By: Stephan Millard, Sr. Director, Product Marketing

With the economy wavering under the strain of inflation, supply chain problems, and the Great Resignation, dealmakers are gearing up for a challenging 2023. Datasite gathered a panel of experts to review what we’ve learned over the past year and what we can do to prepare for the changes ahead.

Mixed Forecasts For M&A in 2023

The discussion kicked off with a look at next year’s prospects for deal activity. Audience poll results showed a nearly perfect split between those predicting an uptick and those expecting a downturn. 

Bharat Zaveri, SailPoint’s Head of Corporate Development, offered a mixed forecast. He said that while activity in some sectors will trend up, he’s anticipating that many others will slow down — though he pointed to his own field, cybersecurity, as one area likely to see an increase.

What about valuations? Zaveri said he expects them to continue dropping, particularly on the private equity side. He pointed out that the private markets tend to lag the public on valuation shifts, and the current mismatch suggests that they haven’t hit bottom yet. Poll respondents backed him up, with 62% of the audience voting for “Decrease”.

Troy Holland, the Senior Manager for Corporate Development and Strategy at Mattel, was more uncertain.

“When you look at some of the things that are a little bit less tech-levered out there, and how depressed valuations have gotten, I wonder how much more they can slip,” he said.

Abby Roberts, the Senior Director for Datasite Insights, agreed. She suspects that valuations have bottomed out in many areas and expects them to be largely steady through 2023.

Reflections on 2022: Headwinds and Tailwinds

Though 2022 was a bumpy ride for the economy in general, there were still some factors driving deals forward. One was the drop in valuations noted above.

Roberts suggested another potential driver: the push to consolidate supply lines in response to major global shocks like the pandemic, global warming, and the war in Ukraine. Many players around the world began to pull back from their globalized postures and retrench at the national and regional levels.

Of course, there was no shortage of obstacles in the past year either. The panelists identified the most significant headwinds as inflation, economic uncertainty, and the rising cost of capital.

Recession Worries Dominate the Landscape of 2023

Moderator Elle Cathey asked the panel to identify the biggest factors impacting dealmakers for the coming year. The looming recession topped the list. Economic indicators are a mixed bag at the moment, but as Holland noted, the recent 2-10 inversion in Treasury bond yields is telling.

Since it’s still hard to say how much of a slump we’re in for, dealmakers are taking a conservative approach. Prep and diligence times are up, and investors are focusing on profitability overgrowth.

Given these shifts, Zaveri predicts a rise in take-private deals.

“Private equity firms are flush with cash, and they’ve been waiting for the right valuations,” he said. He added that take-privates can mean better prices for sellers who are less than enthused about current public valuations, as well as an opportunity to clean house.

Another type of transaction likely to be on the rise is carve-outs, divestments, and exits. Roberts expects firms to jump at the chance to shed some bulk and refocus on core strategies.

How to Fly Right Through the Turbulence of 2023

Reflecting on the challenges ahead, the experts suggested some best practices for dealmakers in this uncertain moment. Zaveri suggested the slowdown in deal activity as an opportunity to reflect on and refine internal processes. A busy market often leaves little time to take a big-picture look at your strategy.

The other panelists agreed. “I always look forward to January, because it’s such a great time to step back and get that 50,000-foot view,” Roberts said. “What are you doing? What’s going on in the industry? What’s your strategy? How do you want to go to market?”

Holland suggested that stepping back this way is also a chance to think outside the box.

“Challenge yourself,” he said. “What are you not thinking about? What’s happening over in that other space you normally wouldn’t explore?”

The discussion also looked at risk management best practices. Zaveri emphasized the need to take a long look at any target’s digital security, particularly for other firms in the cybersecurity space. Holland stressed the need to prompt collaboration and make sure all voices on the team are heard. Since no one can be an expert in everything, the only way to get the complete picture is to put everyone’s heads together.

Roberts seconded this point, stressing that humility is vital to this process. Too often, as she pointed out, the excitement about a deal can cause people to ignore the voices of reason.

The Last Word on 2022

Cathey asked the panelists to sum up the lessons of the past year in one word. Holland said “Change”, referring to ongoing global transformations ranging from shifting supply chains to the resurgence of war in Europe.

Zaveri’s word was “Uncertainty”, which he sees as the biggest factor shaping both 2022 and 2023.

Roberts reiterated “Humility” as the concept that’s top of mind for her.

“This year has knocked all of us down a peg or two,” she said. “Going into 2023, being humble about what we know and having a learning mindset is going to be really critical as we figure out how to navigate market turbulence…and hopefully have a better year.”

Hopefully, this chance for reflection leaves us all better prepared for the obstacles and opportunities ahead. We here at Datasite wish all our readers a happy holiday season and a thriving, happy new year!