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Four M&A trends to watch

2023 M&A Trends
2023 M&A Trends

The last three years have been atypical, to say the least—a global pandemic, unprecedented monetary response, and rampant inflation have given dealmakers plenty to contend with. Cheap money and low-interest rates fueled a record year for M&A activity in 2021, which led to an inevitable decline in 2022.

Falling valuations and large cash balances should help support dealmaking activity, even though persistent inflation and recession are cause for concern. During the first month of the year, we identified four factors that had an impact on M&A activity and set the tone for the rest of the year.

Collapse in valuations could spur merger activity

When the Fed decided to flood the market with cheap money and slash interest rates to near-zero in 2020, M&A activity took off. The following year, 2021, broke the record for transactions globally.

As interest rates steadily rose in 2021, investors began to shift their focus to profitability rather than growth at all costs. In prior years, startups were rewarded with rising valuations as they prioritized growth over building scalable, profitable businesses.

Then the calendar turned to 2022, and public tech companies that were the stars of 2021 saw their stock prices decline rapidly. The Nasdaq shed over 33% in 2022 alone.

As they watched their public portfolios decline, capital allocators began to change their calculus-profits became more important than growth, and those that couldn’t turn a profit saw their valuations plummet.

These depressed valuations could now open the door to mergers and acquisitions that weren’t previously feasible. High- growth companies that had been planning on an IPO may instead opt for other exit strategies, such as being acquired by a larger firm. For instance, Instacart, a well-funded Silicon Valley startup, scrapped its plans to go public in 2022 due to unfavorable market conditions.

EY predicts that “the biggest opportunity for tech companies in 2023 is to adopt an active mergers and acquisitions (M&A) strategy…as valuations come down, the appetite for deals is set to return next year.” While IPOs may be harder to pull off, deals such as outright acquisitions and corporate mergers are likely to see increased activity.

Private equity and venture capital are awash in cash

While PE and VC dry powder has come down from record levels in 2020, firms in these industries still have plenty of cash to work with. Going into 2023, private capital providers are sitting on $3.2 trillion in dry powder, according to Pitchbook, which equals a 6% decline in comparison to 2022.

To generate competitive returns for investors, these firms will be looking to put some of that cash to work. The prospect of a global recession and even higher interest rates are definitely concerned that fund managers will have in mind, and finding opportunities among these headwinds will be key.

If a recession causes equity values to sink further, expect private capital to pounce on the opportunity.


Larry Fink, CEO of BlackRock, sent a letter to his portfolio companies last year that put the industry on notice. In it, he states that his firm—which manages $10 trillion in assets—will only invest in companies that meet certain environmental, social, and governance (ESG) criteria.

Soon after that letter was published, the Securities and Exchange Commission (SEC) proposed a rule that would require public companies to provide significant ESG disclosures in their annual reports. While the rule has yet to take effect, it’s a clear signal to the industry to get ready for a much stricter look at their ESG efforts.

We’ve seen several examples of companies with a strong ESG profile being rewarded by the market. Take Allbirds—the eco-friendly, startup shoemaker was founded in 2014 and went public in 2021 at a valuation of over $4 billion. Consumers are increasingly choosing to buy from companies that support ESG initiatives, and those companies can demand higher valuations as a result.

In fact, according to McKinsey, “a better ESG score translates to about a 10 percent lower cost of capital.”

To prepare for these changes, companies will have to enhance their ability to track ESG metrics, such as carbon emissions and diversity. This will require new investments in staff and systems in order to improve this capability.

A return to careful due diligence

Many private capital managers look back on the zero-interest rate environment of 2020 and admit that in-depth due diligence took a back seat to getting in on hot, high-growth companies.

While factors like recession are hard to predict, it’s basically a guarantee that due diligence will be a higher priority for fund managers in 2023, which means deals will take more time. High-profile events like the FTX collapse exposed even the largest VC firms—rather than doing their homework, they assumed that prior investors had already done so.

All in all, most in the industry expect a return to “normal” in 2023. However, a lot will depend on the path of interest rate increases—if the Fed overcorrects, markets could freeze up. If they ease up on rate increases and inflation remains stubbornly high, valuations could be hard to calculate.