A guide to M&A in 2023 with expert Jonathan Dunn

2022 saw an uncertain time for M&A. Inflation, soaring interest rates, and a recession put an end to the buying spree that followed Covid-19 lockdowns, while Liz Truss’ autumn budget caused uncertainty for buyers and sellers.

In this special episode of the Business Leader Podcast, we speak to mergers and acquisitions expert and CEO of BCMS Jonathan Dunn, to find out what trends we are likely to see in the M&A market in the year ahead.

Last year was an interesting year for the way political and economic situations impacted the M&A space. What were some of the key trends we saw in 2022?

It was definitely an interesting year. I’ve been in M&A for nearly 30 years and I think the last three years have been really different from the others in terms of what to expect — it’s been a really dynamic market. 2022 will be our best year for M&A activity and that’s because of a combination of things that came into effect at that time. There was a decline in deal volumes around that time and buyers began more comfortable with how to operate within M&A in the ‘new world’.

We saw a bit of a bounce-back because of Covid too, and then there was everything going on with currencies and the energy crisis. There was a whole load of uncertainty, which you would expect to have a depressive effect on M&A, but it didn’t. There was a lot of activity in privately owned businesses selling in the UK. That layer of the market is actually quite resilient.

You mention a lot of events that impacted the M&A space. A significant one was Liz Truss’ short-lived government. What impact did this have on M&A?

Whilst we stood watching those events unfold, we didn’t actually lose any deals. No buyers said: “We cannot operate in this uncertainty.” Had that uncertainty prevailed we probably would have seen buyers down. This had a huge impact on currencies and interest rates, but interest rate movement was bound to happen anyway. In our area of M&A, it had a surprisingly dull effect in that we didn’t see a lot of buyers run for the hills. It was a relief, because it was quite shocking at the time.

The consequences of that are still being worked out because buyers are having to borrow money and it’s more expensive. Additionally, companies are having to fund greater levels of dead  — it’s a bit more precarious than it was before. We tend to sell companies that are loaded with cash, so they are just looking for a good home.

You mentioned the boom we saw in the M&A space post-Covid, did we see much of that continue in 2022? Or did this come to a halt?

You have to segment the M&A market down in terms of deal size. In the top end of the market, which we don’t operate in, volumes are way down. There’s been a real decline in M&A activity in big deals, there’s a real reduction in the confidence, appetite and boldness of some of those buyers. Investment bankers at that low end of the spectrum are facing considerably lower activity.

At the lower end of the scale, where there are lower value deals and arguably less risk, the appetite is continuing and it’s pushed by the favourable currency if you’re selling overseas…we often sell to US buyers and we have seen an even greater number of instances where we run a sale process and a US buyer is successful. It’s gone up from roughly 50% to 70%. This is driven partly by Brexit.

Generally, what trends might we see that were prominent last year continue into 2023?

Inflation, we’re going to have to get used to that in the next year. Higher interest rates will prevail and some of those industries that are very energy reliant will suffer. It’s tough for small business trying to make ends meet in these conditions, and I don’t see that getting any easier. I think it’s a year where we’ll all have to try and learn to live with the prevailing conditions that we’ve not really been used to over the last 20 years.

There’s definitely an adjustment in the mindset and in the ability to continue to grow business and grow profit, and people I know are very focused on that. But there are always winners as well in these situations. Those companies that specialise in helping reduce energy consumption, and those in talent and human resources will become a premium.

Is there anything unique about this recession compared to the financial crash in 2008?

There are elements of it that are unique in terms of the inflationary pressure. It’s still a global phenomenon, but this is less of a financial crisis and more of a pure economic one. Because of that, I think it will be unique in the way people cope with this. M&A had completely crashed in 2008. For a good year, nobody wanted to do anything because the funding dried up and we aren’t seeing that now.

Banks are cautious. Everybody is trying to get their heads around what’s going on and what seems like a sensible thing to invest in. This history is obviously a good proof of the future. But it’s not always a key indicator, and when things change, you’ve got to try and work out what the business will do in the future and how they integrate with yours and what challenges that might give rise to. So there’s a bit more caution. But there’s no less appetite. It’s just taking a bit longer to get to that level of confidence that tips people over to sign on the dotted line.

Just how important is confidence over cautiousness when entering into that M&A space?

You asked me what’s changed, and that has not changed at all. You’ve always got to provide confidence to a buyer if you’re selling a business. This business has got to survive when you’re not involved in it and it has to thrive in the new owners hands.

Ways to instil that confidence in buyers includes trying to make the business as predictable, and as certain and resilient as possible. nd as confidence building as they possibly can. Here are a few examples that erode confidence. One is if the business is far too reliant on one particular customer, what happens if that customer decides to go elsewhere? Likewise, for suppliers, if you’ve got one supplier, or two that you very heavily depend on, these are things that fundamentally can be weakened.

In 2023, which industries might be expect a boom in?

Those that reduce energy, energy consumption, renewables, the human resource sector because talent is so scarce, healthcare, and technology companies that supply into regulated industries. AI is another really hot sector and it’s evolving.

If you want to see where there will be the most M&A activity just look at where private equity investing is. They have these very sophisticated thesis that look at value over the next five-10 years in a particular sector, and AI was a focus about three years ago. Just look at where private equity investing is…that’s where M&A is going to be.