Current market challenges continue to create an uncertain dealmaking environment for companies. For leaders, the drive behind mergers and acquisitions (M&A) during this period of high inflation is on deals seen as strategic and focused on value creation.
New PwC research found that M&A activity in the UK for the first half of 2023 (H1) has fallen in comparison to the same period last year as macroeconomic headwinds and tight financing markets continue to affect the volume of deals completed, a press release said.
The UK saw 1,902 deals in H1, compared with 2,408 in the same span last year, a 21% decline. The total value of the deals in the first half of this year was £42.8 billion ($55.2 billion), compared with £95 billion ($122.6 billion) in the first half of 2022, a 55% decline. The release said there were fewer larger deals and a drop in average deal size.
Numerous factors explain the slowing of activity in the region, according to PwC’s UK M&A Industry Trends report, and many sectors are feeling the impact of inflation.
Moreover, the reduction of larger deals is driving this decline in value.
“While the number of transactions is holding up, the average deal size is significantly smaller,” the report said. “This is partly due to large private equity (PE) deals being put on hold temporarily as vendors wait for more stable conditions before exiting.”
A global outlook
UK companies are spending with the same restraint as many regions across the world, according to PwC’s global report, Global M&A Industry Trends: 2023 Mid-Year Update. Deal volumes decreased by about 4% between the second half of 2022 and the first half of 2023. For deals of more than $1 billion in value, the decline was 11%, the report said.
“Smaller deals are less affected by market volatility, often being viewed as the staple of dealmaking activity, allowing companies to take a series of steps on their transformation journey rather than one giant leap,” the report said.
Transformation and disruption go hand in hand, according to the report. “Companies are increasingly looking to reduce their impact on climate and pursue net-zero strategies,” the report said. “The energy transition is creating huge disruption in some sectors, with opportunities for M&A along the way.”
Expectations in the coming months
Many dealmakers in the UK, according to the report, are waiting for the right time and opportunity as valuations fall and capital starts flowing again. “But that’s not to say that the market will look the same as before,” the Industry Trends report said.
“This is no doubt a challenging market, but we remain optimistic that the coming months will see new opportunities for those that have prepared well,” the report said. “The days of riding valuation multiples are over — and that means putting value creation at the heart of every deal.”
PwC expects the following developments in the coming months:
- Greater creativity in deal structures and financing. “PE houses are exploring the democratisation of PE as they work to attract retail investors, and it’s likely that we will see deals with a higher proportion of equity investment, more minority interest deals, and more interest in sustainable financing.”
- Specialisation and consolidation. “Investors are focusing on key sectors and … smaller, mid-market deals where [they] can place more confidence in local markets, specific regions such as the US, resilient and cash-generating assets such as natural resources and infrastructure, and megatrend-supported market areas.”
- Generative artificial intelligence (AI). “There are an increasing number of generative AI companies in the UK, which will create a fertile ground for M&A in the coming months and years.”
- The personal touch. “We are seeing a rise in bilateral agreements rather than competitive auctions, and single asset deals where the investor knows the management team well.”
— To comment on this article or to suggest an idea for another article, contact Steph Brown at Stephanie.Brown@aicpa-cima.com.
