Inflation and higher interest rates are the main challenges facing the M&A market in the Nordic region, but the prospects for deals in 2023 remain highly positive with a new realism and strategic discipline now driving activity.

These are the key conclusions from this year’s Datasite Dealmakers Dialogue event in Copenhagen in May.

Panellists Casper Elnegaard, Director Citi, Nordic Investment Banking, Matvej Golyshev, Head of M&A at Novozymes, Enrique Finkelstein Head of Transactions at CISC, and Tobias Bonde Frost, Partner at Moalem Weitemeyer Advokatpartnerselska, outlined the key headwinds facing M&A activity in 2023, and the tailwinds and opportunities for dealmakers.

Dealmaking is already bouncing back

The record rate of M&A activity across the Nordic in 2021 and early 2022 dropped sharply in the second half of last year as inflation and interest rate rises prompted many dealmakers to take a pause. But panellists noted deal volumes and values remained well above historic levels and were already showing signs of rapid growth in the early months of this year.

Inflation remains a challenge and higher interest rates have raised financing costs. This in turn had led to a mismatch between the price expectations of buyers and sellers. But Bonde Frost and Elnegaard both noted that this mismatch is already disappearing as both sides adapt to the new environment, particularly for TMT assets where prices had become inflated in 2021.

Meanwhile, buyers are also seeking out alternative sources of financing, which, combined with high levels of dry powder from previous fundraisings, means many buyers, notably in private equity, are looking to deploy capital over the coming year.

Strategy and discipline are shaping a healthier M&A market

The tighter financing conditions have also brought a more disciplined approach to dealmaking, with due diligence becoming more robust and greater use of earn-outs for sellers, which had all but disappeared in the slightly feverish M&A environment of 2021 and early 2022.

Corporates in particular were well placed to make acquisitions, driven not by a pricing opportunity but by a long-term strategic rationale, according to Golyshev who described 2023 as a year in which strong strategic conviction would be a key force in M&A activity.

One of the largest strategic drivers for activity will be in the energy and infrastructure sectors. Panellists agreed that while the war in Ukraine had created economic headwinds, it had also thrown the spotlight on energy security and the already significant interest in renewable energy to meet net-zero carbon emissions targets.

Finklestein said there was a ready supply of capital in need of deployment in the renewables sector as well as a need for investment not just in renewable energy generation but in the wider infrastructure such as the energy grid and end-user infrastructure such as electric vehicle charging.

Political support for the sector will be key to renewables growth and the panel noted President Biden’s Inflation Reduction Act that has driven the sector in the US, and which is expected to be reflected in similar policy frameworks in Europe.

The panel’s overall verdict was clear and positive. M&A activity may have fallen from its peak 2021, but the market is still strong by historic standards. And, they suggested the new environment of deeper due diligence, more disciplined finance, and a greater focus on long-term strategic value mean that the M&A market in the Nordic regions is not just set for continued growth but also for a healthier market with more productive and more profitable outcomes for companies and investors.