• After a record 2021 M&A stalled last year, but hopes are high it could pick up again in 2023
  • Underlying drivers of M&A activity still strong according to Goldman Sachs
  • As cost of capital rises, GS says M&A has increasingly become very sector specific

In the financial world one topic which always makes headlines is mergers and acquisitions (M&A). Why? Because the big deal and can have a big impact on companies and investors.

So to refresh your memory a merger describes where one company ceases to exist after becoming absorbed by the other.

An acquisition is when one company acquires or obtains a majority stake in another, which retains its name and legal structure.

M&A is generally considered good for the companies involved and investors. Among benefits of an M&A is greater financial strength, higher market share often in expanded locations, reduced competitive threat and access to greater labour and other assets.

While 2021 was considered a record year for M&A activity, there was a slow down in the deal-making in 2022 amid a backdrop of geopolitical and economic uncertainty.

The total value of global M&A had fallen 37% to $3.66 trillion by December 20, 2022 after hitting an all-time high of $5.9 trillion in 2021.

Central banks hiking rates to curb rising inflation along with the war in Ukraine and ongoing fallout from covid-19 took a toll.

Experts believe the market in 2023 will hang on economic data and how companies plan to adapt to a potentially impending recession.


Goldman Sachs confident M&A will pick up in 2023

Goldman Sachs Investment Banking’s global co-heads of M&A Stephan Feldgoise and Mark Sorrell spoke with Goldman Sachs Research’s Allison Nathan on the latest episode of podcast Exchanges at Goldman Sachs.

Feldgoise said 2022 was a tale of two halves with H1 continuing the volumes of 2021 and a slowdown in H2.

But he said overall 2022 was still quite a good year for M&A activity.

“If you look at the deal counts and deal volumes it was on par with what I’ll call the five year averages excluding the extraordinary 2021 so from an M&A activity it felt pretty good,” he said.

He said private equity makes up about 30-40% of the M&A market and that’s what you saw come to a tremendous slow down in the second half of 2022.

“A lot of that was driven by the leveraged finance markets and what I will call the inability of private equity to get attractive financing they had benefited from frankly for many years not just in 2021 but very low interest rates for a period time.

“That being said, strategic activity remained very robust in 2022 and we’ve seen large transactions.”


Underlying drivers of M&A are still strong

Sorrell said that the trend of technology shift is still there and “arguably, it’s accelerating.”

He said the focus on ESG is still there and arguably, it is also accelerating, while the trend of simplification has definitely been accelerating through 2022.

“And on the private capital side, the amount of liquidity in the system is as high as it’s ever been,” he said..

“The need to deploy is there. “

Sorrell said the underlying drivers seen in the post-covid M&A world are at least as strong as they have been.

“What is different is, one, the financing market – and clearly, the macro is also more uncertain,” he said.


Simplification a big focus

“An important part of the market in 2022, and frankly, for the last several years has been what I’ll call the structured transaction, that could be a spinoff or a split-off,” Feldgoise said.

He said the structured transaction has been driven by investors feeling strongly that it’s easier and more digestible for them to invest in companies where they can view a single sector and consider ‘is that going to be a beneficiary or one that I might not want to invest in?’

“Simplification is going to get a big investor focus,” he said.

Optimism about the path ahead.

“Financing is going to come back – it’s a question of when,” Feldgoise said.

“The world needs investment and to make those investments, the capital has to be provided to where the opportunity sits,” he said.

He said long-term cycles and what has really driven an M&A boom over decades is that the repositioning and the volatility and the dynamics requiring massive investments persist.

“And this is where we play a role – how does capital get allocated? It’s through financing, it’s through M&A, it’s through investment by private equity funds.”


Change in valuation dynamics

Feldgoise said there’s been more regional strategic transactions. He said cross-border has suffered the most and this dates back to even the early days of covid-19 where travelling and negotiating deals across countries and continents was difficult with restrictions.

“Strategic issues and focus coming out of covid has remained top priority ie think about repositioning and supply chain,” he said.

Feldgoise said valuation has also changed with how you think about dollar earnings being a discussion point often in boardrooms.

“Just because interest rates have gone up, the weighted average cost of capital has gone up and therefore fundamental valuations have declined and we’ve seen stock markets decline,” he said.

“But the fundamentals of the business remain very strong so there is a whole valuation dynamic impacting all of this so it gets very sector specific and we’ve seen the largest downdrafts in tech but we’ve seen very robust and continued M&A in sectors like industrials.

Feldgoise said healthcare is another sector primed for M&A activity with big pharma extraordinarily well capitalised coming out of covid and looking to rebuild drug pipelines.

“So as we look to 2023 we think there’ll be sectors which will benefit but don’t expect to see a return of robust cross-border which is the most impacted,” he said.