Anna Mello

We have seen a softening of deal activity in 2022 compared to 2021. Do you expect deal activity to continue to trend down in 2023? What about in your region specifically?

M&A activity has shown resilience in the first half of 2022 despite major geopolitical and financial headwinds. Multiple factors, including the Russia-Ukraine conflict and the relationship between the United States and China, are putting additional strain on a global dealmaking environment already facing inflationary pressures, high interest rates, and supply chain disruption.

While these challenging market conditions point to a slowdown in activity for the remainder of 2022, long-term M&A prospects remain promising. Major deal drivers such as digital transformation, healthcare, and ESG considerations will continue to encourage cash-rich companies to pursue deals.

Interestingly, we are seeing renewed dealmaking in the Latin America region, despite these political and economic headwinds. The regional trend suggests a relative comeback following the pandemic, which has its corresponding challenges – ranging from local government policies concerning economic rescue or reactivation packages, corporations’ capacity to access additional capital to navigate or even capitalize on existing business opportunities, and global macroeconomic challenges, to name a few. We are witnessing a certain optimism in the investment community about their prospects in Latin America, since 2021 was a record year for M&A transactions despite the challenges being faced.

What do you see as the primary drivers of M&A activity in 2023?

Deal drivers that underpinned the record-breaking M&A market in late 2021 and beginning of 2022 – such as digital transformation, supply chain disruption, portfolio optimization, and ESG considerations – have not gone away, and will remain influential in the second half of 2022 and into 2023.

There are still cash-rich companies that will continue to turn to dealmaking to expand or add new capabilities, and this will be most prominent in sectors such as healthcare and tech. Healthcare looks set to be driven by strategic transactions and high demand for biotechs, while digital transformation remains a key driver of revenue and growth in the tech sector.

Despite mounting public scrutiny due to both inflation and ESG-related concerns, energy companies are benefiting enormously from the current shortage in global supply. The energy transition and the need for supply chain security are expected to support M&A activity over the near to medium term.

We have seen macroeconomic conditions become more challenging over the past 12 months, but have not yet seen an increase in insolvencies and bankruptcies – do you expect this to change in 2023?

There is some expectation that general insolvency levels will begin to return to a normal level in the second half of 2022 or at the start of 2023. This is expected following the withdrawal of fiscal or governmental support post-pandemic, as without support, zombie companies will default. The earlier the withdrawal of fiscal support, the earlier we expect to see an increase in insolvency numbers.

We are already seeing examples of this trend in action. The highest insolvency rates to date for 2022 are in Portugal, the Netherlands, Singapore, Belgium, and the US. These countries had low insolvency levels in 2021 and withdrew fiscal support in either late 2021 or early 2022.

New Zealand and Hong Kong are bucking the trend, both seeing decreases in the number of insolvencies throughout 2022. This is attributed in some instances of support being extended until the end of 2022 – effectively concentrating the adjustment in 2023. Other countries where the 2023 insolvency growth rates are projected to be high include South Korea, France, Poland, Norway, and Australia, reflecting relatively low insolvency levels in 2021 and a later withdrawal of government fiscal support in mid-2022.

While insolvency levels are likely to be high at the start of 2023, we expect them to progressively normalize throughout the year.

Do you expect financing conditions to tighten further in 2023 compared to 2022? Will it lead to fewer transactions?

We are seeing banks starting to pull back on lending for big-ticket transactions, choking off financing for private equity firms that fueled the pre-pandemic boom in dealmaking. An increasing number of deals are stalling altogether.

While bankers are keen to point out that activity remains comfortably above historical averages, M&A tends to trail capital markets by a few months – and major equity indexes have been flashing red for a while, with share sales now at a near two-decade low. The hype around special purpose acquisition companies, or SPACs, has also disappeared, blocking another avenue for mergers.

Do you expect greater levels of protectionism and FDI scrutiny globally in 2023? If so, how do you see this affecting dealmaking?

In short, yes – we see merger theories of harm continue to broaden which means further deal scrutiny and complexity even where traditional threshold filing requirements haven’t been met. FDI scrutiny is definitely a big topic, and rising geopolitical tensions have also made governments, intelligence agencies, and regulators look much harder at how a country’s national interest will be protected.

We are seeing an increase in the number of foreign investment regimes, in particular of mandatory filing regimes, with expanded jurisdictional scope and increased scrutiny and penalties in existing jurisdictions, including an expanding list of “sensitive” industries. As a result, multi-jurisdictional foreign investment reviews are increasingly important to the success of a transaction.

How has the war in Ukraine and sanctions against Russia affected M&A? And how are dealmakers approaching transactions that involve sanctions risk?

Russia’s invasion of Ukraine has introduced new risks when carrying out cross-border transactions. Even purely US-centered potential deals aren’t completely sheltered from the effects of the current crisis, with unstable energy prices injecting even more volatility into the mix. There is a trend for expanding the scope of due diligence, especially regarding sanctions. Deal terms may also need to be reviewed in order to address potential issues associated with sanctions.