M&A in 2023: A complex but optimistic outlook for deal-making

Episode Summary

Executive Summary: The discussion explains how M&A cooled in 2022 after a record 2021, largely because rising rates, volatility, and tighter financing hit private equity hardest while strategic dealmaking stayed resilient. Looking to 2023, the speakers remain constructive: financing stability, valuation resets, sector-specific opportunities, and large pools of capital could revive activity, especially in strategic, simplification, and energy-transition deals.

Main Topics: 2022 M&A slowdown and the 'two-halves' year (Priority: 5/5): Deal activity stayed strong early in 2022 but slowed in the second half as inflation, rate hikes, and macro uncertainty weighed on financing and valuations. Overall volumes were still roughly in line with longer-term averages excluding 2021's record year. Private equity hit by financing constraints (Priority: 5/5): Private equity activity fell sharply in late 2022 because leverage markets became expensive and unpredictable. Many PE deals required bespoke structures, lower leverage, all-equity funding, or smaller transaction sizes to get done. Corporate strategics and mega-deals remained resilient (Priority: 4/5): Large strategic buyers continued doing deals, especially investment-grade corporates that could access financing and had strong cash balances. Mega-deals over $10 billion were particularly durable because they were strategic, well-capitalized, and financeable. Corporate simplification and structured transactions (Priority: 4/5): Spin-offs, split-offs, and spin-mergers were a major theme as companies sought to simplify portfolios, close valuation gaps, and unlock shareholder value by separating businesses that trade at different multiples. 2023 outlook: cautious optimism tied to financing stability (Priority: 5/5): The executives expect activity to recover if debt markets become more predictable. They emphasize that interest rates do not need to return to prior lows; what matters is a functioning market that allows underwriting and syndication without hung deals. Cross-border weakness and regional reorientation (Priority: 4/5): Cross-border M&A, especially international deals requiring travel and complex negotiation, was materially weaker. The U.S.-Europe valuation gap and currency effects could create opportunities, but the macro backdrop in Europe remains challenging. Activism and ESG as rising pressures (Priority: 3/5): Activist campaigns increased even during market volatility, with more large-cap targets and broader themes such as capital allocation, operational improvement, portfolio simplification, and ESG-related campaigns.

Key Arguments: The M&A market in 2022 was not uniformly weak; it split into a strong first half and a slower second half, leaving full-year deal counts and volumes near five-year averages excluding 2021. Private equity was the segment most damaged by higher rates and tighter leverage finance, because its model depends heavily on predictable, attractive debt financing. Strategic corporate buyers remained active because they often had investment-grade access, strong cash balances, and confidence in long-term business fundamentals. Companies pursued spin-offs and other simplification trades because investors prefer clearer sector exposure and conglomerates often trade at a discount to the sum of parts. Dealmaking in 2023 depends less on returning to ultra-low rates and more on predictable credit markets, stable underwriting, and confidence that debt can clear. Valuation resets can help spur M&A by making acquisitions look more attractive to corporate buyers, even though public/private valuation gaps remain a challenge. Cross-border activity was the most affected by COVID-era disruptions and remains subdued relative to domestic or regional strategic deals. Activism grew during market stress rather than fading, showing that downturns can increase pressure on boards to fix capital allocation, portfolios, and operating performance. Longer-term structural needs such as the energy transition and infrastructure investment could support sustained M&A and capital deployment over multiple years.

Data Points: Private equity share of M&A market: 30% to 40% - Stefan described private equity as historically representing roughly this share of the M&A market. Record year comparison: 2021 was extraordinary/record levels - Used repeatedly as the benchmark year against which 2022 was measured. Year-over-year pattern: First half strong, second half slowed - Stefan characterized 2022 as a tale of two halves. Cross-border activity: Down materially - Mark said cross-border transactions were the most impacted type of deal. Large-campaign activism threshold: Above $10 billion market cap - Mark noted a record level of activist campaigns targeting companies above this size. Date of episode: Friday, December 16th, 2022 - The episode aired at the end of 2022 and framed the 2023 outlook. Money needed for energy transition: Measured in trillions - Mark emphasized the scale of capital investment required globally for energy and infrastructure transition.

Pivotal Quotes: "It was really a tale of two halves, as I describe it." — Stefan Feldgoiz: Summarizing how M&A stayed strong early in 2022 before weakening later in the year. "We need predictability and some degree of stability for the underwriters of debt to be able to price and put terms in place." — Mark Sorrell: Explaining what is required to revive private equity and broader financing-driven deal activity. "The amount of capital that's going to need to be invested globally as the world transitions our energy base is extraordinary." — Mark Sorrell: Highlighting a long-term structural driver of future M&A and capital allocation.

Implications: M&A should improve if credit markets stabilize and valuation gaps settle, with corporates, mega-deals, simplification trades, and energy-transition investment leading the rebound. Private equity recovery will depend on financing certainty more than on lower rates.