Coming out of the “blowout” year that was 2021, expectations and hopes for 2022 were high for the global M&A world. KPMG noted that “With easy access to capital, low-interest rates and a recovering economy, dealmakers around the world announced $5.1 trillion worth of M&A transactions in 2021, up from $3.8 trillion in 2020 and the highest level since 2015.” 

As it turned out, the goldilocks conditions for M&A didn’t last. Instead, 2022 brought the highest U.S. inflation level in 40 years, a Russian invasion of Ukraine that threatens to escalate to a regional or nuclear conflict, and significant disruption in the global supply chain. As if that were not enough, the year also saw a Federal Reserve intent on fighting a war on inflation. This inflation fight and withdrawal of loose monetary conditions left the worst-performing bond market in memory. Not surprisingly, the 2022 M&A market cooled. 

However, while M&A activity has slowed down, it has not been what one might expect, given the strength of the head- winds. CFO Dive reporter Jim Tyson noted an S&P Global Market Intelligence report that “Mergers and acquisitions worldwide plummeted 35% in the first nine months of 2022.” A mid-year report by McKinsey Consulting wrote that “2022 numbers match healthy, pre-pandemic levels and are especially notable in a time of great uncertainly.” Industry leaders in activity were technology, media and telecommunications. 

M&A predictions for 2023 

Looking forward to 2023, all the chal- lenges from 2022 are still present. With deal activity slowing in the latter half of 2022 and all the headwinds still present, what is in store for the new year? 

Tyson quotes the S&P Global report predicting that “A sharp turnaround is not on the near-term horizon,” citing “equity market volatility and increased cost of acquisition financing.” In particular, “the rising cost of debt eroded prospects for generating returns through leveraged financing.” 

In addition to financing costs, higher interest rates pose a significant risk for acquiring a company with an existing debt load that needs to be rolled over or refinanced. Lower market and asset valuations make it difficult for buyers and sellers to come to terms with a fair sale price. 

Things get interesting in the Energy, Natural Resources and Chemicals sectors (ENRC). While dealing with the same issues as other industries, ENRC, in particular, O&G, is in a unique position due to the rise of com- modities prices. In a Bloomberg Law Analysis article, reporter Emily Rouleau writes, “Next year’s M&A activity varies depending on the industry sector or regions… investment bankers believe the energy sector has and will continue to be on the rise.” 

A KPMG outlook on M&A trends in ENRC notes that while the sector remains cautious, “Private equity (PE) deal activity might increase in the near future with PE firms selling high-producing O&G companies to buyers who want stable, long-term invest- ments.” 

PE-sponsored entities growing, flush with cash 

KMPG goes on to note that while O&G PE deals declined in the latter part of 2022, “Most currently active PE-sponsored operators were originally funded during a period of cheap money, with active PE-sponsored entities growing from 265 in 2014 to 515 in 2018… many of these companies are now ripe to be sold or merged with other companies.” But then asks, “Who will the buyers be?” 

Ironically, the answer could be other PE firms. One of the reasons for potential optimism in the overall 2023 M&A market is the amount of money PE firms are sitting on. McKinsey states that “PE invested over $2 trillion in 2021. Yet they still have trillions in dry powder left to spend, and that will be a really important contributor to the M&A market.” 

Legend has it that the term “may you live in interesting times” is an ancient curse meant not as a sign of goodwill, but a wish that one would deal with difficult and even dangerous issues. As the world emerged from the pan- demic, it is hard to fathom that prospects for 2023 might be considered more “interesting times.” 

Hopefully, the worst of times is over, and 2023 will be a respectable year for the U.S. and global economic issues as well.