M&A deal characteristics in 2023

The initial growth in M&A activity, followed by the slowdown in the latter part of last year, gave rise to an interesting shift in deal volumes and market trends throughout 2022. In 2023, we expect these trends to continue despite economic headwinds that could impact market activity and investor confidence.

In our latest M&A Review, we highlight six deal characteristics deal makers can expect to see this year:

1. Longer due diligence process – buyers will continue to undertake comprehensive due diligence reviews before progressing with the next stages of transactions, extending timelines from the usual six to eight weeks to two to three months. Buyers are also incorporating cybersecurity and ESG (‘environmental, social and governance’) assessments into their due diligence processes, and taking more time to carefully assess contracts and employee arrangements
2. Increased scrip consideration – sharp increases in interest rates (to the highest they have been in over a decade) resulted in an increasing reliance on scrip consideration, as buyers sought to reduce their costs of funding and their interest rate exposures. The economic slowdown expected this year, coupled with continued high borrowing costs, is likely to cause an increase in deal activity for businesses struggling to stay afloat, particularly those in the hospitality, construction and retail sectors
3. Uptick of deferred payment systems – deferred payment systems such as earn-outs (and retention amounts) will be a frequent inclusion in this year’s transactions as interest rates continue to rise
4. Continued importance of ESG – there is a greater focus on upholding the spirit of good ESG principles. Buyers are more broadly assessing ESG risks, looking beyond strict legal compliance and assessing whether there are risks of not meeting public expectations or causing reputational exposure
5. Extended regulatory approvals – expansion of the foreign investment regulatory regime and time periods associated with regulatory approval processes have increased the risk of either party seeking to pull out of or vary a deal. Deal makers should consider such implications during the preparation and strategy stages of a transaction
6. Increase in debt and debt-to-equity deals – the continuing rise in interest rates and tightening of traditional bank finance will result in more debt and debt-to-equity deals this year.

To download a copy of the M&A report, click here. Authored by the national M&A team at HoldingRedlich. – if you would like to get in touch with the Holding Redlich team please contact Nicolas Groffman, contact details below.