17
M&A EXPECTATIONS
Key challenges ahead
Despite their broad sense of optimism, respondents to this poll are
What challenges do you expect to see in M&A in the coming 12 months? (Please
select the two most important, 1 = most important, 2 = second most important.)
concerned about several challenges standing in the way of their
More complex due
diligence process
dealmaking ambitions. At the top of the list, more than a quarter of
7%
20%
respondents (27 percent) indicate the growing complexity of due
diligence processes as one of their top two challenges.
Difficult economic environment
This is understandable. In the current difficult environment,
dealmakers are determined to conduct diligence with far greater
19%
Greater competition
12%
Transparency issues
11%
17%
20%
8%
16%
granularity — and to model likely performance under a broader
range of criteria. Deal processes are becoming more elongated
Inability to raise funds
10%
7%
as a result. The average time to close a deal has increased sharply
in 2022, with 60 percent of transactions during H1 2022 taking
Longer completion times
9%
7%
over 70 days, compared to 54 percent in the same period of 2021,
Access to capital
according to WTW’s Quarterly Deal Performance Monitor.
More lapsed deals
However, there are ways to combat this complexity. In particular,
technology has a crucial role to play in simplifying and accelerating
7%
6%
12%
12%
Difficulty in engaging
2% 5%
management team
due diligence work. The use of virtual data rooms, for example,
can help both parties move toward completion quickly, safely and
Inability to divest 2%2%
efficiently. This could also help address the transparency issues
noted as problematic by 27 percent of respondents.
Greater shareholder activism 2%
0%
Moving with this extra pace is now crucial, says the chief financial
officer of a Mexican consumer company. “We have to complete
Rank 1
7%
5%
10%
15%
20%
25%
30%
35%
40%
Rank 2
18
M&A EXPECTATIONS
deals within our set timelines — we face additional costs if we
exceed those deadlines.”
Overall, 58 percent of respondents see financial
buyers as in a stronger position, with only Latin
American respondents taking a different view.
The other factor regarded as especially problematic right
now is the difficult economic environment, identified by 36
percent of respondents as among their top two concerns. The
uncertain market landscape, with a real prospect of slowing
growth, is beginning to concern dealmakers. Their expectations
of transactions may have to be adapted accordingly.
The nature of dealmakers
In part one of this report, PE respondents said they expected
to be busier over the next 12 months. This finding is underlined
by the broader view of respondents that financial buyers are
better placed, in the current market environment, to pursue M&A
activity than their corporate counterparts.
Overall, 58 percent of respondents see financial buyers as in a
stronger position, with only Latin American respondents taking
Which of the following do you feel are better placed to take advantage of buying
opportunities in the current macroeconomic environment?
100%
80%
42%
35%
36%
48%
58%
60%
40%
58%
64%
65%
52%
42%
20%
a different view. This likely reflects the significant amounts of
dry powder that PE investors still have available to them, in stark
contrast to the more difficult commercial and economic issues
now facing many corporate dealmakers.
0%
Total
Asia Pacific
Europe,
the Middle East
and Africa
Latin
America
North
America
Financial buyers (e.g. private equity, hedge fund, venture capital)
Strategic buyers
19
ESG: PREPARATION AND PROCESS
ESG: Preparation and Process
The importance of ESG continues to rise in M&A processes, although concerns
remain about cost and standardization.
ESG continues to rise up the agenda in the M&A market. Partly,
this reflects the growing regulatory imperative; almost three-
How do you expect the level of ESG regulation in M&A to change over the
next three years?
quarters of respondents (73 percent) expect ESG regulation in an
M&A context to increase over the next three years, including 17
percent who anticipate a significant increase.
Respondents based in the EMEA region are especially likely
Total 4%
23%
Asia Pacific 5%
56%
17%
17%
59%
19%
to expect to face an increasingly demanding ESG regulatory
burden, with 83 percent predicting a rise, including 27 percent
who expect significantly more regulation. Businesses in the
Europe,
the Middle East 4%
and Africa
region have already seen significant interventions, including
the European Union’s Climate Benchmarks Regulation, the
Latin America
13%
56%
10%
27%
46%
38%
6%
Sustainable Finance Disclosure Regulation and the Taxonomy
Regulation, with more to come. The E.U. is in the process of
North America
24%
62%
14%
agreeing to the Corporate Sustainability Reporting Directive and
the Corporate Sustainability Due Diligence Directive, for example.
The U.K. is expanding the scope of its Taskforce on Climate-
0%
Moderately decrease
Moderately increase
20%
40%
60%
80%
100%
No change
Significantly increase
Related Financial Disclosure regulation.
20
ESG: PREPARATION AND PROCESS
“ESG regulation is only going to become
How do you expect due diligence to change in terms of ESG factors in transactions in the next three years?
stricter,” says the general counsel of a German
financial services business. “That means we
have to know exactly where the company
stands in terms of its ESG rating and record
management systems.”
Total
25%
Asia Pacific
29%
Europe, the Middle East
and Africa
47%
47%
33%
Latin America 4%
25%
2%1%
20%
48%
40%
4%
16%
48%
3%
4% 4%
Other areas of the world, meanwhile, have
a less hectic regulatory schedule, at least
North America
0%
for the time being. Respondents in these
regions are therefore less concerned about
the body of work to come. Most notably, only
Significantly more scrutiny
Moderately less scrutiny
25%
50%
20%
40%
Moderately more scrutiny
Significantly less scrutiny
25%
60%
80%
100%
No change
44 percent of Latin American respondents
are expecting to see more ESG regulation
Indeed, 72 percent of respondents believe
ESG scrutiny in diligence processes. And
that affects their M&A activities over the next
ESG issues will receive more scrutiny in M&A
again, Latin America lags behind other
three years.
due diligence work over the next three years,
regions, with a figure of only 44 percent.
including 25 percent who expect the scrutiny
It is not only regulators that are paying more
to increase significantly. That represents a
“There have been reports about companies
attention to ESG factors. These are matters
marked change even from just a year ago. In
engaging in greenwashing,” says the director of
of concern for multiple stakeholders, from
last year’s research, only 48 percent said they
corporate development at a Canadian energy
investors to suppliers, and from employees to
expected to see more scrutiny of ESG matters
company, pointing to one reason for increased
customers. As a result, dealmakers are now
during due diligence.
diligence. “We have to be more prepared to
investigate their green claims; we cannot just
far more focused on ESG issues during deal
processes, particularly at the due diligence
Again, Europe is leading the way, with 81
focus on the information they provide — deeper
stage of transactions.
percent of respondents predicting greater
research and analysis is needed.”
21
ESG: PREPARATION AND PROCESS
The issues that matter most
It should be recognized, of course, that ESG
is a broad term covering a very wide range
of issues. Nevertheless, respondents have a
clear view of the priority concerns in each area
from an M&A perspective.
On environmental matters, the biggest issue for
respondents today is energy efficiency, picked out by
59 percent of respondents.
On environmental matters, the biggest issue
for respondents today is energy efficiency,
picked out by 59 percent of respondents. It is
noteworthy that this issue comes so far ahead
of the second biggest concern, greenhouse gas
emissions and carbon management (cited by 46
(35 percent) are the standout issues. The first
From a governance perspective, respondents
percent). While energy efficiency will certainly
of these issues may be particularly difficult
consider one issue as more important than the
play a part in helping organizations reduce
to deal with during an M&A due diligence
rest: More than half (53 percent) say business
their emissions and move toward net-zero
process as businesses try to understand the
ethics and transparency are something they
commitments, the need to reduce consumption
extent to which a target’s supply chain poses
look at closely during any investment process.
in the face of soaring energy prices may also be
an elevated risk. Other key issues in this
The desire is to work with organizations that
a factor here. More than a third of respondents
category include human rights and community
are culturally attuned to better practices —
(35 percent) also point to the need to prioritize
relations (31 percent) and gender and diversity
to working responsibly and to being more
better water and waste management practices.
(24 percent). High-profile social campaigns in
open about the business’ activities. Those
many parts of the world on sexism, racism and
organizations not delivering on such values put
When it comes to social considerations,
homophobia appear to be breaking through in
acquirers in substantial danger of increased
labor standards (a priority for 46 percent of
this regard (see Spotlight on Diversity, p. 27).
reputational risk.
respondents) and data security and privacy
22
ESG: PREPARATION AND PROCESS
What are the most important ESG considerations when contemplating investing? (Select top two answers.)
ENVIRONMENTAL
59%
46%
35%
26%
Energy efficiency
Greenhouse gas
emissions and
carbon management
Water and
wastewater
management
Biodiversity
issues
46%
35%
31%
Labor standards
Data security
and privacy
19%
8%
7%
Air quality
Deforestation
Hazardous
materials
management
24%
21%
16%
14%
13%
Human rights
and community
relations
Gender and
diversity
Access and
affordability
Customer
satisfaction
Fair marketing
and advertising
Grievance
mechanisms/
compensation
SOCIAL
CORPORATE GOVERNANCE
53%
27%
23%
23%
21%
19%
18%
16%
Business
ethics and
transparency
Supply chain
management
Audit committee
structure
Safety
management
Executive
compensation
Political
influence
Board
composition
Whistleblower
protocols
23
ESG: PREPARATION AND PROCESS
Challenges
their number-one challenge, and a further 33
“There are so many different ESG standards
The emergence of ESG as a crucial
percent cite it as a problem, making this issue
and reporting standards in different markets,”
consideration in many deal processes is
the most frequently cited ESG hurdle that
says the vice president of strategic planning
not proving to be straightforward, even in
dealmakers must overcome.
at a U.S. pharmaceuticals business. “We have
to spend more time scrutinizing core ESG
regions and markets where dealmakers now
have significant experience on this agenda.
In practice, dealmakers point to a series of
problems that ESG scrutiny is now causing
What are your organization's biggest challenges in making ESG-oriented investments?
(Select top three and rank 1-3 where 1 = most important.)
them during M&A.
Excessive cost
20%
15%
10%
Above all, respondents are most likely to
complain about the additional cost that ESG
brings during an investment process. One in
five respondents (20 percent) rank this as the
number-one challenge they face from an ESG
Confusion/lack of clarity on standards
17%
Shortage of knowledge/expertise
16%
Lack of ESG investment opportunities
that meet targeted returns
20%
13%
16%
13%
12%
8%
13%
perspective. They are forced to take more time
Political uncertainty
12%
11%
Lack or quality of sustainability data
11%
13%
to complete due diligence processes, deploy
ESG specialists to the deal, whether internal
or external, and access third-party data and
Lack of consensus among
internal stakeholders
research. And their costs are mounting up.
A second major headache is that a lack of
ESG is not relevant to company strategy 3% 3%
0%
clarity on ESG standards makes working
coherently and consistently very difficult; 17
8%
Rank 1
Rank 2
10%
21%
17%
13%
5%
10%
20%
30%
40%
50%
Rank 3
percent of respondents pick out this issue as
24
ESG: PREPARATION AND PROCESS
practices and then compare the results with
other companies in the jurisdiction.”
However, there is some good news in this
regard. The launch in March 2022 of the
International Sustainability Standards
Board (ISSB) by the International Financial
While a single set of global standards covering every ESG
issue remains elusive, the marketplace is now moving toward
greater reporting consistency.
Reporting Standards (IFRS) Foundation
has been widely praised as a major step
toward the convergence of the currently
fragmented reporting landscape. The
initiative will consolidate the Value Reporting
knowledge and expertise is causing them
Embracing ESG
Foundation, formed following the merger of
problems. Closing the skills gap will require
It is clear from this research that dealmakers are
the Sustainability Accounting Standards Board
organizations to recruit or upskill in-house.
now focusing on ESG considerations to a greater
and the Integrated Reporting Framework,
However, ESG skills shortages are a market-
extent than ever before. But they may have to —
as well as the Climate Disclosure Standards
wide problem in many jurisdictions.
and want to — go even further in the years ahead.
The regulatory agenda around climate change
Board. While a single set of global standards
covering every ESG issue remains elusive, the
For now, says the managing partner of a
mitigation is likely to be one driver of this. More
marketplace is now moving toward greater
U.K. PE firm, “We have to get the opinion of
broadly, a diverse range of stakeholder groups is
reporting consistency.
external experts when we invest in certain
determined to keep pushing various ESG issues
regions, because these are regions where we
further up the agenda.
Similarly, resolving the third biggest challenge
are fairly inexperienced with the ESG norms.
for dealmakers from an ESG perspective will
We do not want any mistakes to impact our
What would prompt dealmakers to embrace that
also take time. Almost one in six respondents
company negatively.”
challenge? Encouragingly, our research suggests
(16 percent) say that a shortage of ESG
many are focused on seizing the opportunity
25
ESG: PREPARATION AND PROCESS
of ESG, rather than responding to coercion. While 27 percent of
respondents say regulatory requirements would prompt their
organization to have a wider consideration of ESG issues, a more
sizable proportion (34 percent) say that proving the link between ESG
and financial performance would encourage them.
In this regard, a study published recently by the NYU Stern
What would push your organization to have a wider consideration of ESG?
(Select one.)
40%
35%
30%
20%
than 1,000 papers published on the relationship between ESG
15%
and financial performance over the previous five years and
10%
financial performance due to ESG becomes more noticeable
19%
12%
8%
5%
0%
The NYU Stern project concluded that studies showed: “improved
27%
25%
School of Business makes instructive reading. It looked at more
established widespread evidence of a positive link.
34%
Proven link
between ESG
and financial
performance
Regulatory
requirements
Better
information
on ESG risk/
opportunity
Growing
awareness in
wider society
Demand
from
client
over longer time horizons”; that “managing for a low carbon
future improves financial performance”; and that “sustainability
initiatives at corporations appear to drive better financial
“ESG is now closely tied to the reputation of the company, so we have to take
performance due to mediating factors such as improved risk
that into account in the way we manage M&A.”
management and more innovation.”
The partner of a Brazilian PE firm adds: “We certainly are evaluating the
Many respondents accept such arguments and are adapting
environmental, social and governance standards of target companies and
their approach to M&A accordingly. The head of M&A at a French
when we are preparing for an exit, we take the time to improve its ESG
industrials business says: “We’re looking at the entire value chain
statistics before announcing the exit.”
of the company in detail from an ESG perspective.” The head of
corporate development at a Chinese business services firm adds:
26
ESG: PREPARATION AND PROCESS
Spotlight on Diversity
Diversity matters to dealmakers. More than
When looking at a new target, how important is the diversity balance within the organization?
half of respondents (51 percent) say that when
Total 1%
they are looking at a new target, the diversity
balance of the organization in question is
important; that includes 19 percent who
consider this very important. Interestingly,
Asia Pacific 2%
Europe, the Middle East
and Africa
Latin America 2%
to last year’s report, when 69 percent of
North America
respondents took this view — and 27 percent
0%
Not important at all
24%
32%
31%
24%
16%
however, this figure has fallen compared
described diversity balance as a very
24%
20%
39%
33%
30%
23%
20%
Of little importance
26%
29%
40%
Neutral
4%
31%
42%
16%
19%
60%
Moderately important
32%
80%
100%
Very important
important issue. The fall is significant both
overall and in each of the individual regions
possible that social campaigns connected to
approach M&A. Even in Latin America, where
diversity — the Black Lives Matter movement,
the numbers are lowest, more than a quarter
It is difficult to explain this drop-off. One
for example — were fresher in dealmakers’
of respondents (26 percent) describe this
possibility is that diversity is now just one of a
minds a year ago.
issue as a factor. At the other end of the scale,
considered in this research.
in the EMEA region, the number rises to almost
larger number of ESG issues that dealmakers
look at when considering new targets —
Nevertheless, the evidence of this year’s
and that diversity as a standout issue has
research is that diversity is still a major
therefore become less prominent. It is also
consideration for dealmakers as they
two-thirds (64 percent).
27
THE ROAD AHEAD FOR M&A IN 2023
The Road Ahead for M&A in 2023
M&A practitioners are expecting a tougher deal environment in 2023, with valuation
gaps and interest rates seen as the biggest challenges.
In a global economy where the cost of capital is increasing
almost everywhere, 81 percent of respondents believe
financial market conditions are set to get tougher over the
How do you expect financing conditions to change in the next 12 months compared
to 2021?
50%
next 12 months, including 43 percent who think they will
43%
become much tougher.
40%
38%
As a result, a third of respondents (33 percent) now think
financing will be the most difficult part of the M&A process over
the next 12 months, up from 20 percent in last year’s research.
30%
Clearly, the outlook on financing has become more troubling
at a significant pace. Respondents in both North America
20%
(35 percent) and the EMEA region (36 percent), where central
14%
banks have moved particularly aggressively on monetary policy
tightening, are especially likely to see financing as tricky.
“Financing deals will take longer than expected,” concedes the
managing director of a PE firm in the U.K. “We cannot remain
10%
5%
0%
0%
Much harder Slightly harder
No change
Slightly easier
Much easier
too focused on traditional financing sources; we have to
28
THE ROAD AHEAD FOR M&A IN 2023
contemplate more modern financing options
Which part of the M&A process will be the most difficult in the next 12 months? (Select one.)
that can help close the deal within the
estimated timeframe.”
Not that this is the only challenge standing
in dealmakers’ way. More than a quarter (26
percent) are now worried about the difficulty
Total
Asia Pacific
Europe, the Middle East
and Africa
33%
26%
27%
13%
28%
36%
Latin America
34%
North America
35%
19%
18%
13%
13%
12%
13%
12%
12%
8%
8%
12%
15%
22%
7%
8%
5%
6%
of reaching price agreements. After all, while
valuations do now appear to be easing back, it
may take sellers some time to accept that they
can no longer secure the prices being paid at the
height of the boom.
0%
33%
20%
Financing
Agreeing on price/valuation
Deal preparation
Integration
40%
Deal sourcing
14%
60%
10%
4% 4%
80%
100%
Due diligence
“The valuation process is now critical,” says the
director of corporate development at a French
boom period, buyers are more likely to focus
the top two concerns. Inflationary and interest
financial services firm. “Buyers and sellers may
on downside risk. A quarter of respondents
rate pressures are cited by 24 percent as well,
not be on the same page about the potential
(25 percent) see buyer/seller valuation gaps
albeit a lower proportion of respondents (eight
opportunities and challenges associated with
as being among the top two challenges to
percent) see it as the number-one priority
a deal.”
completing a deal in the next 12 months.
compared to 13 percent who feel the same
about macroeconomic/stock market volatility.
Respondents point to several challenges that
Second, external factors — macroeconomic
could hinder deal completion over the next 12
risk, stock market volatility, trade conflicts and
Latin American dealmakers in particular worry
months. First, there is the growing possibility
anti-trust scrutiny — could threaten activity.
about inflation, with 72 percent expecting
of a valuation gap — as sellers cling to the
Macroeconomic and stock market volatility are
rising prices to impact M&A in the region over
pricing expectations that evolved during the
cited by 24 percent of those surveyed as among
the next 12 months.
29
THE ROAD AHEAD FOR M&A IN 2023
What will be the biggest challenges to completing a deal in the next 12 months?
(Rank top two, where 1 = the biggest challenge.)
Buyer/seller valuation gap
13%
Macroeconomic/stock market volatility
10%
Antitrust/merger control issues
10%
Technology inefficiencies
8%
Inflationary and interest rate pressure
8%
Availability of financing
5%
6%
5%
Lengthier due diligence processes
5%
2%
Sanctions 1%
Supply-chain issues 1%
12%
Will have a
slightly to
moderately
negative
impact
60%
No evident
impact
22%
Will have a
slightly to
moderately
positive
impact
6%
11%
16%
7%
6%
Political instability
Will have a
significantly
negative
impact
8%
6%
Other legal/regulatory issues
(money laundering, environmental)
Rank 1
11%
12%
Protectionist policies/trade conflicts
0%
12%
13%
Operational issues at target companies
Credit markets
How do you expect high inflation will impact M&A
dealmaking in Latin America over the coming 12
months? (Latin American respondents only.)
4%
5%
4%
4%
3%
4%
5%
10%
15%
20%
25%
Rank 2
30
THE ROAD AHEAD FOR M&A IN 2023
Mitigating risk
How will companies mitigate M&A risk in the next 12 months? (Select top two, where 1 = top choice.)
One way to protect valuations may be
Greater reliance on warranty and
indemnity insurance
for sellers to accept greater risk during
transactions. Indeed, 22 percent of
16%
Comprehensive due diligence
respondents think increased reliance on
warranties and indemnities is going to be
the most important way that dealmakers
More selective targeting
15%
Stricter financial terms
15%
mitigate risk over the next 12 months. We now
Improving integration planning
and execution excellence
10%
anticipate greater use of contingencies in M&A
Improved pre-deal preparation
10%
agreements; 15 percent see stricter financial
Narrowing sector/regional focus
terms as their number-one tactic.
Increasing sector/regional focus
0%
Inevitably, however, many dealmakers are
going to proceed more warily. More than a third
(37 percent) see conducting comprehensive
Rank 1
13%
22%
13%
17%
12%
15%
5%
7%
5%
21%
4%
5%
10%
15%
20%
25%
30%
35%
40%
Rank 2
Which of the following will be the most important to help companies better execute M&A in the next 12 months?
(Select one.)
due diligence as their first or second priority
for risk mitigation while more than a quarter
(28 percent) expect to target transactions
more selectively.
There does now seem to be an appetite for
caution. More than a third of respondents (38
percent) say starting deal preparation earlier will
help them execute M&A better over the next 12
38%
Starting deal preparation earlier
Using technology platforms to improve
information governance and speed
to ensure critical information is on hand
27%
Engaging with advisors earlier
20%
Using AI and machine learning to automate
deal tasks and processes to increase
efficiency and speed of execution
0%
15%
5%
10%
15%
20%
25%
30%
35%
40%
months, while 20 percent intend to engage with
31
THE ROAD AHEAD FOR M&A IN 2023
advisors at an earlier stage. New technology
What disruptive trends will most affect M&A processes in the next 12 months?
will be important too: More than a quarter (27
percent) point to the potential of tools such
as platforms that can improve information
governance and speed; and 15 percent say
artificial intelligence (AI) and machine learning
26%
Cybersecurity
61%
22%
Deal automation
68%
18%
Data analytics
78%
(ML) can help them automate deal processes to
increase efficiency.
17%
IP capabilities
49%
14%
Artificial intelligence
Disruption ahead?
Deal processes themselves are also evolving to
Blockchain
reflect emerging dangers and shifting priorities.
0%
Most important
44%
3%
11%
10%
20%
30%
40%
50%
60%
70%
80%
All that apply
For example, 61 percent of respondents
cite cybersecurity as an area where there is
potential for disruption. The rising number of
cyber attacks during the COVID-19 pandemic
and thereafter continue to draw attention to
Have you experienced greater concerns surrounding security/cybersecurity during M&A deal processes over the
past 12 months?
Yes, and we were
very concerned
23%
this issue. A full 65 percent of respondents
have seen concerns about security and
Yes, and we were
slightly concerned
42%
cybersecurity during M&A processes
increase over the past 12 months; 62 percent
expect such fears to increase again in the
year to come.
35%
No
0%
10%
20%
30%
40%
50%
32
THE ROAD AHEAD FOR M&A IN 2023
“We were concerned about the possibility of bad actors trying
to hinder our deal progress,” says the director of acquisitions at
a German real estate business of one recent transaction. “We
Do you expect concerns surrounding security/cybersecurity during M&A deal
processes to increase over the coming 12 months?
50%
44%
were constantly wary about the potential threats in the deal
environment and devising plans to mitigate these threats.”
40%
34%
Elsewhere, dealmakers are focused on how deal automation
tools can streamline the process, with 68 percent prioritizing
30%
this. Securing greater efficiency at critical moments of the deal
process will be even more important in an environment where
18%
20%
deal processes are becoming elongated because of factors such
as heightened risk and increased due diligence. Tools such as
10%
Robotic Process Automation (RPA), analytics, ML and AI can all
help dealmakers pull back time.
4%
0%
Decrease
somewhat
Remain
unchanged
Increase
somewhat
Increase
greatly
In fact, the focus on deal automation tools is increasing
worldwide. More than a quarter of EMEA-based respondents
(27 percent) think data analytics will be a disruptive trend; and
a third of Latin American respondents (33 percent) point to a
greater role for deal automation.
33
THE ROAD AHEAD FOR M&A IN 2023
Key Takeaways
While the headwinds for M&A appear to be gathering speed, dealmakers
support diligence, including increasingly more innovative solutions
have become more selective and remain determined to pursue the right
such as virtual data rooms (VDRs), will therefore be important to
transactions. To avoid seeing transactions derailed, they will need to
maintain momentum.
navigate a careful course through the problems posed by the economic
slowdown, rising inflation and interest rates, and political risk. We round
Beware of greenwashing as the ESG agenda moves centerstage
up five key takeaways for dealmakers looking to conduct deals over the
Pressure from a diverse group of stakeholders — including policymakers,
coming year:
regulators, investors, customers and employees — continues to prompt
dealmakers to approach M&A through an ESG lens. But acquirers must
Do the right deal at the right time
tread carefully: Not every transaction is as green or sustainable as it
For corporate buyers with a clear strategic agenda, M&A activity is
may initially seem. Amid growing concern about “greenwashing”, it is
likely to be less of a cyclical endeavor. A period of more affordable
vital that due diligence processes now scrutinize targets’ claims on ESG
valuations and/or less competition in the market may even
in more detail.
present opportunities for strategic buyers to pick up the pace of
transformation. Distressed deals are likely to rise in number. As for PE
Adjust for a more difficult financing environment
buyers, their dry powder remains significant; opportunities to deploy
With the cost of capital rising and lenders becoming more risk-averse,
this capital will continue.
securing affordable financing for transactions is becoming increasingly
challenging. Buyers will need to be confident they have the funding
Focus on due diligence but keep deals moving
in place to pursue the deals they are now prioritizing. They may need
Amid a heightened sense of risk, dealmakers are naturally determined
contingency plans in case lenders get cold feet late in a deal process,
to scrutinize every transaction with greater granularity. But elongated
particularly where lending agreements feature material adverse impact
deal processes are more vulnerable to failure. Employing robust tools to
clauses enabling them to withdraw as circumstances change.
34
THE ROAD AHEAD FOR M&A IN 2023
About SS&C Intralinks
Exploit technology for deal efficiency and risk management
The cybersecurity threat looms larger than ever, with dealmakers
SS&C Intralinks is the pioneer of the virtual data room, enabling and
securing the flow of information by facilitating M&A, capital raising and
worrying about bad actors looking to sabotage deal processes.
investor reporting. SS&C Intralinks has earned the trust and business of
Investing in technology tools to detect and repel such threats
many of the Fortune 1000 and has executed over USD 34.7 trillion worth of
is therefore crucial. Similarly, advances in deal automation
technologies can help dealmakers manage transactions with
financial transactions on its platform.
For more information, visit intralinks.com
greater efficiency and security; that may be crucial as risk
increases and the window of opportunity for M&A narrows.
About Mergermarket
Mergermarket is an unparalleled, independent mergers & acquisitions
(M&A) proprietary intelligence tool. Unlike any other service of its kind,
Mergermarket provides a complete overview of the M&A market by
offering both a forward-looking intelligence database and a historical deals
database, achieving real revenues for Mergermarket clients.
For more information, visit mergermarket.com
35
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