Deal or no deal? Experts upbeat about M&A for second half of 2023

Despite the somewhat gloomy economic outlook, many commentators are predicting a resurgence in mergers and acquisitions (M&A) activity in the second half of the year. What will drive that increase, what sectors will see the most activity, will distressed sales be a feature of the market and will rising interest rates and a tightened credit environment dampen valuations and attract bargain hunters into the market?

M&A activity this year

When we talk about activity levels so far this year, we need to consider in the context of the record levels recorded in 2021 and the first half of 2022 for both the value and volume of deals done in Ireland and globally, says John Bowe, partner in corporate finance at Mazars. “Activity in the second half of 2022 was impacted by the war in Ukraine, increased volatility in equity markets, rising interest rates and inflation,” says Bowe. “These factors combined to create greater uncertainty, leading to reduced deal activity.

“As we start 2023, given this dynamic, deal volumes are down on prior periods but there are still good levels of activity and deals are getting done across sectors where fundamentals remain strong.”

Lorna Osborne, corporate and commercial partner at Addleshaw Goddard, agrees that 2023 didn’t start with a bang. “There has been a slow start to M&A in 2023 as the environment has seen tougher financing conditions impact both values and volume,” she says.

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“Despite this, we are now beginning to see business owners preparing companies for sales and private equity (PE) funds actively looking for suitable opportunities. I am cautiously optimistic that M&A activity will build, and we will see a higher volume of deals close out in the second half of 2023.”

On a typical year you’d expect to see more deals closing early in the year, says Don Harrington, head of the growth team in Goodbody’s corporate finance division. “There’s more time to close in the first half of the year. People go out to sell in late December or early January and hope to have it closed out by May or June. If you’re trying to sell in the other half of the year, you have to cut across the summer and there’s less time to close.”

A focus on long-term positioning

While the second half of 2022 was impacted by a tightening in finance markets, the underlying drivers of deal activity remain, with high levels of private capital ready to be deployed and persisting macro themes such as energy supply and transition, innovations in technology, as well as environmental, social and governance and healthcare continuing to influence deal-making levels, says Brian Butterwick, partner in William Fry’s corporate department. “We have already seen a relatively robust start to the year, with well-funded strategic buyers looking through near-term volatility to focus on long-term positioning.

“Coupled with this, improved business sentiment, the emergence of both a more stable and predictable credit market, and also alternative forms for financing should result in an increase in activity, particularly from private equity, as we move through the year. This is likely to be the case even if inflation and interest rates remain above pre-2022 levels as certainty on financing terms and the ability to execute transactions will be of paramount importance. Finally, given Ireland’s appeal in recent years for inbound investment and its current economic outperformance, the Irish M&A market is also likely to benefit from the anticipated increase in 2023 in cross-border activity globally.”

Predictions for the rest of 2023

While there are obvious macroeconomic uncertainties, there are also several factors that could drive activity in the latter half of 2023, says David O’Kelly, head of M&A at KPMG. “One of the primary factors is the volume of private equity available to deploy. We keep in regular contact with funds in Ireland and the UK and have noted significant interest in identifying strong companies in a good market like Ireland,” says O’Kelly.

The global economic outlook now appears to be stronger than originally forecast with some experts predicting that the Eurozone may avoid a recession, says Osborne. “There are also signs that inflation is slowing which would see interest rates stabilise. These macroeconomic factors give us reason to be optimistic about M&A activity in the second half of 2023,” she adds.

The impact of rising interest rates varies significantly by sector, according to O’Kelly. “For example, fixed-income assets such as property have fewer options to offset higher interest costs and suffer a resultant impact on value. For most businesses, funding costs are one factor driving valuation alongside important characteristics such as business quality, strength of management, growth potential and margin profile.”

Periods of volatility tend to create opportunity and there will always be specialist acquisition vehicles who will focus on distressed sales, says Osborne. “However, in my experience, the majority of investors, private equity or otherwise, are primarily interested in viable businesses that have the ability to grow and provide returns on investment, and I do not expect these investors to suddenly pivot their M&A strategies,” she adds.

Playing out the predictions

“I would see private equity as being a key driving force behind the global and Irish M&A markets,” says Osborne. “They are still sitting on significant dry powder and we are aware that there is a laser-like focus on investments in Ireland for a number of PE funds. There has been a rise in PE deals in Ireland, both in new investment opportunities and bolt-on investments to existing portfolio companies in recent years, and this trend is expected to continue.”

In simple terms, capital will drive deal activity, says Bowe. “In an Irish context, there are indigenous private equity funds with between €800 million and €1 billion in capital that need to be invested in Irish companies over the next five years,” he explains. “These funds can’t afford to miss out on good opportunities and will want to do deals. There is also a lot of interest in the Irish market from UK and US funds. We are seeing a large number of mid-market UK funds actively looking at Ireland and several overseas investment houses have recently opened Irish offices.”

Bowe says the strength of the US dollar is giving a big boost to US investment in Europe. Added to that, corporate balance sheets are strong, with resources in place for acquisitions. “Large corporates are looking across their product and service offerings and, in an environment where valuation multiples may come back, will certainly want to make strategic acquisitions,” he says. “Corporates will feel that strong balance sheets will present a buying opportunity for them, given tighter financing conditions.”

Strong sectors and opportunities

O’Kelly says most activity is in healthcare, tech and energy. “The deal drivers range from investment in the decarbonisation of the economy; thematic trends such as cybersecurity or cloud computing; and in healthcare, the huge demand placed on critical services,” he says.

Tech-enabled businesses and software companies will continue to be very attractive, with activity levels remaining high in this sector, agrees Bowe. “The IT-managed services/consulting sector is fragmented in Ireland and, with digitalisation a key focus for businesses, these companies are performing strongly,” he explains. “We expect to see M&A activity in this sector over the course of 2023. Consolidation in the insurance broking market continues at pace in Ireland, and we don’t expect to see that slowing down any time soon so we anticipate that activity levels will remain high in this sector.

“We also recognise that the logistics sector is still quite fragmented, so we expect continued consolidation there. Healthcare is another sector where we expect activity. We are all living longer so businesses with digital healthcare products and services will attract investment.”

Harrington believes there may be more restructuring growth opportunities. “There are businesses that are good but have a poor balance sheet, so a new investor can come in and recapitalise the business. There are also companies that raised a lot of money in 2021 but burned through that money as they built a much bigger platform and the existing investors ran out of road, so it can be recapitalised at a lower valuation.”