THE outlook for mergers and acquisition activity in Northern Ireland and the Republic in 2023 is more uncertain than it was when heading into 2021 and 2022, as macroeconomic challenges have softened sentiment globally.
That's according to KPMG’s annual M&A outlook survey, which reported that 16 per cent of M&A leaders expect higher deal volumes in 2023, while 44 per cent believe they will remain broadly stable, and 40 per cent believe they will decrease.
The survey of over 150 of leading M&A executives from across the island of Ireland found the balance of power is expected to swing toward buyers this year as funding streams tighten. 72 per cent of respondents anticipate that 2023 will be a buyers’ market bolstered by the expectation that deal multiples will soften.
Following an extended period in which fierce competition drove deal multiples (valuations) to historic levels, respondents anticipate value rebasing in 2023.
However, in a positive outlook for deal activity, almost three-quarters (74 per cent) of respondents intend to pursue M&A opportunities in 2023, as deal makers capitalise on inorganic growth opportunities. Investors are expected to act opportunistically with anticipated deal valuation declines in some sectors.
M&A leaders expect the tech sector (38 per cent) to be most active in 2023 as investors look to strengthen their existing offering and capitalise on lower valuations. Healthcare/pharmaceuticals (25 per cent) and energy/infrastructure (11 per cent) are also expected to be active in 2023.
Some 59 per cent believe that strategic buyers rather than financial buyers (41 per cent) will drive M&A in 2023. With private equity sitting on significant dry powder, it is expected that financial buyers will continue to play a central role in 2023.
In a shift from prior years, respondents noted a propensity to fund a transaction from a reduced level of debt fuelled by recent interest rate hikes. Despite these external challenges, there continues to be support from traditional banks and non-bank lenders for island of Ireland M&A transactions.
Given rising interest rates and market uncertainty, 51 per cent of M&A leaders identified availability/cost of financing as the primary obstacle facing deal activity in 2023. 39 per cent cited the current inflationary environment as a concern, indicating that macroeconomic trends will be at the forefront of dealmakers’ minds in 2023.
Traditional diligence workstreams, such as finance, tax, commercial and legal & regulatory continue to be seen as key to unlocking deal value. However M&A leaders also highlighted the growing importance of ESG and IT/operational diligence in 2023.
Russell Smyth, head of deal advisory at KPMG in Northern Ireland, said: “After a buoyant period for deal-makers, macro concerns and a more constrained debt financing environment looks likely to pare activity in 2023.
“Appetite however remains strong from private equity, with record levels of dry powder and corporates with strong balance sheets.
“While investors are being more selective, we continue to see strong competition and pricing for targets with resilient business models and in select sectors such as energy and technology.”
SURVEY HIGHLIGHTS
• M&A leaders in Northern Ireland and the Republic are less confident about deal volumes than in previous years. A majority expect volumes to be stable or grow. However, 40 per cent anticipate a decrease in deal volumes driven by market uncertainty.
• 74 per cent of respondents from across the island of Ireland say they will pursue M&A opportunities in 2023, with 72 per cent believing it will be a buyers’ market. This has reversed recent trends and conditions which were considered seller favourable.
• 91 per cent expect to see a decrease in deal multiples following a period of record company valuations.
• Rising interest rates are expected to drive M&A leaders to fund transactions from a reduced level of debt with 51 per cent identifying availability/cost of financing as the primary obstacle facing deal activity in 2023.
