M&A tends to slow during times of uncertainty or market volatility—but those can be precisely the times when valuations become more attractive and opportunity knocks. Based on our experience, recent deals activity, as well as insight into our clients’ current deals, we are optimistic that exciting M&A opportunities lie ahead in 2023. While overall deal volumes in 2022 were below the record-breaking 65,000 deals in 2021, they remained 9% above pre-pandemic levels. The current market conditions suggest that we are in a sweet spot for M&A, provided that companies have well-thought-out strategies and the financial wherewithal (and in some cases the courage) to make transformational deals—deals that will shape their businesses and contribute to their longer-term success.
In early 2023 the short-term economic outlook remains clouded by global recession fears and rising interest rates as central bankers try to tame record inflation in many regions. When combined with edgy investors still digesting 2022’s steep decline in global stock market valuations, the war in Ukraine, other geopolitical tensions, supply chain disruptions and tightening regulatory scrutiny, it’s no wonder executives have been pushed back on their heels.
Paradoxically, deals done during a downturn are often the most successful. These challenging conditions create opportunities for buyers to achieve better returns and even outsize growth. Right now, thanks to a reset in valuations, lessened competition for deals and new assets coming to market—including from distressed situations—we believe that many C-suites and boards should embrace M&A as part of their strategy. Indeed, some have already begun to open their wallets to capitalise on these opportunities and potentially set the foundation to leapfrog competitors.
PwC’s 26th Annual Global CEO Survey illustrates the lure of M&A in challenging times: while 73% of corporate leaders are pessimistic about global economic growth, 60% told us that they are not planning to delay deals in 2023 to mitigate potential economic challenges and volatility. Along with the need to grow, we believe that CEOs continue to eye M&A as a way to accelerate the digital and environmental, social and governance (ESG) transformation of their businesses. Technology has been the most active sector for dealmaking over the past several years. Yet the thirst for digital assets and capabilities remains largely unquenched, as fierce competition and high valuation multiples over the past few years have stymied the efforts of many companies wanting to make acquisitions. Beyond boosting tech capabilities and the need to invest in the energy transition, companies are seeking to reposition themselves against competitors and a rapidly changing market, fill pipelines, reorient to new markets, and more broadly reinvent themselves.
“Doing transformational deals in today’s climate is not for the faint of heart. However, with the right strategy, the right business case and the courage, CEOs can put some meaningful distance between themselves and their competitors in the long term”
In our 2022 mid-year update, we set out some ideas for how dealmakers can successfully address stakeholder concerns and win trust to get deals done in the current environment. They included building the case for M&A now, focusing on the long term, expanding due diligence and capitalising on the value reset. While some boards’ first instinct when discussing M&A opportunities may be one of hesitation, as macroeconomic risk and recession fears weigh on CEOs’ minds, they need to be aware of how strategic M&A can be a strong lever for sustained growth and transformation. Nearly 40% of CEOs don’t think their companies will be economically viable a decade from now if they don’t transform. This underscores the need to reinvent businesses for the future while also dealing with a multitude of near-term challenges. If CEOs don’t react, they could miss attractive opportunities and potentially open the door to shareholder activism, a trend which has been on the rise.
As such, the time to act is now—particularly for corporate players; however, it’s hard to predict how long acquirors will have to make the bold moves that could change the game in their sector and deliver sustained outcomes. The current market trends are giving rise to a series of headwinds but at the same time creating a dynamic environment for M&A plays. So how can dealmakers navigate this?
During times of uncertainty, companies need to exercise capital discipline and undertake strategic reviews of their business. As CEOs reassess their portfolio against their core strategy, one key question they must address is the extent to which they should continue to invest in non-core or lower-growth areas. Where such assets are marked for divestiture, these will free up cash to reinvest in higher growth areas—and the to-be-divested assets will provide buying opportunities for others. We expect such strategic reviews may also lead to further spin-offs by large conglomerates aiming to become more agile and optimise sustainable capital allocation—following in the footsteps of GE, 3M, GSK, XPO Logistics and J&J, which have recently separated key business units or announced plans to do so.
In other cases, also as part of the portfolio optimisation, assets might be marked for performance improvement to deal with underperformance or to prepare for further economic headwinds. In these situations, we typically see corporate players take action—or stop certain activities—to improve the quality of their sales and customer base, reduce their cost base, and improve their liquidity and working capital management. Recently, a number of large corporates have announced cost-reduction programs including layoffs amid recession fears, but there have also been announcements in new investment areas.
CEOs must face the fact that transformation, although vital, may not be achievable through organic means alone. Can you evolve fast enough to drive the necessary growth? M&A is one way to answer the need for speed. Consider how a deal will be perceived by stakeholders—will it bring new offerings, new markets or new customers? Will it accelerate digitalisation, increase pressure on competitors or benefit the long-term positioning of the company? Deepening the narrative to highlight game-changing strategic attributes may help push cautious stakeholders over the line.
Borrowing has become more expensive and harder to secure, but sophisticated investors will find creative ways to get deals done. Private equity (PE) funds, in particular, are known as innovators, and in recent months, we have seen them use a combination of financing structures such as term loans, seller notes, all-equity funding, consortium deals (including with sovereign wealth funds) or minority investments to finance important deals. For example, the UK’s Vodafone Group recently entered into a co-control partnership with long-term investors GIP and KKR to hold Vodafone’s stake in its European tower portfolio, with additional funding for the transaction provided by the Public Investment Fund.
For others, demonstrating a business rationale and a case for ESG may help secure financing—or potentially be a source of value creation. Sustainability-linked loans and green, social and transition bonds may bring more favourable financial terms, which—along with government incentives and tax credits directed towards renewables and other green-energy initiatives—may improve a company’s bottom line.
We have seen restructuring activity picking up globally, and restructuring and distressed M&A may grow and intensify if current economic headwinds extend further into 2023.
More cautious venture capital (VC) funding has already led to several early-stage companies facing down rounds, or—in situations where they are unable to secure additional financing—looking for a buyer. Combined with a dormant market for initial public offerings (IPOs), this will likely create opportunities—particularly for corporate players—to invest in, or acquire, companies with innovative business models and interesting technology, digital assets or other capabilities at a more reasonable valuation than previously would have been possible.
The reset in public company valuations, particularly in the tech sector, will likely lead to more deals involving public targets, continuing a trend in take-private deals which accelerated during 2022. Valuations for private companies are taking longer to adjust, but we expect dealmaking to pick up as sentiment evolves from a seller’s to a buyer’s market.
Inflation, interest rates, recession fears and other factors are not having a uniform impact on countries or regions. India, for example, was a notable outlier in 2022, with the economy continuing to grow, year-over-year M&A activity increasing 16%, and deal values increasing 35%—to an all-time high. This compares with double-digit declines in deal volumes and values in the US, China, the UK and many other countries. Investors that are able to find opportunities and growth in other markets have the potential to generate higher returns. Furthermore, with a strong US dollar, currency considerations may make international deals more attractive, especially for US dollar-denominated buyers.
PwC research has shown that workforce strategy is being reshaped by forces such as specialisation, scarcity and competition for talent. As a result of the workforce’s direct impact on business performance, all deals today cannot underestimate the people element. How to recruit, motivate and retain staff, as well as the impact of employee compensation and benefits on the go-forward cost structure—especially given talent shortages and wage inflation pressures—are all areas which need careful consideration. Beyond traditional recruiting strategies, companies may need to ‘acqui-hire’ talent with specific skill sets to drive growth at speed. Across all these strategies, the need for transparent communications with employees is essential to gain buy-in and trust and ensure success post-close.
Modelling different scenarios is critical to providing greater comfort around forecast accuracy. Given the potential impact on cash flow, a variety of factors—such as inflation, recessionary (or lower-growth) expectations, foreign exchange movements and ESG considerations—are creating additional complexity in valuations, modelling and building business cases for investment. A wider variety of sensitivity analyses need to be considered to stress test assumptions and plan for both expected and unexpected events.
New possibilities are opening up for CEOs who are prepared to think bigger, be bolder and get the right capabilities into their value creation process. Widening the scope to adopt a more holistic view and thinking about the impact this could have on their transformation journey could include some of the following creative approaches:
Embracing whole new digital business models and distribution channels
Turning cloud transition into a platform for innovation, agility and operational excellence
Unleashing the full value from your data
Restructuring the supply chain
Focusing on partnership and ecosystem delivery
Embedding tax efficiencies into operating models
“I see plenty of reasons to be positive about deal activity as we enter 2023. CEOs will have dealmaking firmly on their agendas as businesses continue to optimise their portfolios and consider how strategic M&A can help drive growth and their transformation journey.”
The more fragile market has affected dealmakers unevenly, creating net advantages for some and challenges for others, depending on their respective M&A strategies. Here’s our view on how different players are likely to respond in 2023:
Corporates. Companies with cash on hand and growth ambitions will be well placed in this market. They will have an added edge on acquisitions if their operations fit well with those of the target company. We are seeing a significant increase in carve-outs and expect this divestment trend to continue. Some corporates are facing pressure to deleverage their balance sheets, and many now recognise the need to be agile and are recalibrating their portfolios.
Private equity. Private equity has put record amounts of capital to work over the past few years, accounting for more than 40% of deal values in 2022. This has significantly changed the dynamic of the overall M&A market. PEs will be looking at new deals and will be focused on creating value in their portfolio companies, which in turn will involve optimisation, build ups and divestitures. Fundraising has continued at pace, such that PE dry powder stands at approximately US$2.4tn globally. However, high interest rates and challenges raising financing through leveraged loan markets have slowed buyout activity. But perhaps not for long. As previously noted, PE will find alternative ways to finance important deals and won’t stay on the sidelines. More disciplined firms will try to maintain their investment plans while remaining flexible enough to act quickly on value creation opportunities as they arise. Some of the biggest PE funds have raised credit funds, which opens up new transaction avenues for them in a tough financing market.
SPACs. Special purpose acquisition companies (SPACs) have struggled to close deals, and many are likely to run out of time. During 2022, there were 85 SPAC IPOs which together raised approximately US$12bn in proceeds, a sharp drop from the more than 600 SPAC IPOs which raised more than US$144bn in 2021. Securities and Exchange Commission (SEC) regulations, poor post-IPO performance for SPACs, and difficulties securing private investment in public equity (PIPE) funding have contributed to record redemption rates, lower de-SPAC merger activity and even the termination of several previously agreed SPAC deals.
Credit funds and private markets capital. As banks seek to limit their exposure to some riskier sectors, we expect to see credit funds continue to take share away from banks. They may join forces to do some larger deals but will have the most impact in the mid-market. Their lending is likely to become key to providing much-needed liquidity to the leveraged loan market—in effect, creating a floor under the M&A market.
Venture capital. As investors pull back from riskier investments and reassess valuations, we expect to see some distress in early-stage companies that may struggle to secure further rounds of financing. This may present some interesting acquisition opportunities for corporate players and PEs. One potential bright spot is climate tech investing. PwC’s State of Climate Tech 2022 report found that while the contraction of VC investments in climate tech overall reflects the kind of cyclicality seen elsewhere in corporate dealmaking, the extent of the decline looks far less drastic. In addition, more than one-quarter of all VC funding is going to climate technology, with increased focus on technologies that have the most potential to cut emissions.
Global M&A volumes and values declined in 2022 by 17% and 37%, respectively, from record-breaking 2021 levels, although both remained above 2020 and pre-pandemic levels. The high levels of M&A activity from 2021 continued into the early part of 2022, but as headwinds continued to grow, each successive quarter reported a decline in deal activity over the prior one. Deal volumes and values declined by 25% and 51%, respectively, in the second half of 2022 compared to the prior year period. However, trends varied across countries and regions. This is indicative of a broader shift by investors to find opportunities and growth in other markets, as we detail further below:
Asia Pacific: Deal volumes and values declined by 23% and 33%, respectively, between 2021 and 2022, with the greatest declines in China, where deal volumes and values decreased by 46% and 35%, respectively. M&A in China has slowed domestically in response to the country’s pandemic-related challenges and weakening demand for exports. Companies seeking access to Asian markets are increasingly looking beyond China—to India, Japan and other countries within Southeast Asia—for investment opportunities. India has emerged as an increasingly attractive destination for investment, overtaking Japan and South Korea in deal values to rank second in the region behind China.
EMEA: M&A performed better in Europe, the Middle East and Africa (EMEA) than in the Asia Pacific and Americas regions, in spite of the impact on markets of higher energy costs and a drop in investor confidence. Deal volumes and values across EMEA declined by 12% and 37%, respectively, between 2021 and 2022. With 20,000 deals in 2022, activity in the region was 17% higher than pre-pandemic 2019 levels.
Americas: Deal volumes and values declined by 17% and 40%, respectively, between 2021 and 2022 due to a combination of macroeconomic, regulatory and geopolitical factors. Deal values were particularly hard-hit, and the number of US megadeals—transactions with a value in excess of US$5bn—almost halved between 2021 and 2022 from 81 to 42, respectively. The decline in the second half of the year was more acute, with just 16 megadeals in the second half of 2022 compared with 26 in the first half of the year.
We expect 2023 will be an exciting time for M&A, with transformation and transactions at the forefront of CEOs’ value creation strategies. But with recessionary fears remaining on the top of dealmakers’ minds, all eyes will be focused on when the US Federal Reserve will signal an end to interest rate hikes. We believe this will act as a catalyst for greater stability and certainty leading to an upswing in M&A, notably among private equity. As business leaders seek to surmount the varying challenges, M&A—and particularly portfolio optimisation—will be a key tool to help them reposition their businesses, bolster growth and achieve sustained outcomes over the long term.
 Source: “Succeeding through M&A in uncertain economic times”, PwC US, accessed 16 January 2023
 Source: “PwC's 26th Annual Global CEO Survey”, PwC US, accessed 16 January 2023
About the data
We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 31 December 2022 and as accessed on 2 January 2023. This has been supplemented by additional information from Dealogic, Preqin, S&P Capital IQ and our independent research and analysis. This publication includes data derived from data provided under license by Dealogic. Dealogic retains and reserves all rights in such licensed data. Certain adjustments have been made to the source information to align with PwC’s industry mapping.
The chart showing "Respondents to PwC's 26th Annual CEO Survey who do not plan to delay deals (%)" is based on the original survey question: “Which of the following options best describes any action your company may be considering to mitigate against potential economic challenges and volatility in the next 12 months?” Respondents selected from a list of several options, answering “We do not plan to do this”; “We are considering this in the next 12 months”; “We are already doing / have done this”; or “Don't know”. The chart displays the percentage of CEOs who responded "We do not plan to do this" to the option “Delaying deals”.
Asia Pacific Deals Leader, Global Corporate Finance Leader, Partner, PwC Hong Kong