Reuters recently reported that global merger and acquisition (M&A) activity shrank to a decade-level low in Q1 2023, with high inflation, astronomical interest rates and recession rumours stalling deals. M&A volume fell by 48%, according to Dealogic, with expensive debt forcing more significant equity financing as an alternative to get deals done.
Translink Corporate Finance UK Partners Don Gray and Stuart Hands say divestiture could prove pivotal for the mid-market deal pipeline as companies look to consolidate portfolios by offloading assets. These insights are behind the group’s cautious optimism about M&A activity for the remainder of 2023.
“We foresee some M&A recovery in the last quarter of 2023. We believe much of the mid-market deal pipeline will be driven by divestitures as cash-flush companies seek divested assets as prime portfolio targets, leading to a flood of deals closing,” adds Gray.
Gray and Hands shed light on these trends and their driving factors, from portfolio tightening and consolidation to increasing divestitures.
Why companies are consolidating portfolios
Hands says the current M&A environment pushes investors to tighten and consolidate profits. “The triad of rising interest rates, inflation, and broader economic uncertainty is making it more expensive for businesses to borrow money and invest, leading to a decline in demand for risky assets.”
Hands takes a deeper dive into these three factors and their impacts:
Gray adds, “Tightening debt markets encourage corporates to look at their portfolios closely to release capital. Some do so voluntarily, while others are encouraged by their lenders. Even for those corporates with substantial liquidity reserves, the rising cost of debt means that subsidiaries or divisions considered non-core or generating below target return on capital employed (ROCE) are under increasing scrutiny.”
How asset divestiture fuels prospective mid-market deals
Hands says divesting assets can help fuel a pipeline of mid-market deals in several ways. These include:
Sectors prone to consolidation and divestiture
Gray says, “More corporate boardrooms are becoming surgical in their approach to portfolio management by scrutinising non-core assets, whereas, previously, CEOs may have taken a more relaxed approach to divisions that were performing well. There are three key drivers of divestitures from the transactions we’re seeing – the availability and cost of debt, the pivot towards digitalisation and the requirement to invest in technology to support this, and geopolitical tension and regulatory divergence.”
Hands adds that most sectors are consolidating, but some of the most notable ones include:
Navigating divestiture dealmaking in 2023 and into the future
Translink has seen an increase in the number of cross-border deals in the market, some of which the group is involved with on the sell side and some on the buy side.
“Translink’s extensive global network allows us to identify targets and support acquirers. When on the sell side, our global network reach enables us to source buyers from multiple countries. For example, a European parent company approached us after unsuccessful attempts to find interested parties in its China subsidiary looking to divest in difficult political circumstances. We successfully engaged with multiple parties and have sourced an offer from a Chinese buyer for the business, demonstrating our exceptional cross-border reach and ability,” concludes Hands.