Decline and fall

Sophie CameronThursday 14 September 2023

After several boom years, culminating in record M&A activity in 2022, there’s been a significant downturn in 2023. Global Insight assesses the causes and what’ll happen next.

2022 was a record year for global M&A. But as 2023 began, there was a note of caution in the market, with headlines warning of recession and interest rates being raised with the aim of thwarting inflation.

Several months later, we can observe that the M&A market suffered a decline in the first half of 2023, compared to the previous year. Deal volumes are not only down in 2023 but transactions are taking longer to close due to, among other things, increased regulatory scrutiny and the time being taken by investors conducting thorough due diligence and embarking on prolonged negotiations.

Tighter access to bank finance and a widening valuation gap between buyers and sellers have compounded the difficulties for getting deals away

Rebecca Cousin
Vice Chair, IBA Corporate Governance and Activism Subcommittee

So far this year the market has seen fewer mega cap deals at the top end of the market when compared to between a year and 18 months ago, explains Harry Coghill, Secretary of the IBA Private Equity Subcommittee and a partner at Macfarlanes in London. This stands in stark contrast with the peak seen during the Covid-19 pandemic, when the M&A market was very busy. ‘Now, there’s difficulty getting financing and [there are] differences between buyers’ and sellers’ expectations,’ says Coghill. ‘The change in interest rates has meant that the financial environment is difficult, and financing is more expensive. That’s in addition to the impact caused by the conflict in Ukraine and the macroeconomic uncertainty. Buyers are also no longer willing to pay what they were, say, 18 months ago.’

The fall in M&A activity didn’t, however, come as a complete surprise to the legal sector. There are several reasons for this. Firstly, the previous two years saw unprecedented levels of M&A activity, so a decline was likely and was always going to be more significant given the recent highs. Secondly, it was a given that major geopolitical events and macroeconomic developments – such as Russia’s invasion of Ukraine and its impact on, for example, energy prices and the use of sanctions – would have consequences for the M&A market.

Slow deals and alternative funding

Dovilė Burgienė, Vice-Chair of the IBA Corporate and M&A Law Committee and Managing Partner of Lithuania at Walless, explains that in the current geopolitical climate, businesses are being classified by their choices. For example, whether a company continued its operations and/or business activities in Russia has had a significant impact on whether it’ll attract investment. ‘Other areas of concern, such as national security, data protection, anti-money laundering, and competition have made M&A slower and more costly’, adds Burgienė. ‘This deters some potential buyers, as long periods of waiting until the deal closes in uncertain economic conditions is not something some investors are willing to bet on.’

This uncertain economic environment hampers corporate decision-making processes, says Rebecca Cousin, Vice-Chair of the IBA Corporate Governance and Activism Subcommittee and a partner at Slaughter and May in London. ‘Buyers and sellers have had to navigate difficult macro-economic conditions, geopolitical instability, supply chain issues, increased regulation, and accelerating ESG [environmental, social and governance] pressure,’ she explains. ‘In particular for M&A, tighter access to bank finance and a widening valuation gap between buyers and sellers have compounded the difficulties for getting deals away. Against this backdrop, a decline in M&A is not surprising, although it may seem more pronounced when viewed against the record levels of M&A that were seen soon after the start of the pandemic.’

Buyers are insisting on having the time to conduct more robust due diligence and are willing to push for additional deal protections to mitigate the uncertainties

Caroline Rae
Partner, Herbert Smith Freehills

The disruption to global markets, coupled with post-pandemic inflation, has caused the cost of capital to rise and investors have become particularly cautious about the potential geopolitical and economic risks. Meanwhile, business owners are asking whether now’s the best time to sell their companies, due to the possibility of less buy-side competition and of lower valuations.

More specifically, the first half of 2023 has seen deals increasingly failing to get over the line due to a gulf between expectations on price. For example, some major public takeovers have fallen through because the board and the target haven’t been on the same page on price. ‘We have seen a lot of activity by non-UK bidders for UK publicly listed targets who often saw UK assets as cheap and were hoping to get a bargain,’ explains Simon Branigan, Global Head of Corporate at Linklaters, London. ‘Some targets believed that they were grossly undervalued by analysts and the markets more broadly, leading to a number of UK targets unequivocally rejecting these advances.’

Situations where the target’s board believes the company is undervalued by analysts or where sellers are reluctant to transact at declining valuations have led to a number of sales falling apart. Caroline Rae, a partner at Herbert Smith Freehills in London, says that ‘in an attempt to bridge valuation expectations and funding gaps, we are seeing dealmakers revert back to traditional mechanics, such as contingent consideration, rollover stakes and vendor financing. Inevitably, this all leads to greater complexity and longer timetables. Across all sectors, we are seeing deal processes taking significantly longer, particularly when compared to 2021, and we expect this to remain a feature of M&A in the near term.’

Deal processes are also being extended because crucial due diligence is taking longer, given the economic uncertainty. Rae explains that appetite from buyers remains strong, particularly from well-capitalised strategic buyers, but the current landscape means buyers are under pressure to verify the performance of a target and its future prospects before proceeding with an acquisition. ‘As a result, buyers are insisting on having the time to conduct more robust due diligence and are willing to push for additional deal protections to mitigate the uncertainties,’ she says. ‘It remains to be seen whether this more cautious approach from buyers will lead to a shift away from the seller-friendly M&A deal terms, which have become a feature of M&A over the last five to ten years, driven primarily by private equity sellers and competitive auction processes.’

With the number of mega deals lower than usual, mid-market deals are driving M&A activity in 2023, at least in some jurisdictions. Lorenzo Olgiati, Publications Officer for the IBA Corporate and M&A Law Committee and Head of the Corporate/M&A Practice Group at Schellenberg Wittmer, Zurich, says that, overall, while there’s certainly less confidence from chief executive officers (CEOs), in Switzerland there’s a healthy level of mid-market deals that have stabilised the M&A landscape. There’s also significant interest in sectors such as renewable energy/decarbonisation and digitalisation/technology. ‘Some buyers, particularly in the private equity sector, are still facing financing challenges given the higher interest rates and tighter credit policies by acquisition finance providers, which impacts the deal flow,’ explains Olgiati. ‘But we are still seeing add-on acquisitions and portfolio improvements.’


In the wake of increasing interest rates and macroeconomic pressures, higher pricing and tighter terms have shifted the dynamics of acquisition financing. As a result, there’s been an increase in alternative funding structures, such as deferred or contingent payment mechanics, which can be useful ways to bridge a valuation gap too. ‘We are also seeing a greater proportion of the consideration comprising equity or coming from cash reserves in order mitigate the increased costs,’ explains Cousin. ‘Consortium or co-investor bids may also increase in order to support a successful financing package.

To deal with market volatility and uncertainty, there’s also been a recalibration of structures and deal terms. For example, joint ventures or partial purchases have enabled a strategic investment without taking on the entire valuation risk and financing burden at the outset, and could include mechanics to transfer the remaining business over time, says Cousin. ‘While deal terms are becoming more evenly balanced relative to the seller-friendly M&A environment of recent years, there is heavier negotiation around conduct of business in the period between signing and closing,’ she adds, ‘to deal with the risks posed by longer timeframes as a result of wider regulatory conditions.’

The pandemic’s lingering impact

The unprecedented uncertainty brought about by the Covid-19 pandemic and the subsequent economic downturn had a significant impact on the M&A landscape. Notably, the pandemic saw a surprising increase in M&A activities in some sectors, including big tech. The pandemic also led to some countries adopting protectionist policies and an increase in governments and regulators intervening in M&A transactions that raised national interest or security concerns. So-called protectionism took many forms, including restrictions on foreign investment, antitrust regimes, export controls and takeover rules, which can be used to block or influence M&A deals.

The pandemic also highlighted the importance of establishing and maintaining robust and diverse global supply chains. Supply chain weaknesses led to delays and disruption, with many companies struggling in the face of pandemic-related restrictions and extraordinary changes in supply and demand.

The pandemic also pushed forward the adoption of emerging technologies by businesses, to assist them in continuing their operations in light of the restrictions. In the context of M&A these included the adoption of legal tech and artificial intelligence (AI) solutions, such as Luminance, an AI tool used to process legal documents, for undertaking diligence exercises. ‘The longest lasting impact of the pandemic on M&A may well be in respect of working practices,’ says Cousin. ‘The flexibility of virtual meetings and the benefits of legal tech solutions introduced to support them, such as e-signing platforms, have enhanced transaction management. The legacy is likely to be not just the long-term adoption of such practices, but a more open mind to evolving the ways we work and get deals done in the future.’

Inquisitive regulators

Many commentators suggest that competition regulators around the world, particularly in the UK and US, are becoming more interventionist, more aggressively scrutinising deals and in some cases being more willing to block deals where they deem it appropriate.

This additional scrutiny has an impact on deals. Ronald C Chen, a partner at Wachtell, Lipton, Rosen & Katz in New York, explains that ‘increased regulatory scrutiny around the world, whether regarding competition or foreign investment issues, continues to contribute to increasing uncertainty in many M&A transactions. That uncertainty in many cases has proven to be sufficient to impact both a buyer’s and seller’s willingness to proceed with a transaction or heavily influence a seller’s choice of buyer in a competitive bidding situation.’ In any event, adds Chen, buyers and sellers are focused on negotiating contractual provisions that provide buyers with sufficient protection, while enabling sellers to have sufficient flexibility in a potentially more protracted period between the signing and closing of a transaction.

In some jurisdictions, new legislation on investments has been introduced. An example is the National Security and Investment Act 2021 (NSIA) in the UK, which came into force at the start of 2022, while in the EU, Regulation 2019/452 was enacted in spring 2019, establishing a framework for the screening of foreign direct investments into the bloc.

Law firms need a strong antitrust team to look at issues very early on, as that can make the difference

Simon Branigan
Global Head of Corporate, Linklaters

The UK’s Deputy Prime Minister, Oliver Dowden, said at the time that the NSIA ‘represents a major upgrade of the UK’s investment screening powers. It allows us to identify and manage risks to our national security - but in a sensible and proportionate way that allows investment to continue to flow.’

‘The requirements of the NSIA aim to apply more scrutiny into deal activity in certain sectors, such as the tech sector,’ explains Branigan at Linklaters. As a result, the UK’s Competition and Markets Authority (CMA) is becoming more interventionist, he says. ‘Over the last four or five years the CMA has become more unpredictable, referring more deals into phase two,’ he adds. The CMA has a duty to refer a merger for a more in-depth phase two investigation where it believes such a merger may lead to a substantial lessening of competition.

Transactions that fall within the 17 sensitive sectors of the UK economy outlined in the NSIA now require government clearance before completion, affecting a significant number of deals and potentially extending their time to completion. ‘It is fair that such a regime is in place. If certain assets in sensitive sectors are being sold off, it’s important to be clear that the new owners don't pose a risk to the UK or more broadly,’ says Branigan.

Where deals are subject to increased scrutiny by regulators, there’s a general uncertainty in the market about what the outcome will be. The Microsoft/Activision deal, originally announced in January 2022, is a good example, says Coghill. It involves technology giant Microsoft’s proposed acquisition of leading video game publisher Activision, which was initially blocked by the UK’s CMA over concerns about ‘innovation and choice in cloud gaming’, while the US Federal Trade Commission (FTC) also sought to pause the deal.

Subsequently, Microsoft made several concessions to the proposed deal, including putting forward that it would offer Activision’s popular game Call of Duty on other cloud gaming platforms for a decade. The FTC formally withdrew its challenge in July after failing to obtain injunctions to block the merger and the deal was separately cleared by the European Commission after Microsoft made commitments to provide cloud streaming rights in the European Economic Area. Microsoft then announced in August that, to address the CMA’s concerns, it was restructuring the transaction to acquire a narrower set of rights, and the CMA is now considering the deal afresh. For its part, Microsoft has stated that it believes ‘that this development is positive for players, the progression of the cloud game streaming market, and for the growth of our industry.’

Taking stock of ESG

Investors are increasingly taking ESG factors into account when making business decisions related to M&A deals, particularly in cross-border transactions. ESG is important throughout the lifecycle of a deal, from the early stages when considering a transaction, through to the due diligence process, the negotiation of the definitive agreement and post-closing. Evolving ESG reporting and disclosure obligations in some jurisdictions – for example, those under the EU’s Corporate Sustainability Reporting Directive, once it’s in effect – have also increased the attention and pressure on companies in this regard.

Cousin explains that the active consideration of ESG issues is becoming increasingly prevalent in large cross-border M&A deals, with clients now treating ESG-related risk issues with higher priority. ‘At the due diligence stage, alongside assessing the legal risks, buyers are also taking a more holistic view of a target group’s current business practices, with an eye to how they will be viewed by its main stakeholders […] in relation to supply chain, climate issues and modern slavery,’ she says. ‘Consideration is given as to whether a target complies with relevant industry standards and an assessment of its own due diligence processes and compliance relating to its suppliers. It is also becoming more important to assess whether a target has made climate-related statements that can be validated in order to ward off the risk of greenwashing claims.’

Burgienė adds that ESG considerations have a great impact on the choice of M&A targets by financial sponsors. ‘Even in the absence of hard law, the reputation of the target in the area of ESG is potentially increasing or damaging the value of the business,’ she explains. ‘Having said that, it would be difficult to argue that ESG-compliant businesses are valued better. It is more an issue of the attractiveness of a business’, which includes but isn’t solely focused on ESG.

The CMA’s stance on the deal received attention from the UK’s parliament given the country’s focus on becoming a tech and innovation hub, and particularly given the European Commission’s decision to approve the deal. ‘The CMA wants to assert itself following Brexit,’ believes Coghill. ‘Before Brexit the competency on such matters was shared between the UK and the EU. Now, the CMA can make its own decisions.’

The CMA’s CEO, Sarah Cardell, speaking to the Centre for Competition Policy in June, said that ‘out of thousands of merger transactions impacting on the UK every year, the CMA steps in to prevent just a handful of problematic deals. We continue to clear the vast majority of mergers, including many carried out by the major tech firms such as Meta’s acquisition of Kustomer and Microsoft’s acquisition of Nuance. Most recently, we cleared Amazon’s acquisition of iRobot which makes the Roomba vacuum cleaner. But where, after careful consideration of all the evidence, we conclude that a merger will substantially lessen competition, including in dynamic and innovative sectors, it’s right that we step in.’

Jean-Claude Rivalland, Treasurer for the IBA Corporate and M&A Law Committee and a partner at Norton Rose Fulbright in Paris, says we may see a pattern whereby regulators slowly soften their stance against large conglomerates and appear less concerned about protecting competition at all costs when the survival of critical operations is at stake. An example would be the banking sector, where, Rivalland believes, ‘more mergers may occur in the future.’

Whether or not regulators eventually move in this direction, there’s a need for legal teams to take competition aspects into account at the onset of a potential transaction. ‘In my opinion, law firms need a strong antitrust team to look at the antitrust issues very early on,’ says Branigan, ‘as that can make the difference between a failed deal and one that the team can successfully navigate’ through the regulator.

Future resilience

As interest rates have gradually begun to fall, there’s now some positivity about the next six and twelve months in the M&A market. Capital markets are picking up and some companies are also said to be embarking on initial discussions about launching an initial public offering. Branigan is very optimistic. He explains that ‘private equity is on the up. We are seeing increased activity in the UK and Asia. Financial sponsor-backed groups are busy, and we are seeing a number of high-profile deals again. The availability of debt has increased. We are also seeing the start of a number of complex and high profile multi-jurisdictional deals again involving some of our biggest strategic clients.’

The world of M&A is nothing if not resilient and adaptable, concludes Cousin. ‘Whilst, in large part, M&A follows the cyclical nature of the wider economy, downturns give rise to opportunities and encourage the evolution of deal terms and structures to not only weather the storm, but to inform future deal making,’ she says.

Sophie Cameron is a freelance journalist and can be contacted at sophiecameron2@googlemail.com