Ready to move: Gearing up for the deal rebound in 2023

UK M&A Industry Trends

Businesses have been exercising understandable caution around some deals and investments. But they are balancing this with the need to secure longer-term growth. Our research shows that the momentum for dealmaking should remain strong in the year ahead, particularly in areas where businesses can’t afford to hold back, like acquiring new talent and technology.

Following a period of political instability, high inflation, declining consumer confidence and rising borrowing costs, it’s no surprise that UK deal volumes and values fell sharply in H2 2022.

Our economic forecast for 2023 anticipates that economic headwinds will continue this year. However, the analysis also predicts that inflation is likely to have peaked and more than 300,000 workers could rejoin the labour market over the coming 12 months. These positive indicators are matched by an easing in political and market uncertainty.

Reset to pre-pandemic levels

Within the deal market, tougher economic conditions have been reflected in uncertainty over valuations, wide bid-ask spreads and reduced access to leveraged debt. Many sellers are still reluctant to rein in valuations despite the earnings decline and further economic headwinds ahead.

But while dealmaking dropped in the second half of 2022, it was back to pre-pandemic levels rather than falling away altogether. Our sector and market-wide Global M&A Industry Trends: 2023 Outlook reveals strong pockets of activity.

In the UK, private equity firms still have a large amount of dry powder to put to work and time limits on its deployment. Strongly capitalised groups in sectors such as pharmaceuticals and financial services have sustained a strong deal pipeline. In other sectors such as energy and technology, mid-market activity has held up well, even if the limited availability of leveraged debt has put a pause on large transactions.

UK deal volumes and values, 2018–2022

Deal appetite rebuilds

Looking ahead, businesses recognise the importance of dealmaking in providing a fast and effective way to realise strategic objectives, even if there is still caution around execution. The main drivers are the urgent need to reinvent business models and modernise operational capabilities in the face of accelerating digital transformation, shifting consumer expectations and net zero targets.

“63% of UK CEOs do not plan to delay deals in the next 12 months.”

^{26th Annual PwC CEO Survey}

Nearly a quarter of the business leaders taking part in our latest CEO Survey (22%) believe that their business won’t be economically viable within a decade on its current course, while 10% believe they have less than three years. Currently, 40% believe their company’s tech capabilities lag behind the demands of their strategic objectives, and the gap will only widen without concerted investment in talent and technology. As CEOs look to bridge the gap, 41% are investing in external partnerships to get better access to tech capabilities and 21% are planning to acquire other organisations to obtain tech skills and capabilities.

If we look at pharmaceuticals as an example, we can see how urgent the need for transformation can be. Globally, the sector is facing a $200 billion ‘patent cliff’ as old licences expire. The race is therefore on to acquire innovative development firms to help strengthen the pipeline of new medications.

A similar dynamic is evident in other industries as groups look to acquire cutting-edge capabilities in areas ranging from data and analytics to renewable energy.

Turning point ahead

The big question is when this intent will turn into tangible deal flows? We know that there are large numbers of non-core operations being prepared for sale as businesses seek to divest to invest and refocus on growth.

Many potential buyers are reluctant to commit for now. But once debt markets begin to reopen and valuations move closer to the new market realities, we could see a rapid uptick in activity. Exactly when that would be is difficult to say with any certainty, so it’s important to be ready.

Seizing the initiative

Well-prepared dealmakers are already on the front foot, looking for opportunistic targets in the short-term, while preparing for an influx of acquisition opportunities later in the year. To make the most of the openings ahead, four key priorities stand out:

Develop the agility to move quickly
Identify what talent and technology is needed to meet strategic objectives and the potential targets that could meet these demands. That way you can move quickly when the right target comes up for sale.
Be creative on funding
Borrowing is more expensive and harder to secure, but sophisticated investors are finding creative ways to get deals done in areas ranging from all-equity funding to consortium deals.
Model the risks
While the economic risks are receding, they haven’t gone away. It’s therefore important to enhance due diligence with scenario plans for threats such as a resurgence in inflation, geopolitical tensions or new COVID-19 variants.
Demonstrate the full value potential
Acquirers are likely to apply a haircut for uncertainty and the cost of turnaround. As a seller, you can reduce this and optimise valuations by demonstrating the full potential of the divested operation. This includes creating a standalone balance sheet so potential buyers can gain a real picture of the revenues and costs and identifying options for transformation and cost-cutting once acquired.