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Q4 2021 MARKET PREDICTION
Contents
Foreword.....................................2
Key Findings................................3
Market Sentiment and
the M&A Environment.................. 7
M&A Expectations......................13
ESG: Preparation and Process....20
The Road Ahead
for M&A in 2023.........................28
Key Takeaways..........................34
Foreword
In 2021, as the global economy roared back
from COVID-19 shutdowns, the mergers
and acquisitions (M&A) market went into
hyperdrive. Deals held over from the previous
year, combined with huge demand for new
transactions amid the bounceback, powered
M&A to all-time highs.
After such a period, 2022 was predictably
more restrained — and the economic and
geopolitical challenges that developed over
About this research
In the second quarter of 2022, Mergermarket surveyed
300 mergers and acquisitions (M&A) dealmakers from 225
corporate and 75 private equity (PE) firms. These included
100 respondents headquartered in North America, 75 in
Europe, the Middle East and Africa, 75 in Asia Pacific and
50 in Latin America. Overall, 21 percent of corporates
describe their main sector of focus as Technology, Media
and Telecom, with 18 percent in each of Industrials and
the course of the year added to the likelihood
of a slowdown, while an array of headwinds
gathered strength.
Against the backdrop of this shifting
landscape, we surveyed 300 M&A dealmakers
globally to get a picture of their current
sentiment, where they see the market heading
and the challenges and opportunities they
expect along the way.
Chemicals, Energy, Mining and Chemicals, and Financial
Services. Among these corporates, 46 percent have an
annual turnover greater than USD three billion. Among PE
respondents, 53 percent have assets under management
of less than USD 10 billion.
All charts show overall figures, except when figures based
on region or corporate/PE are statistically significant.
2
 KEY FINDING 01

01
01
Optimism
Persists

62%
02

03

04

expect overall levels of

M&A activity to increase
over the year to come.
All respondents are expecting to undertake deal activity over the
next 12 months — and 42 percent expect to do four or more deals.
The mid-market is expected to dominate. More than three-quarters
of respondents (78 percent) expect to undertake a mid-market
transaction (worth less than USD two billion) in the next 12 months.
3
 KEY FINDING 02

01
ESG in the
Spotlight
02
02
In last year’s study, we reported on the growing importance
of environmental, social and corporate governance (ESG)
factors in dealmaking and deal processes. This theme has

72%
03 accelerated over the past 12 months.

04

now expect ESG issues to receive

more scrutiny in M&A processes over
the next three years, compared to 62
percent who said the same last year.
4
 KEY FINDING 03

01
Disruptive Trends
Continue to Emerge

68%
02

03
03

04

say deal automation will

affect M&A processes in
the next 12 months.
This is in contrast to last year's report, in which only 42 percent of
respondents felt the same way. Meanwhile, other disruptive trends
observed in last year’s report — notably, the growing importance of
data analytics and cybersecurity protection during deal processes —
have also gained momentum.
5
 KEY FINDING 04

Private Equity

PE
01

Leads the Way

02
While corporate dealmakers are increasingly preoccupied
with the slowing global economy, increasing inflation and
geopolitical risks, private equity investors are still sitting
03 on unprecedented amounts of dry powder. As a result,
private equity dealmakers are notably more optimistic

64%
about their deal activity.

04
04

tes
ora
p
Cor
expect to undertake four or more
deals over the next 12 months,
compared to 34 percent of corporates.
6
Market Sentiment and
the M&A Environment
Despite rising headwinds and a more difficult environment for dealmaking,
market sentiment remains broadly optimistic.
After a record-setting year for M&A activity
in 2021, it would have been challenging
to maintain dealmaking momentum at
such a pace even in the most auspicious
of circumstances. As it turned out, 2022
provided a much less supportive backdrop
than the previous year. M&A activity dropped
back as a result, though it remained resilient.
Challenges came quickly and in large numbers
over the year: The conflict in Ukraine,
which began February 20, 2022, prompted
a significant escalation of geopolitical
uncertainty and tension. In the economic
sphere, the return of rampant inflation in
many countries prompted central banks
to tighten monetary policy sharply, with a
series of interest rate rises increasing the
cost of capital. Moreover, the fallout from the
COVID-19 pandemic continued, causing ongoing
disruption to global supply chains — with China,
in particular, imposing further lockdowns.
In combination, these factors have lowered
expectations of global economic growth. The
International Monetary Fund (IMF) pared back
its growth forecasts over the year. In October,
the IMF predicted global growth of 3.2 percent
and 2.7 percent in 2022 and 2023 respectively.
The IMF described the outlook as “the weakest
growth profile since 2001 except for the global
financial crisis and the acute phase of the
COVID-19 pandemic.”
Inevitably, as the mood darkened, appetite for
M&A eased. There were 20,056 deals in the
first three quarters of 2022, down 12 percent
from the same period the previous year,
according to Mergermarket data. These deals
were collectively worth USD 3.1 trillion, which
is around 26 percent lower than in the first
nine months of 2021.
In addition, the slowdown appeared to gain
steam during the third quarter. Worldwide
Page A7
MARKET SENTIMENT AND THE M&A ENVIRONMENT
M&A activity during the third quarter of the
year reached just USD 731 billion. Transactions
decelerated at every level of the market, from
megadeals to small and mid-market M&A, and
every region slowed.
Holding on
This is not to suggest the global M&A market
is grinding to a halt. Activity in 2022 compares
well to pre-pandemic levels of dealmaking —
and comparisons with the record year of 2021
were always going to look underwhelming.
Moreover, many of the drivers of that record
year remain in place. Corporates continue to
focus on improving supply-chain resilience,
optimizing their portfolios, reflecting on ESG
themes, and, perhaps above all, securing
digital transformation. PE has USD 3.2 trillion
of dry powder available to it, according to
estimates, down from record highs but still
elevated by all historical comparisons.
However, a slowdown in the frenetic pace
of dealmaking brings new opportunities.
Most obviously, valuations may become less
There are so many political uncertainties and policy
changes which cannot be predicted accurately — this is
a hindrance for dealmakers.
Vice president of strategy, Latin American consumer business
demanding. Mergermarket’s data points to 23 percent who forecast a significant increase.
early evidence of this; indeed, lower public And despite the considerably different market
market valuations saw USD 216 billion in conditions, this result is notably similar to last
public-to-private transactions up to the end of year, when 24 percent of those polled said
the third quarter in 2022 — a 24 percent year- they expected activity levels to rise
over-year increase. significantly and a further 40 percent
expected it to rise somewhat.
Maintaining hope
Against this backdrop, respondents to this Still, the regional picture is more nuanced.
research remain broadly optimistic about Asia Pacific (APAC) respondents are
the outlook for deal activity for the next 12 particularly upbeat, with 76 percent expecting
months. Almost two-thirds of respondents (62 to see M&A activity rise, including 31 percent
percent) expect overall levels of M&A activity who expect a significant increase; North
to increase in the year to come — including American (NA) respondents are more upbeat
8
MARKET SENTIMENT AND THE M&A ENVIRONMENT

than the average too, with 73 percent saying they expect an What do you expect to happen to the level of M&A activity over the next 12 months?
increase. The EMEA region was also positive, albeit less so —
56 percent expect a rise in M&A. By contrast, in Latin America Total 2% 19% 17% 39% 23%

(LATAM), only 32 percent of respondents think M&A activity will

accelerate — and the same number predicts a decline. Asia Pacific 3% 9% 12% 45% 31%

Europe,
In fact, Latin America is the only region of the world where the Middle East 25% 19% 31% 25%
and Africa
positive expectations are matched by negative forecasts. One
explanation for this was the considerable uncertainty caused by Latin America 6% 26% 36% 30% 2%

a tight election race in Brazil in the autumn of 2022, which was

won by left-wing former president Luiz Inácio Lula da Silva. There North America 1% 16% 10% 46% 27%

is further political upheaval expected in 2023, with an election

0% 20% 40% 60% 80% 100%
in Argentina. As the vice president of strategy at one Latin
Decrease significantly Decrease somewhat No change
American consumer business puts it: “There are so many political
Increase somewhat Increase significantly
uncertainties and policy changes which cannot be predicted
accurately — this is a hindrance for dealmakers.”

These regional variations also play out in respondents’

expectations of their deal activity. While all respondents expect to
pursue M&A opportunities over the next 12 months, those based in Almost two-thirds of respondents (62 percent)
North America (60 percent) and APAC (47 percent) are much more expect overall levels of M&A activity to increase
likely to anticipate undertaking four or more deals. Most Latin over the year to come — including 23 percent who
American respondents, by contrast, expect to be less busy — only
forecast a significant increase.
10 percent say they expect to undertake four or more deals over
the next year, compared to 42 percent of all those surveyed.
9
MARKET SENTIMENT AND THE M&A ENVIRONMENT

There is also a split between corporates and PE in this regard. How many M&A deals do you expect to undertake over the next 12 months?
(Select one.)
Almost two-thirds of the latter respondents (64 percent) —
100%
doubtlessly conscious of their dry powder mountain and perhaps 10%

hopeful of reduced competition as the market slows — expect 33%

80% 42% 47%
to undertake four or more deals over the next 12 months. Only a 60%

third of corporates (34 percent) say the same. 60%

90%
40%
This is not to suggest PE investors are not becoming risk-averse 58%
67%
53%
too. A Brazilian PE partner explains the firm’s appetite for deals: 20% 40%

“Our current portfolio companies are struggling due to supply-

chain challenges; we want to pursue add-on opportunities that 0%
Total Asia Pacific Europe, Latin North
the Middle East America America
will help stabilize their operations.” and Africa
1-3 4 or more

Overall, respondents are set to embark on more transactions

in the next 12 months than in the past year: Last year’s survey How many M&A deals do you expect to undertake over the next 12 months?
(Select one.)
found that only 18 percent of corporates and 36 percent of
PEs expected to undertake four or more deals. Not only that,
13 percent of those polled last year said they did not expect
to embark on any M&A deals in the coming year — whereas no 66% 34% 36% 64%

respondent this year said the same.

Corporate Private equity firm

1-3 4 or more

10
MARKET SENTIMENT AND THE M&A ENVIRONMENT

Mid-market to the fore What size of M&A deals do you expect to undertake in the next 12 months?
(Select all that apply.)
This survey also suggests the M&A market is less likely to see
megadeals over the next 12 months. Rather, most respondents
100%
89%
are focusing on the mid-market (deals worth less than
80% 78% 75% 76% 73%
USD two billion). Overall, more than three-quarters of
61%
60% 52% 53%
respondents (78 percent) expect to undertake deals in this 47%
40%
range, compared to just 52 percent anticipating doing a large 40%

20% 20%
deal (worth USD two billion to 10 billion) and only 15 percent that 20% 15%
9%
4%
think a megadeal (worth more than USD 10 billion) is possible. 0%
Total Asia Pacific Europe, Latin North
Respondents in every region of the world are broadly aligned on the Middle East America America
and Africa
this issue. Middle-Market (worth less than USD 2 billion)
Large (worth between USD 2 billion - USD 10 billion)
100%
Transformative/Megadeals (worth more than USD 10 billion)
81%
PE firms share this view. Indeed, 81 percent expect to do a 80% 77%
64%
mid-market deal, compared to 77 percent of corporates. That 60%
48%
said, in a marketplace where PE firms generally expect to be
40%
more active M&A players over the next 12 months, one in five 20%
20% 13%
anticipate undertaking a megadeal, compared to only 13 percent
0%
of corporates. Corporate Private equity firm

Middle-Market (worth less than USD 2 billion)

This suggests that dealmakers feel more risk averse amidst Large (worth between USD 2 billion - USD 10 billion)
Transformative/Megadeals (worth more than USD 10 billion)
growing macroeconomic challenges as well as more difficulty
accessing financing for deals.

11
MARKET SENTIMENT AND THE M&A ENVIRONMENT

Which deals is your company most likely to be involved in in the next 12 to 18 months? (Select top three.)

60%
54%
50%
50% 47%
39% 40%
40% 37% 37% 36%
33% 34% 33%32% 32% 33%
29% 31%
30% 26% 28%
23% 23% 25% 22%20% 22%
20% 17% 17% 18%
14% 14%
11%
10% 8% 9%
6%

0%
M&A Buyout/ Joint venture/ Distressed Refinance Minority Co-investment Carve-outs/ Exit Secondary Special
Add-on Strategic stake as minority Spin-offs sale purpose
alliance partner acquisition
company (SPAC)

Total Corporate Private equity firm

Pursuing different options
It is worth noting that respondents expect to undertake a broad
range of corporate activity over the next 12 months. Overall,
half (50 percent) say they will likely be involved in a traditional
M&A transaction, but significant numbers also expect to be
conducting joint ventures or strategic partnerships (34 percent)
and distressed M&A activity (33 percent).
“We are keen to use M&A to strengthen our technology across
the entire business,” says a senior director of M&A at a Canadian
media group. “Joint ventures can be a good way to strengthen
our revenue streams while managing risk,” adds the chief financial officer
of a U.S. transport company.
Moreover, PE respondents have a different outlook than their corporate
peers. Almost half (47 percent) expect to do a buyout or add-on, with
40 percent anticipating conducting refinancing activity — a result of a
more unstable market. “The intent here is to focus on co-investment
opportunities. We anticipate market risk will increase, so pooling
resources and expertise will help with stability,” says a partner of a French
PE firm.
12
M&A EXPECTATIONS

M&A Expectations
Digital transformation and capturing synergies are set to be among the top drivers
of deal activity in 2023.

Despite the M&A slowdown in 2021 and the What size of M&A deals do you expect to undertake in the next 12 months? (Select all that apply.)
uncomfortable headwinds now facing the
Europe
global economy, both corporates and PE firms 10% 9% 26% 20%
North America
anticipate doing more deals over the coming 12 10% 13% 26% 19%
months. As part one of this research revealed, Asia (excluding China and Japan)
7% 3% 21% 12%
the majority of respondents expect overall The U.K.
12% 15% 11% 11%
levels of deal activity to increase — and many
Japan
are planning to undertake significant numbers 6% 2% 3% 4%
The Middle East
of transactions themselves. 9% 10% 3% 6%
China
16% 20% 3% 12%
Where deals will get done Africa
7% 6% 2%3%
Respondents to the survey expect Europe Latin America (excluding Brazil) & The Caribbean
6% 8% 2% 5%
and North America to be the strongest
Brazil
sources of M&A growth over the next 12 10% 11% 2% 4%
Australia & New Zealand
months; 26 percent of respondents chose 7% 3% 1% 4%

both of these two regions as the one where

they expect to see the highest growth. Asia
Second-lowest growth Lowest growth Highest growth Second-highest growth
(excluding China and Japan), the first choice
13
M&A EXPECTATIONS
of 21 percent of respondents, is the next most
favored region.
At the other end of the scale, one in five
respondents (20 percent) select China as the
country where slower dealmaking growth can
be expected. Still struggling from pandemic-
related disruption as the government sticks
with a “zero-COVID” policy, China’s economy is
also threatened by a global slowdown, reduced
demand for its exports and the impacts of
political tensions with the West.
The U.K., picked as likely to deliver slower growth
by 15 percent of respondents, is another area of
potential weakness for M&A expectations. The
country saw political turmoil throughout 2022,
promoting currency weakness and rising fears
over levels of public borrowing. The U.K. also
continues to struggle with the impacts of its
departure from the European Union.
These are issues that dealmakers are weighing
more seriously than ever before, says the
head of investment strategy at a South
Korean business services company. “We
have to think about geographic expansion
in a very systematic and practical manner,”
the executive warns. “Given global market
challenges, we are only sourcing opportunities
in markets that have a favorable foreign
investment environment.”
Sector outlook
M&A activity looks set to be concentrated in
particular areas of the market over the next 12
months, with Technology, Media and Telecom
(TMT) once again expected to be especially
dominant. These expectations naturally reflect
the different dynamics of individual sectors of
the economy.
Over a third of respondents (38 percent) pick
TMT as the sector which will see the highest
growth in deal activity in the next 12 months,
with an additional 28 percent expecting the
sector to see the second-highest growth.
This reflects the ongoing pressure on
businesses worldwide to embrace new
technologies and digital transformation, both
as a driver of new growth and as a source of
increased efficiency. The COVID-19 crisis has
only accelerated the existing trend toward
digitalization. Certain parts of the sector are
likely to be particularly active. The demand for
improved cybersecurity, for example, is a clear
deal driver; so too is the increased reliance of
many businesses on data and analytics.
The business and financial services
industries are also set to see a healthy level
of dealmaking over the next 12 months,
with 23 percent of respondents expecting
this area of the economy to see the highest
growth. One part of the equation here is the
desire by corporates worldwide to secure
greater efficiency and cost control, with
business services providers benefiting
from outsourcing and new contracts. In
the financial sector, consolidation remains
an ongoing theme and rising interest rates
finally offer the prospect of improving returns
on capital for banks.
14
M&A EXPECTATIONS

Pharmaceuticals, Medical and Biotech Which sectors will see the highest growth in the next 12 months?
(Please select the two most affected, 1 = highest growth, 2 = second-highest growth.)
(PMB), previously considered as a potentially
hot area for M&A activity, is now forecast Technology, Media and Telecommunications
to deliver the most growth by only six 2% 1% 38% 28%

percent of respondents. While the COVID-19 Business and Financial Services (including Computer Services)
pandemic drove demand for pharma assets, 6% 3% 23% 23%

and excitement about digital health further Industrials and Chemicals (including Automotive)
contributed to the sector’s allure, enthusiasm 11% 8% 15% 14%

now appears to have waned and the healthy Consumer and Leisure
cash position of many biotech businesses 8% 9% 12% 11%

made it easier for them to reject takeover Pharmaceuticals, Medical and Biotech

approaches. The largest deal announced in the 14% 13% 6% 12%

first three quarters of this year in the sector Energy, Mining and Utilities

was Pfizer’s USD 11.6 billion acquisition of 12% 19% 5% 5%

Biohaven — a far cry from megadeals like the Real Estate and Construction

Takeda/Shire, AbbVie/Allergan and Celgene/ 10% 17% 1% 5%

BMS deals, all of which were announced in Agriculture

8% 10% 1%
recent years and were each worth USD 70
billion or more. Transportation
14% 9%

The ups and downs of the energy commodities Defense

15% 11% 1%
market over the past few years have created
unfavorable conditions for M&A. As a result,
nearly one in five (19 percent) of those surveyed Second-lowest growth Lowest growth Highest growth Second-highest growth
say they expect the energy, mining and utilities
15
M&A EXPECTATIONS

(EMU) sector to see the lowest growth in the next year. The sector What will be the key drivers of your M&A activity over the next 12 months? (Select
the top three and rank 1-2-3 by order of significance, where 1 = most significant.)
is highly cyclical, meaning that a slowing global economy is a likely
depressive factor. Previously soaring energy prices now appear
to have peaked. And the ongoing conflict in Ukraine is driving Capturing synergies between 20% 15% 14%
the businesses
uncertainty about the short to medium-term outlook for large parts
of the sector. Pursuing digital transformation 15% 16% 14%

Similarly, the real estate and construction sector is tipped as a Opportunities for restructuring
and turnaround of a 14% 14% 16%
fast-growth area for M&A by only one percent of respondents. distressed business

Rising interest rates, higher raw materials costs and slowing

Increasing market share 12% 18% 13%
economic growth all represent substantial headwinds for the
sector, with 17 percent seeing this area of the economy as the
one which will experience the slowest growth in the next year. Expansion into new geographies 12% 10% 9%

31%

Reasons to transact Supply-chain optimization 10% 13% 11%

Almost half of the respondents (49 percent) describe a desire

to capture more synergy as likely to be among their three most Disposal of non-core
7% 4% 10%
units/streamlining
important drivers of M&A activity over the next 12 months. This
includes 20 percent who believe that this will be the top driver — Pursuing diversification of 5% 5% 7%
products and services
an increase on the 13 percent from last year’s survey.
Completing transactions before
tax and regulatory 5% 5% 6%
The need to reduce costs and secure greater efficiency is conditions tighten

significant. As the director of development at a Scandinavian 0% 10% 20% 30% 40% 50%

energy company explains: “Major cost synergies can really reduce Rank 1 Rank 2 Rank 3
the burden on our financials — we can optimize our processes and
service distribution more seamlessly.” 16
M&A EXPECTATIONS

Similarly, 44 percent of businesses cite

opportunities for restructuring and turnaround
of distressed businesses as likely to drive
We want to source targets that would be useful for
their M&A activity in the next 12 months.
accelerating growth in the next couple of years.
In last year’s report, only 34 percent of
respondents said the same; the implication Head of new markets development, Swedish pharmaceuticals company

is that respondents expect that the number

of businesses set to face difficulties in the
coming year has risen.

“We have the talent and expertise to pursue
opportunities for restructuring a distressed
organization,” says the managing director
of one U.S.-based PE firm. “It is not an easy
task but when we have the resources to build
a company from scratch, we can drive more
profits from these opportunities.”
The desire to increase market share — seen
as a driver of M&A activity by 43 percent of
respondents — could be reflective of similar
imperatives. Businesses with a more dominant
position in their sector can secure greater
pricing power, protecting their margins in an
inflationary environment or where demand is
falling. At a Swedish pharmaceuticals company,
the head of new markets development says:
“We will be increasing our market share — we
want to source targets that would be useful for
accelerating growth in the next couple of years.”
Indeed, of the drivers of M&A activity seen
as most pressing for the year ahead, only
the desire to pursue digital transformation
— cited by 45 percent of respondents —
feels like a more advantageous strategy.
Businesses’ desire to harness new
technologies, including data analytics,
artificial intelligence, machine learning and
cloud computing, reflects the huge potential
of these tools to drive more rapid growth,
over both the short and long term.
The pressure to transform continues to grow.
If anything, a more difficult market landscape
makes it even more imperative for businesses
to reinvent themselves. “We are focusing on
digital development in M&A because bringing
innovative solutions to the market depends
on constantly pursuing non-traditional growth
strategies,” says the director of acquisitions at
a Chinese financial services company.
17
M&A EXPECTATIONS

Key challenges ahead What challenges do you expect to see in M&A in the coming 12 months? (Please
select the two most important, 1 = most important, 2 = second most important.)
Despite their broad sense of optimism, respondents to this poll are
concerned about several challenges standing in the way of their
More complex due
dealmaking ambitions. At the top of the list, more than a quarter of diligence process 20% 7%

respondents (27 percent) indicate the growing complexity of due

Difficult economic environment 19% 17%
diligence processes as one of their top two challenges.
20%
Greater competition 12% 8%
This is understandable. In the current difficult environment,
dealmakers are determined to conduct diligence with far greater Transparency issues 11% 16%

granularity — and to model likely performance under a broader

range of criteria. Deal processes are becoming more elongated Inability to raise funds 10% 7%

as a result. The average time to close a deal has increased sharply

in 2022, with 60 percent of transactions during H1 2022 taking Longer completion times 9% 7%

over 70 days, compared to 54 percent in the same period of 2021,

Access to capital 7% 12%
according to WTW’s Quarterly Deal Performance Monitor.

More lapsed deals 6% 12%

However, there are ways to combat this complexity. In particular,
technology has a crucial role to play in simplifying and accelerating Difficulty in engaging
2% 5%
management team
due diligence work. The use of virtual data rooms, for example,
can help both parties move toward completion quickly, safely and Inability to divest 2%2%

efficiently. This could also help address the transparency issues

noted as problematic by 27 percent of respondents. Greater shareholder activism 2% 7%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Moving with this extra pace is now crucial, says the chief financial
Rank 1 Rank 2
officer of a Mexican consumer company. “We have to complete
18
M&A EXPECTATIONS

deals within our set timelines — we face additional costs if we

exceed those deadlines.”

The other factor regarded as especially problematic right Overall, 58 percent of respondents see financial
now is the difficult economic environment, identified by 36 buyers as in a stronger position, with only Latin
percent of respondents as among their top two concerns. The
American respondents taking a different view.
uncertain market landscape, with a real prospect of slowing
growth, is beginning to concern dealmakers. Their expectations
of transactions may have to be adapted accordingly.

The nature of dealmakers Which of the following do you feel are better placed to take advantage of buying
opportunities in the current macroeconomic environment?
In part one of this report, PE respondents said they expected
to be busier over the next 12 months. This finding is underlined 100%

by the broader view of respondents that financial buyers are 35% 36%
80% 42% 48%
better placed, in the current market environment, to pursue M&A 58%

activity than their corporate counterparts. 60%

40%
Overall, 58 percent of respondents see financial buyers as in a 65% 64%
58%
52%
stronger position, with only Latin American respondents taking 20% 42%

a different view. This likely reflects the significant amounts of

dry powder that PE investors still have available to them, in stark 0%
Total Asia Pacific Europe, Latin North
contrast to the more difficult commercial and economic issues the Middle East America America
and Africa
now facing many corporate dealmakers.
Financial buyers (e.g. private equity, hedge fund, venture capital)
Strategic buyers

19
ESG: PREPARATION AND PROCESS

ESG: Preparation and Process

The importance of ESG continues to rise in M&A processes, although concerns
remain about cost and standardization.

ESG continues to rise up the agenda in the M&A market. Partly, How do you expect the level of ESG regulation in M&A to change over the
next three years?
this reflects the growing regulatory imperative; almost three-
quarters of respondents (73 percent) expect ESG regulation in an
M&A context to increase over the next three years, including 17
Total 4% 23% 56% 17%
percent who anticipate a significant increase.

Respondents based in the EMEA region are especially likely Asia Pacific 5% 17% 59% 19%

to expect to face an increasingly demanding ESG regulatory

Europe,
burden, with 83 percent predicting a rise, including 27 percent the Middle East 4% 13% 56% 27%
and Africa
who expect significantly more regulation. Businesses in the
region have already seen significant interventions, including
Latin America 10% 46% 38% 6%
the European Union’s Climate Benchmarks Regulation, the
Sustainable Finance Disclosure Regulation and the Taxonomy
Regulation, with more to come. The E.U. is in the process of North America 24% 62% 14%

agreeing to the Corporate Sustainability Reporting Directive and

0% 20% 40% 60% 80% 100%
the Corporate Sustainability Due Diligence Directive, for example.
Moderately decrease No change
The U.K. is expanding the scope of its Taskforce on Climate-
Moderately increase Significantly increase
Related Financial Disclosure regulation.
20
ESG: PREPARATION AND PROCESS

“ESG regulation is only going to become How do you expect due diligence to change in terms of ESG factors in transactions in the next three years?
stricter,” says the general counsel of a German
financial services business. “That means we Total 25% 47% 25% 2%1%

have to know exactly where the company

Asia Pacific 29% 47% 20% 4%
stands in terms of its ESG rating and record
Europe, the Middle East
33% 48% 16% 3%
management systems.” and Africa

Latin America 4% 40% 48% 4% 4%

Other areas of the world, meanwhile, have

a less hectic regulatory schedule, at least
for the time being. Respondents in these
regions are therefore less concerned about
the body of work to come. Most notably, only
44 percent of Latin American respondents
are expecting to see more ESG regulation
that affects their M&A activities over the next
three years.
It is not only regulators that are paying more
attention to ESG factors. These are matters
of concern for multiple stakeholders, from
investors to suppliers, and from employees to
customers. As a result, dealmakers are now
far more focused on ESG issues during deal
processes, particularly at the due diligence
stage of transactions.
North America 25% 50% 25%
0% 20% 40% 60% 80% 100%
Significantly more scrutiny Moderately more scrutiny No change
Moderately less scrutiny Significantly less scrutiny
Indeed, 72 percent of respondents believe ESG scrutiny in diligence processes. And
ESG issues will receive more scrutiny in M&A again, Latin America lags behind other
due diligence work over the next three years, regions, with a figure of only 44 percent.
including 25 percent who expect the scrutiny
to increase significantly. That represents a “There have been reports about companies
marked change even from just a year ago. In engaging in greenwashing,” says the director of
last year’s research, only 48 percent said they corporate development at a Canadian energy
expected to see more scrutiny of ESG matters company, pointing to one reason for increased
during due diligence. diligence. “We have to be more prepared to
investigate their green claims; we cannot just
Again, Europe is leading the way, with 81 focus on the information they provide — deeper
percent of respondents predicting greater research and analysis is needed.”
21
ESG: PREPARATION AND PROCESS

The issues that matter most

It should be recognized, of course, that ESG
is a broad term covering a very wide range
of issues. Nevertheless, respondents have a
On environmental matters, the biggest issue for
clear view of the priority concerns in each area
respondents today is energy efficiency, picked out by
from an M&A perspective.
59 percent of respondents.
On environmental matters, the biggest issue
for respondents today is energy efficiency,
picked out by 59 percent of respondents. It is
noteworthy that this issue comes so far ahead
of the second biggest concern, greenhouse gas
emissions and carbon management (cited by 46 (35 percent) are the standout issues. The first From a governance perspective, respondents
percent). While energy efficiency will certainly of these issues may be particularly difficult consider one issue as more important than the
play a part in helping organizations reduce to deal with during an M&A due diligence rest: More than half (53 percent) say business
their emissions and move toward net-zero process as businesses try to understand the ethics and transparency are something they
commitments, the need to reduce consumption extent to which a target’s supply chain poses look at closely during any investment process.
in the face of soaring energy prices may also be an elevated risk. Other key issues in this The desire is to work with organizations that
a factor here. More than a third of respondents category include human rights and community are culturally attuned to better practices —
(35 percent) also point to the need to prioritize relations (31 percent) and gender and diversity to working responsibly and to being more
better water and waste management practices. (24 percent). High-profile social campaigns in open about the business’ activities. Those
many parts of the world on sexism, racism and organizations not delivering on such values put
When it comes to social considerations, homophobia appear to be breaking through in acquirers in substantial danger of increased
labor standards (a priority for 46 percent of this regard (see Spotlight on Diversity, p. 27). reputational risk.
respondents) and data security and privacy
22
ESG: PREPARATION AND PROCESS

What are the most important ESG considerations when contemplating investing? (Select top two answers.)

ENVIRONMENTAL

59% 46% 35% 26% 19% 8% 7%

Greenhouse gas Water and Hazardous

emissions and wastewater Biodiversity materials
Energy efficiency carbon management management issues Air quality Deforestation management

SOCIAL

46% 35% 31% 24% 21% 16% 14% 13%

Human rights Grievance

Data security and community Gender and Access and Customer Fair marketing mechanisms/
Labor standards and privacy relations diversity affordability satisfaction and advertising compensation

CORPORATE GOVERNANCE

53% 27% 23% 23% 21% 19% 18% 16%

Business
ethics and Supply chain Audit committee Safety Executive Political Board Whistleblower
transparency management structure management compensation influence composition protocols

23
ESG: PREPARATION AND PROCESS

Challenges
The emergence of ESG as a crucial
consideration in many deal processes is
not proving to be straightforward, even in
regions and markets where dealmakers now
have significant experience on this agenda.
In practice, dealmakers point to a series of
problems that ESG scrutiny is now causing
them during M&A.
their number-one challenge, and a further 33 “There are so many different ESG standards
percent cite it as a problem, making this issue and reporting standards in different markets,”
the most frequently cited ESG hurdle that says the vice president of strategic planning
dealmakers must overcome. at a U.S. pharmaceuticals business. “We have
to spend more time scrutinizing core ESG
What are your organization's biggest challenges in making ESG-oriented investments?
(Select top three and rank 1-3 where 1 = most important.)
Excessive cost 20% 15% 10%

Above all, respondents are most likely to

Confusion/lack of clarity on standards 17% 20% 13%
complain about the additional cost that ESG
brings during an investment process. One in
Shortage of knowledge/expertise 16% 16% 8%
five respondents (20 percent) rank this as the
Lack of ESG investment opportunities
number-one challenge they face from an ESG that meet targeted returns
13% 12% 13%

perspective. They are forced to take more time

Political uncertainty 12% 11% 21%
to complete due diligence processes, deploy
ESG specialists to the deal, whether internal Lack or quality of sustainability data 11% 13% 17%

or external, and access third-party data and

Lack of consensus among
8% 10% 13%
research. And their costs are mounting up. internal stakeholders

ESG is not relevant to company strategy 3% 3% 5%

A second major headache is that a lack of
0% 10% 20% 30% 40% 50%
clarity on ESG standards makes working
coherently and consistently very difficult; 17 Rank 1 Rank 2 Rank 3

percent of respondents pick out this issue as

24
ESG: PREPARATION AND PROCESS
practices and then compare the results with
other companies in the jurisdiction.”
However, there is some good news in this
regard. The launch in March 2022 of the
International Sustainability Standards
Board (ISSB) by the International Financial
Reporting Standards (IFRS) Foundation
has been widely praised as a major step
toward the convergence of the currently
fragmented reporting landscape. The
initiative will consolidate the Value Reporting
Foundation, formed following the merger of
the Sustainability Accounting Standards Board
and the Integrated Reporting Framework,
as well as the Climate Disclosure Standards
Board. While a single set of global standards
covering every ESG issue remains elusive, the
marketplace is now moving toward greater
reporting consistency.
Similarly, resolving the third biggest challenge
for dealmakers from an ESG perspective will
also take time. Almost one in six respondents
(16 percent) say that a shortage of ESG
While a single set of global standards covering every ESG
issue remains elusive, the marketplace is now moving toward
greater reporting consistency.
knowledge and expertise is causing them Embracing ESG
problems. Closing the skills gap will require It is clear from this research that dealmakers are
organizations to recruit or upskill in-house. now focusing on ESG considerations to a greater
However, ESG skills shortages are a market- extent than ever before. But they may have to —
wide problem in many jurisdictions. and want to — go even further in the years ahead.
The regulatory agenda around climate change
For now, says the managing partner of a mitigation is likely to be one driver of this. More
U.K. PE firm, “We have to get the opinion of broadly, a diverse range of stakeholder groups is
external experts when we invest in certain determined to keep pushing various ESG issues
regions, because these are regions where we further up the agenda.
are fairly inexperienced with the ESG norms.
We do not want any mistakes to impact our What would prompt dealmakers to embrace that
company negatively.” challenge? Encouragingly, our research suggests
many are focused on seizing the opportunity
25
ESG: PREPARATION AND PROCESS

of ESG, rather than responding to coercion. While 27 percent of What would push your organization to have a wider consideration of ESG?
(Select one.)
respondents say regulatory requirements would prompt their
organization to have a wider consideration of ESG issues, a more 40%
sizable proportion (34 percent) say that proving the link between ESG 34%
35%
and financial performance would encourage them.
30%
27%

25%
In this regard, a study published recently by the NYU Stern
19%
20%
School of Business makes instructive reading. It looked at more
than 1,000 papers published on the relationship between ESG 15% 12%

and financial performance over the previous five years and 10% 8%

established widespread evidence of a positive link. 5%

0%
Proven link Regulatory Better Growing Demand
The NYU Stern project concluded that studies showed: “improved between ESG requirements information awareness in from
and financial on ESG risk/ wider society client
financial performance due to ESG becomes more noticeable performance opportunity
over longer time horizons”; that “managing for a low carbon
future improves financial performance”; and that “sustainability
initiatives at corporations appear to drive better financial “ESG is now closely tied to the reputation of the company, so we have to take
performance due to mediating factors such as improved risk that into account in the way we manage M&A.”
management and more innovation.”
The partner of a Brazilian PE firm adds: “We certainly are evaluating the
Many respondents accept such arguments and are adapting environmental, social and governance standards of target companies and
their approach to M&A accordingly. The head of M&A at a French when we are preparing for an exit, we take the time to improve its ESG
industrials business says: “We’re looking at the entire value chain statistics before announcing the exit.”
of the company in detail from an ESG perspective.” The head of
corporate development at a Chinese business services firm adds:
26
ESG: PREPARATION AND PROCESS

Spotlight on Diversity

Diversity matters to dealmakers. More than When looking at a new target, how important is the diversity balance within the organization?
half of respondents (51 percent) say that when
Total 1% 24% 24% 32% 19%
they are looking at a new target, the diversity
balance of the organization in question is Asia Pacific 2% 31% 24% 39% 4%

important; that includes 19 percent who Europe, the Middle East 16% 20% 33% 31%
and Africa
consider this very important. Interestingly,
however, this figure has fallen compared Latin America 2% 42% 30% 26%

to last year’s report, when 69 percent of North America 16% 23% 29% 32%

respondents took this view — and 27 percent 0% 20% 40% 60% 80% 100%
described diversity balance as a very
Not important at all Of little importance Neutral Moderately important Very important
important issue. The fall is significant both
overall and in each of the individual regions
considered in this research. possible that social campaigns connected to approach M&A. Even in Latin America, where
diversity — the Black Lives Matter movement, the numbers are lowest, more than a quarter
It is difficult to explain this drop-off. One for example — were fresher in dealmakers’ of respondents (26 percent) describe this
possibility is that diversity is now just one of a minds a year ago. issue as a factor. At the other end of the scale,
larger number of ESG issues that dealmakers in the EMEA region, the number rises to almost
look at when considering new targets — Nevertheless, the evidence of this year’s two-thirds (64 percent).
and that diversity as a standout issue has research is that diversity is still a major
therefore become less prominent. It is also consideration for dealmakers as they
27
THE ROAD AHEAD FOR M&A IN 2023

The Road Ahead for M&A in 2023

M&A practitioners are expecting a tougher deal environment in 2023, with valuation
gaps and interest rates seen as the biggest challenges.

In a global economy where the cost of capital is increasing How do you expect financing conditions to change in the next 12 months compared
to 2021?
almost everywhere, 81 percent of respondents believe
financial market conditions are set to get tougher over the 50%

next 12 months, including 43 percent who think they will

43%
become much tougher.
40% 38%

As a result, a third of respondents (33 percent) now think

financing will be the most difficult part of the M&A process over
30%
the next 12 months, up from 20 percent in last year’s research.
Clearly, the outlook on financing has become more troubling
at a significant pace. Respondents in both North America 20%

(35 percent) and the EMEA region (36 percent), where central 14%
banks have moved particularly aggressively on monetary policy
10%
tightening, are especially likely to see financing as tricky.
5%

“Financing deals will take longer than expected,” concedes the 0%

0%
managing director of a PE firm in the U.K. “We cannot remain Much harder Slightly harder No change Slightly easier Much easier

too focused on traditional financing sources; we have to

28
THE ROAD AHEAD FOR M&A IN 2023

contemplate more modern financing options Which part of the M&A process will be the most difficult in the next 12 months? (Select one.)
that can help close the deal within the
estimated timeframe.” Total 33% 26% 13% 13% 8% 7%

Asia Pacific 27% 28% 13% 12% 8% 12%

Not that this is the only challenge standing
Europe, the Middle East 36% 19% 13% 12% 15% 5%
in dealmakers’ way. More than a quarter (26 and Africa

percent) are now worried about the difficulty Latin America 34% 18% 12% 22% 8% 6%

of reaching price agreements. After all, while

North America 35% 33% 14% 10% 4% 4%
valuations do now appear to be easing back, it
0% 20% 40% 60% 80% 100%
may take sellers some time to accept that they
Financing Agreeing on price/valuation Deal sourcing Due diligence
can no longer secure the prices being paid at the
Deal preparation Integration
height of the boom.

“The valuation process is now critical,” says the

director of corporate development at a French
financial services firm. “Buyers and sellers may
not be on the same page about the potential
opportunities and challenges associated with
a deal.”
Respondents point to several challenges that
could hinder deal completion over the next 12
months. First, there is the growing possibility
of a valuation gap — as sellers cling to the
pricing expectations that evolved during the
boom period, buyers are more likely to focus
on downside risk. A quarter of respondents
(25 percent) see buyer/seller valuation gaps
as being among the top two challenges to
completing a deal in the next 12 months.
Second, external factors — macroeconomic
risk, stock market volatility, trade conflicts and
anti-trust scrutiny — could threaten activity.
Macroeconomic and stock market volatility are
cited by 24 percent of those surveyed as among
the top two concerns. Inflationary and interest
rate pressures are cited by 24 percent as well,
albeit a lower proportion of respondents (eight
percent) see it as the number-one priority
compared to 13 percent who feel the same
about macroeconomic/stock market volatility.
Latin American dealmakers in particular worry
about inflation, with 72 percent expecting
rising prices to impact M&A in the region over
the next 12 months.
29
THE ROAD AHEAD FOR M&A IN 2023

What will be the biggest challenges to completing a deal in the next 12 months? How do you expect high inflation will impact M&A
(Rank top two, where 1 = the biggest challenge.) dealmaking in Latin America over the coming 12
months? (Latin American respondents only.)

Buyer/seller valuation gap 13% 12% Will have a

significantly 12%
negative
Macroeconomic/stock market volatility 13% 11% impact

Operational issues at target companies 12% 8%

Protectionist policies/trade conflicts 10% 5%

Will have a
slightly to
Antitrust/merger control issues 10% 6% moderately 60%
negative
impact
Technology inefficiencies 8% 11%

Inflationary and interest rate pressure 8% 16%

Availability of financing 6% 7%
No evident
22%
impact
Other legal/regulatory issues 6% 4%
(money laundering, environmental)

Political instability 5% 5%
Will have a
slightly to
Lengthier due diligence processes 5% 4% moderately 6%
positive
impact
Credit markets 2% 4%

Sanctions 1% 3%

Supply-chain issues 1% 4%

0% 5% 10% 15% 20% 25%

Rank 1 Rank 2

30
THE ROAD AHEAD FOR M&A IN 2023

Mitigating risk How will companies mitigate M&A risk in the next 12 months? (Select top two, where 1 = top choice.)
One way to protect valuations may be
Greater reliance on warranty and
for sellers to accept greater risk during indemnity insurance
22% 13%

transactions. Indeed, 22 percent of Comprehensive due diligence 16% 21%

respondents think increased reliance on

More selective targeting 15% 13%
warranties and indemnities is going to be
Stricter financial terms 15% 17%
the most important way that dealmakers
Improving integration planning
10% 12%
mitigate risk over the next 12 months. We now and execution excellence

anticipate greater use of contingencies in M&A Improved pre-deal preparation 10% 15%

agreements; 15 percent see stricter financial Narrowing sector/regional focus 7% 5%

terms as their number-one tactic. 5%

Increasing sector/regional focus 4%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Inevitably, however, many dealmakers are Rank 1 Rank 2

going to proceed more warily. More than a third

(37 percent) see conducting comprehensive
due diligence as their first or second priority
for risk mitigation while more than a quarter
(28 percent) expect to target transactions
more selectively.
Which of the following will be the most important to help companies better execute M&A in the next 12 months?
(Select one.)
Starting deal preparation earlier 38%
Using technology platforms to improve
information governance and speed 27%
to ensure critical information is on hand

There does now seem to be an appetite for Engaging with advisors earlier 20%

caution. More than a third of respondents (38 Using AI and machine learning to automate
deal tasks and processes to increase 15%
percent) say starting deal preparation earlier will efficiency and speed of execution
help them execute M&A better over the next 12 0% 5% 10% 15% 20% 25% 30% 35% 40%

months, while 20 percent intend to engage with

31
THE ROAD AHEAD FOR M&A IN 2023

advisors at an earlier stage. New technology What disruptive trends will most affect M&A processes in the next 12 months?
will be important too: More than a quarter (27
26%
percent) point to the potential of tools such Cybersecurity
61%
as platforms that can improve information 22%
Deal automation
governance and speed; and 15 percent say 68%

artificial intelligence (AI) and machine learning Data analytics

18%
78%
(ML) can help them automate deal processes to
17%
IP capabilities
increase efficiency. 49%

14%
Artificial intelligence
44%
Disruption ahead?
3%
Blockchain
Deal processes themselves are also evolving to 11%

reflect emerging dangers and shifting priorities. 0% 10% 20% 30% 40% 50% 60% 70% 80%
Most important All that apply

For example, 61 percent of respondents

cite cybersecurity as an area where there is Have you experienced greater concerns surrounding security/cybersecurity during M&A deal processes over the
potential for disruption. The rising number of past 12 months?

cyber attacks during the COVID-19 pandemic

Yes, and we were
23%
and thereafter continue to draw attention to very concerned

this issue. A full 65 percent of respondents

have seen concerns about security and Yes, and we were 42%
slightly concerned
cybersecurity during M&A processes
increase over the past 12 months; 62 percent 35%
No
expect such fears to increase again in the
year to come. 0% 10% 20% 30% 40% 50%

32
THE ROAD AHEAD FOR M&A IN 2023

“We were concerned about the possibility of bad actors trying Do you expect concerns surrounding security/cybersecurity during M&A deal
processes to increase over the coming 12 months?
to hinder our deal progress,” says the director of acquisitions at
a German real estate business of one recent transaction. “We 50%

were constantly wary about the potential threats in the deal 44%

environment and devising plans to mitigate these threats.” 40%

34%
Elsewhere, dealmakers are focused on how deal automation
30%
tools can streamline the process, with 68 percent prioritizing
this. Securing greater efficiency at critical moments of the deal
process will be even more important in an environment where 20% 18%

deal processes are becoming elongated because of factors such

as heightened risk and increased due diligence. Tools such as 10%

Robotic Process Automation (RPA), analytics, ML and AI can all 4%

help dealmakers pull back time.

0%
Decrease Remain Increase Increase
somewhat unchanged somewhat greatly
In fact, the focus on deal automation tools is increasing
worldwide. More than a quarter of EMEA-based respondents
(27 percent) think data analytics will be a disruptive trend; and
a third of Latin American respondents (33 percent) point to a
greater role for deal automation.

33
THE ROAD AHEAD FOR M&A IN 2023
Key Takeaways
While the headwinds for M&A appear to be gathering speed, dealmakers
have become more selective and remain determined to pursue the right
transactions. To avoid seeing transactions derailed, they will need to
navigate a careful course through the problems posed by the economic
slowdown, rising inflation and interest rates, and political risk. We round
up five key takeaways for dealmakers looking to conduct deals over the
coming year:
Do the right deal at the right time
For corporate buyers with a clear strategic agenda, M&A activity is
likely to be less of a cyclical endeavor. A period of more affordable
valuations and/or less competition in the market may even
present opportunities for strategic buyers to pick up the pace of
transformation. Distressed deals are likely to rise in number. As for PE
buyers, their dry powder remains significant; opportunities to deploy
this capital will continue.
Focus on due diligence but keep deals moving
Amid a heightened sense of risk, dealmakers are naturally determined
to scrutinize every transaction with greater granularity. But elongated
deal processes are more vulnerable to failure. Employing robust tools to
support diligence, including increasingly more innovative solutions
such as virtual data rooms (VDRs), will therefore be important to
maintain momentum.
Beware of greenwashing as the ESG agenda moves centerstage
Pressure from a diverse group of stakeholders — including policymakers,
regulators, investors, customers and employees — continues to prompt
dealmakers to approach M&A through an ESG lens. But acquirers must
tread carefully: Not every transaction is as green or sustainable as it
may initially seem. Amid growing concern about “greenwashing”, it is
vital that due diligence processes now scrutinize targets’ claims on ESG
in more detail.
Adjust for a more difficult financing environment
With the cost of capital rising and lenders becoming more risk-averse,
securing affordable financing for transactions is becoming increasingly
challenging. Buyers will need to be confident they have the funding
in place to pursue the deals they are now prioritizing. They may need
contingency plans in case lenders get cold feet late in a deal process,
particularly where lending agreements feature material adverse impact
clauses enabling them to withdraw as circumstances change.
34
THE ROAD AHEAD FOR M&A IN 2023

About SS&C Intralinks

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SS&C Intralinks is the pioneer of the virtual data room, enabling and
The cybersecurity threat looms larger than ever, with dealmakers securing the flow of information by facilitating M&A, capital raising and
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many of the Fortune 1000 and has executed over USD 34.7 trillion worth of
Investing in technology tools to detect and repel such threats
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is therefore crucial. Similarly, advances in deal automation
technologies can help dealmakers manage transactions with For more information, visit intralinks.com
greater efficiency and security; that may be crucial as risk
increases and the window of opportunity for M&A narrows.

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Mergermarket provides a complete overview of the M&A market by
offering both a forward-looking intelligence database and a historical deals
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For more information, visit mergermarket.com

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