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    3 POINT PERSPECTIVE | MACRO SHIFTS

    Navigating the M&A Market in 2023

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    Contributor: Gary Posternack

    20 Feb 2023

    M&A activity slowed considerably in 2022 due to soaring inflation, rising interest rates, challenging financial markets and the war in Ukraine. Activity is expected to rebound in the back half of 2023, when pent-up M&A demand could drive a sharp pickup in activity. Gary Posternack, Global Co-Head of M&A, offers his insights into the current dynamics shaping M&A activity.

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    Contributor: Gary Posternack

    20 Feb 2023

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    Navigating the M&A Market in 2023
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    1. Opportunity abounds for well-capitalised buyers

    Despite the current environment, M&A market participants are increasingly poised to go on the offensive. Live deal flow may have decreased, yet conversations about potential opportunities have not.

    It is a “buyer friendly” market for strategic buyers and sponsors with cash or easier access to capital markets, driven by several factors:

    - Fewer players in the M&A arena currently positioned to go on 'offense';
    - Less competition from initial public offerings for private companies;
    - Lower equity valuations for many potential targets;
    - Continuing market support for smart, strategic deals.

    Well positioned US multinationals (S&P 500 Index) have a window of opportunity to capitalise on M&A opportunities

    Additionally, larger, sophisticated financial sponsors remain poised to invest in corporate carve-outs as well as deals to take public companies private, using more equity and more creative capital structures than traditional leveraged buyouts.

    2. Increasingly aggressive shareholder activism is emerging

    Activist investors are becoming increasingly aggressive as softer stock prices leave companies vulnerable to operational and strategic challenges. Approximately 35% of 2022 activist campaigns had an M&A element or demand to them (i.e. whole company sale, break-up, divestiture, activism against a sale).1

    Activism rebounds to pre-COVID levels; large-caps were almost 50% of targets in 2022 US campaigns

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    Source: Activist Insight, 13D Monitor. Includes US companies with market cap greater than $250mm. 

    Activists are fundamentally value investors. They target companies they believe to be trading for less than their intrinsic value and push for changes that will improve valuations. This could mean a shift in operations, strategy or management, or a push for commitments to Environmental, Social or Governance (ESG) initiatives. Lower market valuations create a broader set of attractive opportunities for activists.

    In addition to more favourable market conditions for activists, new universal proxy rules reduce the costs and complexities of running campaigns, increasing the risk that smaller, less-experienced activist funds will seek board seats at targeted companies.

    Activists often work to longer time horizons than market cycles. As a result, activists seeking to force strategic mergers could take positions in companies now and wait for the M&A market to improve later.

    1 Activist Insight, 13D Monitor

    3. Current conditions make cross-border deals and spin-offs more common

    The strong dollar has put US companies in a good position to acquire listed companies in the UK and Europe, particularly those with significant revenues in US dollars.

    Cross-border activity may flow in the other direction as well. Many European companies are likely to refocus their operations and assets away from China and Russia towards the US for better stability given current geopolitical dynamics. By acquiring US assets, UK and European companies can also benefit from the relatively stronger US economy and lower energy US input prices.

    Ongoing market and geopolitical uncertainty is also causing many companies to reassess their corporate strategies as well as their business portfolios. For this reason, actvity in tax-free, corporate spin-offs will likely continue unabated.

    Since 2017, companies have announced more than 200 strategic separations, and currently there are 11 pending spins by US listed parent companies with a market cap greater than $11 billion.2

    2Pending spins for US listed companies as of 2/14/2023 with parent market cap ≥ $1bn.

     

    Top Separation Rationales US tax-free spins with parent market cap ≥ $1bn

    Related content

    Shrinking to grow: Creating value through spin-offs

    Barclays’ M&A Structuring team analysed 100+ large spin-offs to uncover the factors that can result in long-term value for both Parent companies and SpinCos.

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    Source: US tax-free spins with parent market cap ≥ $1bn. Trailing 12-Month period as of 2/13/2023. Rationales based on details in transaction announcement.

    Since they do not require a counterparty, spin-offs have low execution risk, even in challenging market environments. The opportunity to bring enhanced shareholder value, management focus, strategic flexibility and tailored capital structures makes spin-offs especially attractive in the current environment.

    Conclusion

    Expect activity to remain slow for the first half of 2023, as markets stabilise and interest rates level. Spin-offs, cross-border deals, increased activism, and a wider field of smart, strategic deals are all likely to see greater focus ahead of an anticipated snapback in M&A activity later in the year.

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    About the expert

    Gary Posternack

    Global Co-Head of M&A

    Gary Posternack is Co-Head of Global M&A within the Investment Bank at Barclays. Gary joined Barclays in September 2008 as Head of Natural Resources M&A and the M&A Takeover Defense practice at Barclays. He was named Head of M&A in the Americas in March 2009 and assumed his current role as Head of Global M&A in July 2014. Before joining Barclays, Gary held various positions at Lehman Brothers from 1995 to 2008. He has 35 years of experience in the investment banking industry both in New York and London, including time at Dillon, Read & Co. Inc. from 1988 to 1995. Gary has advised clients across a broad range of industries on more than $1 trillion of transactions. Gary earned his BA at Harvard University where he graduated magna cum laude.

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