While merger and acquisition activity has not returned to pre-pandemic levels, the pace is expected to accelerate in 2023, particularly in the second half, according to Morgan Stanley’s M&A Outlook Report. The factors driving the bank’s optimism include:
- Well-capitalized companies making acquisitions in their core businesses
- Financial sponsors, now holding record amounts of capital, deploying it in acquisitions
- Shareholder activism, stoked by uneven performance among companies
- Comeback of cross-border M&A
Large Company Core Business Reinforcement
Economists observe that many large companies enjoy a strong capital position, especially those who benefited from strong online demand by a remote consumer base during the pandemic. A good use of this bonanza of capital is to make core business acquisitions that will reinforce bottom lines against future economic instability.
This acquisition strategy will likely be particularly appealing in the technology, energy, and healthcare industries. Technology businesses shifting from private to public may drive deals in that field, due to new shareholders seeking returns. M&A motivation for pharmaceutical companies may be to replace expiring patents with ones that can bring new value.
Megadeal Prevalence
Deals with a value over $10 billion are classified as megadeals, and they have been on the rise in recent years. Globally, the total number of deals announced in 2020 was about the same as in 2021. Despite this, the value of the deals in the first half of 2021 was three times that of the total deal value in 2020. 2021 has now set the record for the highest first-quarter deal value. With technology businesses leading in these high-value acquisitions, and the continued growth of the technology industry overall, it will not be surprising to see more frequent megadeals.
Increased Shareholder Activism
In some large companies, shareholder activism campaigns have risen over the past few years, with an increasing number specifically aimed at promoting M&A deals. In 2023, companies may look to accommodate these shareholder-driven campaigns.
International Scale M&A
The pandemic was very disruptive to global supply chains. Investments in bolstering links in the chain soared, a phenomenon that continues into 2023. For many companies, the answer may be cross-border acquisitions that secure and fortify supply against instability. This would lead to a resurgence in international deals. The accessibility of virtual data rooms will facilitate cross-border M&A growth as it makes secure data sharing less limited by location.
Industry Rollups
Rollups involve a parent or holding company quickly acquiring multiple companies in the same industry. This practice can be used to rapidly build value, as the upkeep costs of multiple separate companies are “rolled” into one. The combined resources from multiple companies into one parent company can also fuel more growth than they might generate individually. eCommerce companies are notable choices for rollup strategies. Such rollups usually aim to gather multiple sellers of a similar product under one roof. The process simultaneously reduces competition and boosts the likelihood of innovation under the holding company’s umbrella. The convenience of virtual data rooms also facilitates the rapid acquisitions that rollup strategies require.
Private Equity Firm Investing
Trends also point toward private equity (PE) firms taking on more M&A activity. Helping to drive this development is the increase in industry specialization by PE firms. Specialization has given these companies more confidence in their investing as they can better predict their chosen industries’ development. Trends suggest that PE firms will continue to boost M&A activity along the lines of industry specialization.
Venture Capital M&A Fuel
Venture-backed start-ups are increasingly banking on acquisitions by large tech companies to secure their future. These start-ups can drive significant competition in the acquisitions market by positioning themselves as industry experts and arming themselves with valuable and unique new tech. Thanks to continued growth in the tech industry, venture-backed start-ups and their acquisitions are expected to continue strong into 2023.
Prepare with Rigorous Due Diligence
In this environment, well-prepared companies can still find the funding they need to meet their growth goals. An essential element of that preparation is rigorous due diligence - an internal comprehensive appraisal of a business’s assets, liabilities, and market position, suitable to support a valuation claim.
To aid the due diligence process, some VDRs provide a Due Diligence Checklist, which automatically populates a VDR with a hierarchy of folders to add documents to and facilitates the user permissioning system.
Exhibit Smart Cyber Security Mindedness
Cybersecurity, of course, is a paramount concern during M&A and other dealmaking processes. Security research firm Getastra reports that cybercrime accounted for $6 trillion in damages in 2022, a number they predict will grow by 15 percent a year starting in 2023. The finance and banking industries, and M&A specifically, are prime targets. Hackers understand the M&A process and have AI-enhanced algorithms to seek out vulnerabilities, such as unencrypted financial records, confidential documents shared in an unprotected online environment, and data files shared by email or with consumer-grade file-sharing apps.
A company can telegraph its security-mindedness by using a virtual data room (VDR) when it engages with a potential seller or buyer. A virtual data room, sometimes called a virtual deal room, is an online platform for storing and sharing confidential documents. A VDR from a quality provider like ShareVault provides a full array of safeguards: all documents in the VDR are automatically encrypted, and access to documents is limited to an authorized list of users who gain access using a two-factor password. Even those who have access have defined permissions for use, such as save, print, copy, or view only, and expiration dates on access. Documents can be remotely “shredded”, even for files that have already been downloaded.
ShareVault, a company with more than 15 years of experience in working with banks, investment and private equity firms, and other financial institutions, also understands the pressure-cooker atmosphere in finance dealmaking, so they provide protections for every authorized user, allowing fully encrypted document sharing from any browser or device, at any time, from anywhere, including those in remote locations. ShareVault protected access and document sharing can also be extended to analysts, accountants, the legal team, regulatory experts and other third parties.
ShareVault’s built-in software includes document management tools like drag-and-drop uploads, a powerful full-text search engine, inter-document hyperlinking, and easy integration with DocuSign and other file-sharing apps.
At the appropriate time, a bank or investment firm can invite investors or a potential partner into the protected ShareVault VDR. By following the same security protocols, these current and prospective customers can enjoy fully protected document sharing.
With more than 15 years of experience working with investment banks, private equity firms, and other companies engaged in Mergers and Acquisitions, ShareVault understands the M&A process, so they provide protections for every authorized user, allowing fully encrypted document sharing from any browser or device, at any time, from anywhere, including those in remote locations. ShareVault protected access and document sharing can also be extended to those necessary third parties who help develop due diligence: analysts, accountants, the legal team, and regulatory experts.
ShareVault’s built-in software includes document management tools like drag-and-drop uploads, a powerful full-text search engine, inter-document hyperlinking, and easy integration with DocuSign and other file-sharing apps.
At the appropriate time, administrators can invite investors or potential merger partners into the protected ShareVault VDR. By following the same security protocols, these prospective partners can enjoy fully protected document sharing.
Regulatory Scrutiny
Along with the many growing industries making moves in the M&A market, governmental regulatory bodies are paying more attention. Companies seeking deals need to navigate carefully to strike a balance between the size and speed of their growth to comply with regulators. Antitrust enforcement is also making it increasingly valuable to complete proper due diligence in pursuing any deals so that no surprises disrupt them.
Note that once due diligence is complete and a deal sheet is available, parties to an M&A transaction can invite regulators into the security of the VDR environment. A ShareVault VDR helps banks and investment firms comply with regulatory requirements, such as KYC, AML, and GDPR, all of which require the secure handling of sensitive information. ShareVault’s User Activity Monitoring feature can produce a detailed report, suitable for an regulatory audit.
Virtual Data Room Value
With the expectations of growth lying ahead of the M&A market in 2023 and beyond, the value of due diligence tools has only increased. ShareVault’s powerful virtual data room software affords both parties in an M&A deal the confidence that their documents are accessible and secure. The digital space allows deals to be negotiated conveniently at any time, from around the world, facilitating global M&A. Secure data sharing provides a solid foundation for successful deals, and can be expected to grow in value as the M&A market resurges in 2023 and the future. Contact ShareVault to learn more about data-sharing solutions for your upcoming M&A deals.