Boom and Gloom? European M& A Outlook 2023

Report Data Insight 22 September

Boom and Gloom? European M& A Outlook 2023

330 global dealmakers give their verdict on the year ahead for European M&A

  • M&A expectations run high: Almost all respondents (88%) are currently considering M&A.
  • Undervalued targets and distressed sales to drive activity: The biggest buy-side driver of M&A is expected to be the availability of undervalued deal targets. On the sell-side, distressed situations are expected to be the biggest driver, cited by 26% of respondents.
  • Valuation gaps: seller/buyer valuation gaps are seen as the biggest obstacles to M&A.
  • Cost of financing to increase: As many as 87% of all respondents expect financing to be tighter compared with 2021 – this includes 45% who expect it to be much more difficult.
  • ESG rises up the M&A agenda: Some 90% of respondents expect ESG scrutiny in their dealmaking to increase over the next three years, compared to 72% in 2021’s survey.

Despite facing a far more difficult deal environment, 73% of dealmakers expect the level of European M&A activity over the next year to increase, up from 53% this time last year, according to the tenth edition of the European M&A Outlook, published by CMS in association with Mergermarket.

The report offers a comprehensive assessment of dealmaking sentiment in Europe’s M&A market. It reflects the opinions of 330 corporates and private equity firms based in Europe, the Americas and Asia-Pacific about their expectations for the European M&A market in the year ahead.

Louise Wallace, Head of the CMS Corporate/M&A Group, said: "Despite ongoing geopolitical uncertainty, rising inflation and interest rates, 2022 has seen M&A largely above or in line with pre-pandemic levels with of a number of large M&A deals, particularly in the industrials, technology, real estate and consumer sectors. Financial sponsors remain very active and corporate executives continue to discuss possible deals, and all are sending clear and strong signals that dealmaking activity is likely to continue at a high level in the coming months."

While respondents’ expectations may be high, seller/buyer valuation gaps are expected to be the biggest obstacle to M&A as sellers struggle to let go of previous all-time high valuations and buyers wish to acquire repriced assets. They are also keenly aware that borrowing will be more costly and less readily accessible. No less than 87% of respondents say they expect financing market conditions to be tougher than last year, including 45% who expect them to be significantly more challenging. Hammering home this reality, not a single respondent believes that financing conditions will be easier than last year.

A more challenging business environment will have its upsides however: just over a fifth (21%) of dealmakers cite undervalued targets as the biggest buy-side driver of activity, while 26% view distressed situations as the biggest driver on the sell-side.

The other key focus for respondents is the rise of environment, social and governance (ESG) factors. As many as 90% of respondents anticipate ESG coming under closer focus in their dealmaking over the next three years, compared with 72% in last year’s survey. The proportion of respondents expecting ESG scrutiny to significantly increase has nearly doubled to 48% from 26% 12 months ago. The trend could not be clearer.

Malte Bruhns, Co-Head of the CMS Corporate/M&A Group, said: " Investments that incorporate ESG metrics can help you invest successfully for the long term. In our view, society is undergoing a paradigm shift towards sustainability, and companies, investors and governments need to prepare for a significant shift of capital. It is becoming increasingly important for companies to implement a clear sustainability strategy, with institutional investors having implemented ESG commitments into their investment decisions."

In terms of sector-level activity, buyers are more upbeat on TMT than any other sector, which is justified given that it has consistently claimed the largest share of M&A value in Europe over the past decade, correlating with increasing rates of digitalisation and connectivity. A third (33%) of respondents expect it to see the highest growth over the next 12 months, a further 35% anticipating it to be the sector which delivers the second-highest growth.

Methodology

In the second quarter of 2022, Mergermarket surveyed senior executives from 240 corporates and 90 PE firms based in Europe, in the Americas and Asia-Pacific regions about their expectations for the European M&A market in the year ahead. Among the 330 executives interviewed, 70% are headquartered in Europe, while the remaining 30% are equally split between the Americas and the Asia-Pacific regions. 70% of all respondents have been involved in an M&A transaction over the past two years and 88% plan to undertake an M&A transaction in the coming year. All responses are anonymous, and results are presented in aggregate.

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