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2023 Outlook for Middle Market Mergers & Acquisitions
In 2021, as the global economy roared back from COVID-19 shutdowns, the mergers and acquisitions (M&A) market went into hyperdrive. Deals held over from the previous year, combined with huge demand for new transactions amid the bounce back, powered M&A to all-time highs.
After such a period, 2022 was predictably more restrained. The economic and geopolitical challenges that developed over the year added to the likelihood of a slowdown while an array of headwinds gathered strength. Against this shifting landscape, Mergermarket surveyed 300 M&A dealmakers globally to get a picture of their current sentiment, where they see the market heading, and the challenges and opportunities they expect along the way.
Key findings include:
- 62 percent say M&A activity will increase, and all respondents expect to undertake deal activity in 2023. Primarily in the middle market
- 72 percent expect ESG issues to get more scrutiny in the M&A process over the next three years, a theme that has accelerated over the last 12 months
- 68 percent say automation will impact your deals notably, the growing importance of data analytics and cybersecurity protection during deal processes
- Corporate dealmakers are increasingly preoccupied with the slowing global economy, increasing inflation, and geopolitical risks; private equity investors are still sitting on unprecedented amounts of dry powder and are notably more optimistic. 64% expect to undertake four or more deals in 2023
Market sentiment remains broadly optimistic despite rising headwinds and a more difficult dealmaking environment. However, global M&A deal volume in all sectors has declined 36 percent compared to 2021. However, there has been a noticeable rebound in the smaller M&A deals.
According to data published by EY, M&A for small companies worth between $100 million and 500 million increased by 27 percent in 2022 compared to pre-pandemic levels (2015-2019). That’s a noteworthy trend in a year that has seen anemic deal flow.
The EY team believes this trend is sustainable. They expect to continue to see this strong flow of smaller deals throughout 2023, even as CEOs remain cautious due to ongoing geopolitical tensions and heightened uncertainty. Deal financing challenges from higher interest rates, increased costs of financing, and regulatory scrutiny will continue to make smaller deals more attractive.
Tech CEOs are particularly keen on small deals heading into 2023. A recent EY report found that 72 percent of tech CEOs plan to pursue M&A in the next 12 months, compared to an average of 59 percent across all sectors. CEOs with ample liquidity and cash could use recent price corrections to consolidate their position in the market.
EY’s broader outlook on M&A activity in 2023 is mixed. Stock market volatility, rising interest rates, inflation concerns, and geopolitical uncertainty could restrain the deals market in the coming months. Despite these challenges, dealmaking should remain relatively robust in 2023.
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