After 2022's Turmoil, What's Next For The City And M&A?

Mergers and acquisitions (M&A) are increasing in complexity. In 2021, dealmakers using Datasite ran larger, more complex processes in shorter time frames compared to 2020. This year, sell-side processes are taking longer to complete versus last year, as dealmakers spend more time preparing deals and conducting due diligence, in the midst of choppier market conditions, rising interest rates, supply chain challenges and decreased demand in some cross-border deals.

In the UK, some of these challenges have been further exacerbated by exceptionally frequent changes in government leadership, including three prime ministers (PMs) in only two months and five PMs in the last six years. Economic policy decisions, like the recent autumn mini budget from former PM Liz Truss and her team, received a disastrous market reception, and the country is now experiencing a once-in-a-generation economic crunch.

Setting the economic growth agenda

The UK inflation rate is currently among the highest of the G7 nations, and earlier this year the British pound hit its lowest level ever against the dollar. New Prime Minister Rishi Sunak and Chancellor Jeremy Hunt kicked off a more austere fiscal program in October, which includes about £30 billion in spending cuts and £24 billion in tax increases, yet the Chancellor acknowledged the UK has officially entered a recession, as forecasts predict the economy will shrink by 1.4% next year.

This approach is expected to give the finance industry some much-needed reassurance and hope that the new administration will be a steadying influence on markets, boosting investment, and helping the UK regain its former role as an international centre of finance. Stimulating a regulatory culture that is agile, robust, and fair will also be crucial in the months ahead.

Establishing financial discipline

Renewed optimism surrounding Rishi Sunak’s ability to manage the nation’s finances and a weaker pound could, together, ensure the British deals market and investment remains strong.

British companies have become increasingly attractive because of lower valuations as foreign firms seek to either invest or take them over. In fact, £25bn of UK firms have been acquired by overseas investors in this year’s third quarter, boosting foreign investment in the UK and stimulating profits for some of the largest companies in the FTSE100, which earn a sizeable portion of their profits in dollars. However, it can also have a negative impact as lower valuations mean UK companies entering potential M&A deals may get less than expected. Therefore, it is paramount that companies get the fundamentals of deal execution right to capture maximum value.

Brexit or bust?

A key and lingering issue continues to be Brexit. Many in the City are hoping the new PM will be looking to improve relations with the EU. Sunak has said that he wants to build an economy that "embraces the opportunities of Brexit", suggesting a far more pragmatic approach than his predecessors.

Sunak has also previously outlined his perspective on the financial services industry and cited the Financial Services and Markets bill, which is currently going through parliament. The bill will introduce regulation on stablecoins and ease capital rules for insurers, along with giving regulators a new competitiveness objective.

Navigating M&A shifts

Despite the disruption and risk, market leaders continue to deploy M&A strategies even during these volatile times. While global M&A deals on Datasite, which facilitates about 13,000 deals a year, were down 5% in November 2022 versus November 2021, global M&A deals launched on Datasite, are up 3% Jan. – Nov. 2022, compared to the same time in 2021. Sector-wise, technology, industrials, and healthcare and life sciences continue to be hot investment areas.

Still, operating in today’s uncertain economy will require companies to prepare and deploy strategies that reduce exposure, account for inflation, and fine-tune operating models and processes to enable growth. There are ways to mitigate the impact of such uncertainty and risk to ensure counterparties are deal ready. Leveraging new technologies to improve the customer journey, distinguish competitive advantage and deliver a more scalable, cost-efficient and innovative platform for growth will be key to expansion strategies and survival.