M&A activity forecast to be cautious yet stable in Q2 2023

M&A activity is expected to remain stable during the second quarter of 2023, despite a host of geopolitical headwinds. While activity is forecast to remain at levels similar to those seen during Q1 2023, Q2 is expected to see a significant year on year increase compared to Q2 2022.

On a global level, Intralinks’ Deal Flow Predictor for M&A in Q2 2023 forecasts that activity will remain “neutral” compared to Q1 2023 – defined as anything ranging from a 5 per cent decline to a 5 per cent increase, with the report noting a “risk for negative movement”. Compared to Q2 2022, however, activity is expected to “outperform” - defined as an increase of 10 per cent or greater.

In its report, Intralinks notes that global headwinds so far have seemingly not been “materially hindering” M&A appetite. The report cites a study from Bain which found that acquisitive companies delivered higher returns during stress cycles than inactive companies, reiterating that the best-value M&A deals are often carried out during economic downturns.

Focusing on the EMEA region, the report found that M&A activity had been resilient, despite proximity to Russia’s war in Ukraine. Intralinks expects EMEA to see a “marginal uplift” in activity from Q1 2023 to Q2 2023, but, again, forecasts a “material uplift” of 10 per cent or greater compared to Q2 2022. This is mirrored in its forecasts for UK M&A activity, with “neutral” performance compared to Q1 2023, but “overperformance” compared to Q2 2022.

The report identifies three key sectors for M&A in the UK: banking, retail and technology. Banking and retail M&A in Q2 2023 are both expected to overperform compared to Q1 2023 and Q2 2022, while technology M&A is expected to overperform compared to Q1 2023 and see neutral performance compared to Q2 2022.

Overall, the report notes that M&A appetite seems to be “decoupled” from the wide range of geopolitical headwinds that have been impacting global economies over recent months – including Russia’s war in Ukraine, rising interest rates, inflation and equity market volatility.

Despite this resilience, however, Intralinks’ VP, Product, Marketing & Strategy Matt Wells cautions that economic uncertainty and geopolitical risk could yet have an adverse impact on M&A activity during 2023, especially in the light of the recent turmoil in the US banking sector.

He writes: “Overall, there are strong pockets of volatility through the markets, especially with added stress in the U.S. banking sector, which can spread through Europe, and ongoing concerns about the cadence and depth of rate hikes that can impair long term investments in illiquid assets.”

“If U.S. and European banks feel added pressure to shore up capital reserves, which can negatively impact mid- and lower-mid-market financing, acquirers may begin to see lending facilities tighten for acquisitions or higher borrowing costs that may impair valuations.”

Tightening financing conditions have been broadly forecast to be one of the major barriers to dealmaking during 2023, as traditional lenders become increasingly cautious amid economic volatility and adjust their lending conditions accordingly.

However, for buyers that can generate the funds for acquisitive growth, deals struck during periods of economic turbulence can deliver huge value (providing buyers conduct rigorous due diligence to help mitigate the inherent risks). As demonstrated by the strong M&A activity and appetite recorded in the Intralinks report, this is a fact that dealmakers across the globe are increasingly aware of.

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