The M&A landscape of 2022 was largely defined by disruption. War in Europe, supply chain instability, plummeting tech values, and a pinch in capital markets all played a part in slowing down the prior two years of record-setting transaction volumes. In partnership with Datasite, Financial Times organized a virtual panel of industry veterans to discuss how dealmakers can adapt to the new economic reality.

The face of dealmaking in 2023

Moderator Sujeet Indap, FT’s Wall Street Editor, opened the discussion by asking the panelists how the day-to-day work of M&A had changed over the past year. All agreed that the pace has been slower. Quite a few deals that initiated in 2022 died on the vine due to economic uncertainty.

Karen Ashley, the Vice President of Corporate Development Integration at Cisco, recalled utilizing this quiet period to figure out how they wanted to proceed in 2023.

Some aspects of the business show signs of returning to pre-2020 norms. Marco Caggiano, Head of North American M&A at JP Morgan, said he’s observed a shift back to a more traditional pace of dealmaking, complete with in-person meetings.

The market holds its breath

Todd Albright, Datasite’s Chief Revenue Officer, remarked that there’s “a state of deal readiness” pervading the industry — buyers and sellers alike are preparing for transactions, but an abundance of caution makes it difficult to pull the trigger.

Caggiano felt that part of the reason is that many sellers aren’t ready to accept reduced valuations, perhaps due to the abundance of dry powder remaining in private markets.

Meanwhile, from the buy side, it’s hard to justify any purchase without some assurance that it can survive the looming recession. Jeff Markusson, Senior Marketing Director for the Ontario Teachers’ Pension Plan, expressed that he’s operating under the assumption that any new acquisition will be facing headwinds for at least the next 6-12 months.

When will the pace of deals pick back up? An audience poll pointed to Q3 of 2023 as the most likely time for a rebound. The panelists largely agreed, forecasting more activity in the back half of the year.

Stakeholder expectations in a post-pandemic world

Indap asked how communications with stakeholders have shifted as M&A teams adopt a more cautious posture. Ashley replied that it’s now even more critical for dealmakers to show a well-thought-out plan for integrating, realizing synergies, and meeting revenue projections. Deal times are getting longer as buyers make use of their newfound breathing room to ensure they can make effective use of potential acquisitions.

Profitability is also a much bigger part of the equation. We’re no longer in the world of 2021, when easy money and a surging capital incentivized a focus on growth above all else.

An audience member asked if there’s been any noticeable shifts in the focus of due diligence. One factor that all the panelists agreed on was the rise of ESG concerns, driven partly by concerns over how companies responded to COVID-19.

Albright mentions that ESG was not a focal point three years ago, but social and environmental impacts have seen increased emphasis. Ashley added that this can be especially problematic when evaluating smaller companies that may not be able to devote as much attention to ESG.

Signing on the dotted line

Indap asked the panel if the slowdown has prompted changes in contract structures to address the uncertainty of buyers. Ashley said she’s seen more of a shift in earlier phases. Companies are more likely to bring in third parties to get an outside perspective on diligence, and to prioritize identifying and retaining business-critical talent.

Caggiano pointed to regulatory risk as another important consideration. Looking at the numbers, he said, deal times and completion percentages haven’t actually gotten much worse despite widespread concerns around harsher regulation. What has changed is that larger deals are terminated more quickly and take longer to reach completion.

Opportunities for bargain hunters?

Indap noted that the recent downturn has been particularly rough on growth-focused companies that haven’t reached profitability — the IPO and SPAC market, broadly speaking. He asked the panelists if they thought this represented a chance to get potentially valuable assets for a bargain price.

Markusson replied that the current environment makes it hard to justify outright acquisitions of these fragile businesses. However, he noted that it’s often possible to take a partial stake in a privately-held company that’s facing liquidity issues. This can be an attractive proposition for both parties — the original sponsor can reduce their risk without refinancing, while the new buyer can get a good deal on a portion of a company with a strong potential for future growth.

What can we expect from the year ahead?

Indap closed by asking for their predictions and trends to watch for in 2023.

The speakers were unanimous in expecting deal volumes to increase, particularly in the latter half of the year. Ashley said the primary focus is likely to be on profitable growth and recurring revenue. Caggiano mentioned he expects to see non-tech firms continuing to acquire tech companies for their growth potential and the novel capabilities they offer.

Markusson predicted a greater emphasis on creativity and novel deal structures moving forward.

It seems all but certain that we’ll see more innovations in dealmaking as the world continues to adjust to the shocks of 2022. Watch for more insights from Datasite in the months ahead.