2023 review
Deal trends
Acquisition finance
- Overall, acquisition finance was less accessible, with increased interest rates and lenders imposing tougher terms, and less willing to lend larger amounts.
- Private credit, family offices, seller loans, co-investments and partial exits filled the gap where more traditional lenders reduced access.
- Private credit had become a go-to for mid-market deals over the last couple of years, but in 2023, this source of funding also supported larger deals historically funded by a syndicate of bank lenders. While negotiation is relatively simple and speedy, pricing and terms for private credit can be onerous. However, the competition created between the private credit and traditional bank lenders (where they were willing to lend) was a plus for borrowers.
- The use of earn-outs and deferred consideration addressed cash flow concerns, as did an increased reliance on share consideration and minority or staged investments.
- Deals tended to be smaller due to the challenges to funding of larger transactions.
Valuations and competition for assets
- Overall, valuations were difficult to ascertain as a result of fluctuating costs, growth and profits, with buyers and investors taking a cautious approach.
- Buyers relied more on full completion accounts processes to verify valuations, which may result in an uptick in completion accounts disputes in H1 2024.
- There was sometimes a mismatch of pricing expectations of buyers and investors, who were reluctant to overpay and whose funding costs had increased, and sellers and founders/companies, who felt their assets were being undervalued. This gap led to trickier negotiations, creative consideration structures (earn-outs were increasingly used to bridge valuation gaps, though this will store up the potential for more disputes in the medium term) and impacted deal deliverability.
- Risk-averse investors wanted to see a solid financial track record and a history of profitability and were laser-focused on valuation and aftermarket performance of companies launching an IPO.
- There was less supply of acquisition and investment targets, meaning buyers could be selective, though there was fierce competition and relatively higher valuations for the most attractive prospects.
- Some jurisdictions saw an increase in the use of competitive auction processes for sales, though this has been impacted slightly by the move to a buyer's market.
- To make a prospect as appealing as possible, and maximise sale price, some sellers were turning more to vendor due diligence on auction processes.
Risk appetite and deal deliverability
- In general, parties have had less risk appetite and deal execution certainty has lessened.
- In some cases, sellers and companies have decided to wait and see and focus on internal improvements to ensure deal readiness when the market rebounds, rather than pursue an immediate exit or IPO. Similarly, buyers and investors have more readily pulled out of negotiations, put a deal on hold or sought to renegotiate terms.
- There has however been an uptick in distressed M&A and turnaround deals, where processes are "quick and dirty". Smaller deals that have shorter timetables and are less risky to finance have also been easier to execute.
- The problems associated with securing deal funding, reaching agreement on risk allocation and an increase in regulatory approvals being sought have contributed to aborts and stop-starts with transactions.
- Targets have been more fiercely scrutinised in due diligence, with a more aggressive stance taken to negative due diligence findings with some anecdotal evidence of more indemnity cover being sought.
- Parties looked for security for payments, with a heightened concern about credit risk. We observed that, in some jurisdictions, escrows are becoming less popular as it becomes more challenging from an anti-money laundering perspective for law firms to act as escrow agent. In others, where lawyers are willing escrow agents, the use is common. Bank guarantees are becoming less popular due to cost.
- Dealmakers have been sensitive to exposure to adviser costs and due diligence budgets, with tight cash control and careful front-end project planning. In response, advisers have increasingly looked to digitalise processes to reduce costs and risks, and improve service delivery.
Warranties and W&I insurance
- An increased use of warranty and indemnity (W&I) insurance on M&A and PE deals addressed the lack of risk appetite of parties.
- W&I markets are maturing in continental Europe, meaning better terms and more add-on synthetic elements and standalone products have been offered by insurers to mitigate risks for sellers and buyers.
- With an increased use of W&I, more deals were executed on the basis of nil recourse arrangements, where the seller's liability was capped at £1 or €1.
- The increased use of W&I insurance meant more thorough due diligence taking longer to complete.
- Warranties and due diligence began to be included to cover topical risks such as environmental social and governance (ESG), FDI controls and AI, and warranties relating to cyber security, IT, data, anti-money laundering, anti-bribery and corruption and compliance, were beefed up and increasingly covered in depth in due diligence.
Carve-out transactions
- Carve-out transactions (and intra-group reorganisations) were popular as businesses sought of offload non-core or underperforming assets, deleverage their balance sheet in the face of rising interest rates, reorganise their group structures and refocus efforts on more profitable markets or products, or to raise capital to acquire an alternative business.
- However, they were less popular than expected, and this was perhaps due to corporate parents choosing to wait for an improved valuation and internally restructure in the interim, or private equity funds avoiding these kinds of deals, which can be more complex (though carve-outs still represented a higher percentage of PE deals compared to the previous year).
Transformative deals
- Businesses of all sizes turned to acquisitions to buy in valuable patents, cutting-edge technologies, useful expertise or resources or scale or geographical reach.
- Many companies bought elements of their supply chain in-house via a vertical acquisition sometimes perhaps combined with a near- or friend-shoring exercise; many of these transactions were cross-border.
- In some cases, joint ventures were the easiest route to expansion, but through a lower risk exposure than a full acquisition.
What were the biggest challenges for corporate transactions in your jurisdiction in 2023?
The Netherlands
The international markets were disrupted due to inflation and cost of financing, and we noticed that as a result:
(i) purchasers had a lower risk appetite;
(ii) their bids were generally lower than desired by the sellers (i.e. there is a "valuation gap"); and
(iii) risks identified during the due diligence stage required more attention and an appropriate remedy in the transaction documents.
Poland
One of the biggest challenges was the high price expectations of sellers, low activity of funds and small number of large transactions.
Germany
In Germany, transactions took longer, there were more aborted deals, and higher interest rates have put acquisition financing at risk.
France
In France, there was a dynamic M&A market in 2023 even if there has been a decrease in volume of M&A transactions (mainly in large-cap). This is because, in France, since the beginning of 2023 there was a decrease in inflation, interest rates reached their maximum.
However, some banks entered bankruptcy, and financing remained more complex and more expensive. This led to the development of alternatives to the "usual" financing tools (such as earn-out structures, rollover structures, equity consideration, etc.) and a competitive advantage for companies with strong financial capabilities. We saw an increase of the number of distressed M&A transactions.
Belgium
We saw a drop in M&A activity in Belgium, but the impact was lower for mid-market deals than for large transactions. The cost of capital increased significantly, which resulted in an increased focus on valuation by buyers (especially PE sponsors). Professional investors focussed more on bolt-on acquisitions by their existing portfolio. M&A activity in the real estate sector slowed down considerably in 2023 and consequently we saw more investments in increasing the sustainability of the existing portfolio.
Spain
The biggest challenges for M&A in Spain in 2023 were high interest rates, inflation, market volatility and valuation uncertainties.
Italy
Inflation and its negative impact on household and business consumption and the slowdown in growth in some key countries in Europe, such as Germany, with repercussions on Italian exports, impacted Italian M&A. Rising interest rates and the expectation of further rises, which make financing more expensive and, consequently, negatively affect investment strategies, in Italy as in the rest of Europe also had an impact.
United Kingdom
A lack of quality assets (combined with high levels of competition for quality assets) and mismatch between seller and purchaser pricing expectations has caused a slowdown in transaction volumes and it taking longer to agree on price and deal structure.
In private equity, interest rate increases in the domestic market have disrupted leveraged deals and contributed to general uncertainty in the market which has led to a softer market.
For a summary of predicted trends for the Nordic region, please see Horizon scanning M&A trends in Scandinavia: what will shape 2024?