Merger and acquisition deals will still get done in 2023 but they will be harder and take longer. Photo / NZME
Merger and acquisition deals will be harder to get over the line and take longer this year, according to experts at a major law firm.
Neil Millar and John Conlan, head of corporate partners at MinterEllisonRuddWatts, have forecast a much tougher year ahead for deal-making after a strong run in 2021 and the first half of 2022 in the company’s annual M&A Forecast report.
“The incredible highs of 2021 and early 2022 were clearly a peak. We don’t think that deal-making will completely dry up in 2023. However, we do expect to see a return to more normal transaction volumes.”
Millar and Conlan said a number of New Zealand and Australian private equity funds still had capital to spend. “And we expect that they will drive transactional activity.”
But they also see the return of trade buyers as rising interest costs and reduced availability of debt impacting financial investors.
They expected to see industry consolidation mergers and acquisitions as corporates realised scale benefits in a higher-cost environment.
“Meanwhile, those corporates with less-healthy balance sheets may undertake strategic reviews with a focus on key business unit and a divestment of non-core assets - which will provide a supply of assets for those looking to expand.”
But Millar and Conlan said all the advisers they had spoken to agreed deal-making would be more challenging.
“Deals will definitely be done in 2023 - but they will be hard work and take longer to complete.”
While the tougher economic conditions and more expensive debt would make things harder businesses were also grappling with a tighter workforce, increased regulatory requirements, and new due diligence requirements particularly around environmental, social, and governance principles.
The pair also predict the general election would potentially slow things down as buyers waited for the outcome before making a commitment.
Insolvency experts have been expecting a rise in distressed deals for some time as fallout from the Covid pandemic.
Millar and Conlan said after two years of trying to predict when the tidal wave of insolvency was going to hit they had given up but with a recession now on the cards for 2023 they believe distressed deals will be a big feature of this year.
“Adding to this is the relatively new overlay of bank conduct issues - with some observers noting that the past bank practice of a very measured and patient approach to borrowers in distress, may not cut it under the ‘conduct’ lens.
“We expect to see banks more actively managing their problem borrowers in 2023 - and for deals to emerge as a consequence.”
Millar and Conlan say the trend of doing virtual deals - established because of the inability to do face-to-face meetings because of Covid - is here to stay.
“Many of our largest deals of the last 48 months were completed without a single face-to-face meeting. In some cases, buyers never set foot in New Zealand. There is no doubt virtual deal-making is here to stay.”
The vast majority of deals would continue to be done virtually although some clients were wanting to press the flesh again and meet in person. They predicted the new normal would be a hybrid of the old and new ways of doing deals.
ESG would also continue to be a key investment criterion early on in the deal process and be central to creating value after the acquisition was made.
Millar and Conlan predicted technology, healthcare and financial services would continue to be the main sectors for deal activity.
And in some good news getting approval by regulators could speed up due to lower deal numbers.
“Both the OIO [Overseas Investment Office] and the Commerce Commission have been incredibly stretched in recent times. We expect that 2023 will give them time to fine-tune their approach to the more recent regime changes and get back to more normal timeframes for consents and clearances.”
Although some OIO decisions could be delayed around the election as the Government sought to minimise political fallout.