Should businesses pursue M&A opportunities in 2023?

Since the onset of COVID-19, global markets have been met with great uncertainty regarding business growth and economic stability going into 2022. Nonetheless, the market experienced high levels of M&A activity in 2021 going into 2022 as businesses seek to strengthen their position in various industries and improve efficiencies within supply chain, customer satisfaction and their operations. While this made businesses feel more comfortable pursuing more M&A opportunities in 2022, additional uncertainty came about in the form of global supply chain issues, geopolitical issues, i.e. Russia/Ukraine war, rising interest rates and volatile markets.

We have seen the early onset of companies cutting back on cost, with the anticipation of current market conditions continuing into Q1 of 2023. Major players in the tech industry such as Meta, Apple, Twitter, Netflix and Amazon etc, with at least 20,000 job cuts in November of last year. Leadership has cited that the main reasons for these cuts are inflation concerns, rising interest rates, and ongoing geopolitical issues. The US central bank has been increasing interest rates to offset inflation, which has not made executives feel confident in pursuing as much M&A activity in 2023.

The question now is, what will the markets look like in 2023 and is it safe to pursue M&A activities. As a seasoned consultant would say, it depends! That is true, it all depends on the industry, the deal rationale and the market factors affecting different companies and firms. With high interest rates and inflation going into 2023, it's difficult for startups to raise new funds and such startups will likely have a lower business valuation than expected. Private equity firms may find M&A opportunities in 2023 less appealing due to their nature of using debt, of which they would be less inclined to do with high interest rates. If there exist an unfavorable market and operating environment, some companies will be forced to divest non-core and non-performing assets to improve balance sheet and focus on the strategic growth of their performing assets.

On the other hand, there will be companies lined up to pursue M&A activity. Businesses that are forced to sell non-performing assets will need a buyer. A typical buyer would be a company with the ability to acquire such assets in the interest of their long term goals, such as to maintain a competitive advantage in the industry. Companies with a healthy balance sheet may pursue M&A opportunities to transform their business in line with changes the last 2 years have brought about to their industry and customer needs. Technology and operational efficiency have always been the main drivers of M&A activity regardless of market occurrences, so there would be no surprise if the market witness M&A activities in 2023 for those reasons. With an increased level of uncertainty, due diligence will be a very high priority for buyers to ensure that they fully understand a business before acquiring and that everything is 100% in order to not end up in a situation similar to that of Binance and FTX.

Overall, there are many factors at play for leadership to decide if pursuing M&A activity in 2023 is ideal. No one can predict the market or future, but it's important for businesses to strengthen their due diligence efforts, optimize their deal rationale, analyzed their industry and observe trends in the market (past, present and future) before seeking M&A ventures.