Signs of optimism in the M&A market

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If the M&A market delivered much worry around the globe by the end of the first quarter, it was at least striking for its lack of turbulence. Challenged by continued geopolitical crises, rising interest rates, higher capital costs, more stringent regulatory scrutiny1 as well as a banking crisis, the M&A market in this year’s first quarter experienced successive waves of what it likes least: uncertainty.

Indeed, unlike the global M&A market of 2022, which delivered dichotomous results comprised of soaring performance in the first half and a significant contraction in the second, the first quarter of 2023 delivered a consistent story. On paper, at least. Market performance largely declined, globally and across regions.

But sturdy shoots of optimism can be found. Some deal makers question why the global M&A market would depart from a pattern established over eight years, which shows mostly stable deal value on an annual basis, with 2021’s record-breaking performance the only recent outlier. Although 2022 followed with a 36 percent decline, to $3.7 trillion, this total was in line with annual prepandemic deal values.

Additionally, while the number of deals over $25 million fell 46 percent in the first quarter from a year earlier and 24 percent from the 2022 fourth quarter, our experience with clients shows that soft-to-serious deal conversations continued. This suggests that companies view recent shocks and longer-term structural change—such as the growing importance of sustainability and the looming impact of AI—as reason enough to actively scrutinize portfolios.

At McKinsey’s recent European M&A conference co-hosted with Goldman Sachs, more than half of participants polled said they expect to increase their M&A activity or pursue transformative deals this year. Among the factors bolstering their confidence were shallower valuation declines than in past downturns, and stores of dry powder among public companies and private equity funds exceeding those of the postpandemic M&A boom. Then too, some pointed to hints of economic recovery or, at least, increasing stability.

In any case, individual companies have shown they can deploy highly effective M&A strategies irrespective of market cycles. Decades of McKinsey research shows that companies that pursue a programmatic approach to M&A, meaning they pursue at least two to four small or medium-size acquisitions annually, outperform peers—delivering higher TSR with less risk. Our research on the largest 2000 companies globally from 2013 to 2022 showed that programmatic acquirers’ median annual returns to shareholders exceeded their peers by 2.3 percent. The benefits of a programmatic approach are consistent across sectors, and the evidence remains strong during downturns. In contrast, during the same period, other M&A strategies had a 50–50 chance of outperforming industry peers, while companies that only pursued organic growth destroyed value on average.

In addition to staring down market cycles, programmatic acquirers are bold in other ways. They are more likely to make acquisitions outside of their core businesses—creating opportunities to accelerate growth—and are willing to pay higher valuations, and actively divest as well as acquire.

But only about 14 percent of companies manage M&A programmatically, indicating that much opportunity to deliver value remains. Active portfolio management, including acquisitions, partnerships, or the equally important step of culling businesses through divestitures, will continue to be a means of sharpening strategies in a volatile world.

Only about 14 percent of companies manage M&A programmatically, indicating that much opportunity to deliver value remains.

First-quarter global M&A market results

In addition to sharp declines in volume globally for deals over $25 million, the value of companies changing hands in the first quarter fell 49 percent to $562 million from a year earlier, and 27 percent from the 2022 fourth quarter. Average deal size fell 5 percent from a year earlier, to $364 million.

The Americas continued to be the most active region, accounting for 51 percent of global M&A activity in the first quarter (up 4 percentage points from the whole of 2022), even with retrenchment in the tech industry. The Asia–Pacific region’s (APAC) share of activity grew to 30 percent from 26 percent for all of 2022 as the M&A market in the region continues to mature, while Europe, the Middle East, and Africa (EMEA) fell to 19 percent from 28 percent.

Technology, media, and telecommunications (TMT) remained the most active sector, contributing 21 percent of value globally for deals over $25 million, followed by healthcare, at 19 percent. The healthcare sector also contributed a whopping 28 percent share of value in the Americas, while TMT was the most active sector in APAC, contributing 22 percent of value. The industrials sector prevailed in EMEA with a contribution of 15 percent.

Megadeals (over $10 billion) retreated, contributing $102 billion in deal value, down from $272 billion a year earlier. Their share of global M&A activity fell to 18 percent in the first quarter from 25 percent a year earlier, a contribution similar to the first two quarters of 2020, during the pandemic lockdowns.

Private equity deal value, which began to retreat in last year’s second half, fell 61 percent from a year earlier and 19 percent from the fourth quarter as many of these firms—seeing higher interest rates and greater constraints on exits—chose to watch from the sidelines. But PE deal size increased sharply, by 40 percent to $1.15 billion from $824 million a year earlier.

Meanwhile, PE’s temporary hiatus opened new opportunities for corporate acquirers, which accounted for the vast majority of first-quarter global deal activity. Corporate or “strategic” buyers contributed 81 percent of value for deals over $25 million, as reduced competition from PE acquirers and moderating valuations enhanced the attractiveness of some assets. Capitalizing on this clearer terrain, many corporate acquirers calculated their position as advantaged, and bet on their ability to deliver value creation, synergies, and growth from new capabilities.

Cash financing—increasingly common since 2021—remained the preferred payment method for the top 100 deals globally.

The changing face of M&A

While it is difficult to accurately predict the appearance or departure of the kind of shocks that rocked M&A in the first quarter, there is much to learn from successful acquirers.

In addition to their consistent approach to M&A, programmatic acquirers tend to pursue not only cost synergies but also revenue synergies as part of their deal thesis, taking into consideration how they can expand offerings, services, and customer segments, over time. While they pursue transactions in their core industry and adjacent areas, programmatic acquirers are more likely than peers to make step-out acquisitions (21 percent of value from 2012 to 2022) and to actively shed assets (80 percent did so over this period.)

Also, successful acquirers increasingly trade target lists for “ecosystem clusters,” looking to harness AI to assess a richer set of targets with the capabilities likely to create transformational value. Emboldened with that understanding, they can proactively cultivate these targets far earlier than the typical deal cycle would dictate.

Finally, decades of data from our cultural diagnostics suggest that healthy organizational cultures lead to healthy integrations and, in turn higher returns to shareholders within two years of close, making cultural due diligence and remedies an important adjunct to traditional due diligence.

Few things are as difficult as making long-term commitments when global markets deliver challenges and uncertainty on the scale experienced in this year’s first quarter. But investing in consistent and active portfolio management, and other practices such as ecosystem sourcing, target cultivation, and building culture and integration capabilities, can go a long way toward tempering external exigencies, and moving companies more quickly and successfully toward delivering value through M&A.

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