Mergers and acquisitions (M&A) market outlook 2023

Your latest deals market snapshot
Mergers and acquisitions (M&A) market outlook 2023

We provide regular Deloitte mergers and acquisitions updates on the UK M&A market, including industry M&A outlooks and key M&A deal trends. Through videos and articles, we look at how hot topics, such as inflation, digitalisation, Environmental, Social and Governance (ESG) and the Energy Transition, are impacting M&A activity.

We have seen a drop in deal values and volumes in 2023, as caution in the market continues. Despite macroeconomic instability, we observe M&A drivers in some industries, such as Financial Services. Crucially, less volatility in the debt markets will be vital if we are to see a revival in M&A transactions in 2024.

Watch our macro perspective video

Gurm Dhillon, UK M&A Lead, provides a macro perspective on the global and UK M&A markets. Gurm discusses the macroeconomic environment and how this has contributed to a drop in deal values and volumes this year compared to 2022. He looks at what M&A activity is happening across different sectors such as TMT and Consumer, as well as in Private Equity, and provides predictions on what we can expect as we look to winter 2023.

Read transcript

Watch our sustainability & climate video

James Hilburn, Financial Advisory Sustainability & Climate Lead, and Daniel Grosvenor, UK Power, Utilities & Renewables Lead discuss sustainability & climate related trends we’re seeing in the M&A market. James and Daniel dig into the data and examine key trends that shape the outlook for 2024 deal activity. For example, they look at how some organisations are using M&A to update their business models and prepare for sustainability megatrends, including the Energy Transition.

Read transcript

00:00:10 - 00:00:57 Introduction

Hi, I'm Gurm Dhillon, Deloitte's UK M&A Lead. Welcome to our Winter 2023 M&A Market Outlook.

Inflation, rising interest rates, prevailing debt conditions and increased cost of capital have seen the optimism of our Spring CFO survey rapidly fade. This is driving a focus on cost reduction, value creation and cash control. This is also reflected in deals by more portfolio optimisation, rationalisation, strategic bolt-ons and consolidation.

However, as predicted, caution remains causing a drop in deal value and volume versus 2022. In addition, increasing scrutiny of deals from boards, oversight committees and financing banks has meant they are taking longer to execute.

As ever though, market dynamics at a sector level shape our outlook.

00:00:57 - 00:02:43 Industry outlooks

Tech, Media and Telco lead 2023 deal volumes, with the expectation that it will continue through Q4 and into next year. Telecom majors will seek a less capital intensive structure and look to consolidate or integrate undervalued companies.

Consumer businesses are inevitably prioritising cash flow improvement and cost reduction. Deals will take longer to crystallise as business leaders face the headwinds of dented consumer sentiment, continued high inflation and expensive capital costs.

Life Sciences and Health Care has been relatively resilient.

M&A activity has been driven by demographic shifts, evolving care models, and an ongoing corporate drive towards portfolio optimisation. Recent government and Labour Party endorsement of the private sector collaboration to reduce NHS backlogs will be a welcome boost to some.

Financial Services is exhibiting multiple M&A drivers amidst market instability.

Banking deals are likely to be challenger-led as they try to achieve scale. The payments sector remains a hot topic for financial investors, with large-cap UK banks showing interest. Insurers, flush from better investment yields will increase corporate M&A activity across all underwriting sectors. Yet the risk of claims inflation will mean non-core disposals continue.

The need for investment and wealth management firms to drive scale, particularly with current depressed market revenues, caused an increase in M&A activity this summer - accelerating into next year.

Turning to the ESG agenda concerns arise despite government net zero commitments. Escalating financing of raw material costs for clean technologies may hinder projects. In the Energy, Resources and Industrials sectors, ESG-focussed opportunities are disrupting deal activity.

00:02:43 – 00:03:21 Private equity

For Private Equity, there are significant headwinds in the market. Rising interest rates and availability of debt has dampened the traditional LBO market in the short term. However, we continue to see market leaders raise record level funds across various asset classes. As interest rates stabilise, deals will grow, driven by the record levels of dry powder raised over the last five years and the dislocation created by liquidity constraints.

In the meantime, portfolio companies are attracting sponsor attention with notable optimisation through value creation activities before exits. Many of these assets will be in closed-ended structures that must be realised quickly.

00:03:21 – 00:03:41 Summary

To summarise, business leaders will continue to focus on deals that ensure their businesses are resilient and well positioned for growth. As we head towards 2024, stability in the macroeconomic environment and less volatility in the debt markets will be critical to ensuring a resurgence in transactions. Watch this space as we navigate these dynamic times together.

00:00:10 - 00:00:31 Introduction

Welcome to our latest M&A market outlook. I'm James Hilburn. And, I'm Daniel Grosvenor. Today, we'll dive into sustainability and climate related trends we're observing in the M&A market.

Against a familiar backdrop of conflict, inflation signals, and geopolitical tension, the noise suggests that companies and investors are de-prioritising sustainability objectives.

00:00:31 - 00:01:56 Analysing deal data

But what does the data say? As highlighted in our recent macro M&A outlook with our colleague Gurm Dhillon, deal volumes and values are down versus this point last year. This is a pattern we see across all sectors.

We've dug into the data and if we strip out the macro pressures weighing on activity across all sectors, we observe that deals for businesses in the Energy, Resources and Industrials sector have risen as a proportion of total deal value.

This is from 27% in 2022 to 31% in 2023 year-to-date. It is the only sector to have posted a double digit increase in its share of total transaction values since 2020, from 20% up to 31%; and a reverse of a trend seen in some other sectors.

Energy and Industrials businesses have also been significant investors over the period, supported by robust balance sheets that have been bolstered by surging commodity prices.

From this position of strength, data suggests that ER&I businesses are using M&A to acquire nascent forward-looking technology to futureproof their businesses. Either by adding new capabilities or using M&A to access new product segments.

For example, over the last three years, ER&I investments in the tech sector have accounted for over 7% of total ER&I transaction volumes, but less than 3% on a value basis. This is clear evidence that the investments being made are smaller in value than those in other sectors.

00:01:56 - 00:02:36 Using M&A to transform business models

Another trend we observe is that organisations are beginning to use M&A to transform their business models in preparation of key sustainability megatrends such as the energy transition.

For example, in 2023 we have observed how several acquisitions and investments have been used to accelerate strategic sustainability objectives.

These include VW and BMW, two European auto businesses who secured their battery supply chain with investments into Europe's largest battery cell producer. Let’s also a look at AtkinsRealis, a Canadian company that provides engineering, procurement and construction services. It has acquired digital process simulation technology to meet its net zero ambition.

00:02:36 - 00:02:59 Summary

In summary, M&A activity is becoming increasingly shaped by sustainability and climate related trends. We anticipate that this will continue to influence dealmaking throughout Q4 and into 2024.

Look out for our upcoming articles on stranded assets and the energy transition in the context of the M&A landscape.

Watch our previous video updates using our YouTube playlist | Q2 2023, Q1 2023, Q4 2022 and Q3 2022

What happened in the M&A market in 2022 and 2023? With ongoing market uncertainty, our updates over the last 18 months offer macro perspectives on the market and discuss key M&A trends and drivers of deal activity across sectors, including Consumer, FS, and TMT.

Key contacts

Charindra Pathiwille

Managing Partner, Financial Advisory

Gurm Dhillon

UK Leader M&A