Dealmaking conditions are undeniably tough and organisations must tackle ESG, cyber and people-related risks to get deals over the line

Almost half of execs expect an uptick in mergers and acquisitions, with technology, media and telecoms expected to be the most prolific sector for transactions, according to new research.

An increase in alternative financing and scrutiny for Environment, Social, and Governance (ESG) factors are expected to lead to an “uncertain M&A market”, according to a survey published by Aon and Mergermarket.

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46% of the respondents said they expect the number of deals globally to increase over the next 12 months compared to 2022, while a fifth (20%) expected consistent deal traffic.

Some 96% of respondents expect ESG scrutiny in deals to increase over the next three years, including 48% who expect it to increase significantly.

In addition, 24% said environmental litigation creates the most concern in respect of potential disputes in a deal.

Some 68% of respondents identify Technology, Media and Telecom (TMT) as likely to be the most prolific generator of M&A activity over the next 12 months.

Conversely, the financial services sector is forecast by 32% of respondents to be the least prolific sector for dealmaking, said the survey of 50 senior executives from corporate development teams, private equity firms and investment banks and dealmakers.

“By taking this broad view of the M&A landscape, dealmakers are better able to understand and respond to critical risks that can have an impact on a deal’s success,” said Gary Blitz, global co-CEO of Aon’s M&A and transaction solutions business.

Key Takeaways

  1. Continuing the trend observed over the last few years, the largest share of survey respondents, 68%, identify TMT as likely to be the most prolific generator of M&A activity over the next 12 months. Conversely, the financial services sector is forecast by 32% of respondents to be least prolific sector for dealmaking, reflecting stresses in the banking sector and broader market dislocation.
  2. Almost two-thirds of respondents, 64%, identify North America as one of the most attractive destinations for M&A over the next 12 months, indicative of a flight to security on the part of dealmakers globally. At the other end of the spectrum, economically underperforming Japan (48%), inflation-laden Latin America (42%), and UK (40%) are broadly identified as the least attractive destinations for M&A.
  3. In response to the challenging economic and credit environment, large subsets of respondents are shifting their M&A strategies to focus more on alternative investments (34%) and minority deals/joint ventures (32%). Divestments and restructuring-related deals are also expected to come to the fore (28%), with many companies likewise narrowing their focus on core sectors and geographies (30%).
  4. With the recent banking crisis still fresh in everyone’s minds, 72% of respondents expect financing conditions to worsen compared to 2022, including 38% who expect them to become much more challenging. In response, dealmakers are turning increasingly toward alternative financing sources, including private equity (64%) and non-bank lending (38%).
  5. Almost all survey respondents, 96%, expect ESG scrutiny in deals to increase over the next three years, including 48% who expect it to increase significantly. Relatedly, 24% say environmental litigation creates the most concern with respect to potential disputes in a deal, up from just 2% who said the same in the previous edition of this research in early 2022.
  6. Appreciating the potentially massive risk involved in acquiring a company with subpar defenses, the vast majority of respondents to our survey, 86%, say they are likely to abandon a deal if they uncover a material cybersecurity risk at the target company, including 32% who say they are very likely to walk away from a transaction.
  7. Just over half of respondents, 54%, currently employ credit risk technology, though the adoption and application of these technologies is not always smooth. More than half, 56%, cite difficulties in resourcing skilled workforces, and large subsets point to challenging procedural processes (48%) and poor standards of reporting (42%).

What does it mean for risk managers?

Despite the positive outlook for M&A activity, sailing is unlikely to be smooth.

In fact, the report notes that dealmaking conditions are undeniably tough.

Between macroeconomic volatility, market dislocation, challenging financing conditions and increasingly strict regulatory scrutiny, it seems more difficult than ever to get a transaction over the line.

Asked to identify the top three risks that their organisations face over the next 12 months, the largest share of respondents, 72%, cite environment, social, and governance (ESG) factors and climate change.

In a distant second and third place are a pair of technology-related risks, reflecting the already-rapid digitalisation of business functions that was accelerated during the pandemic.

Half of respondents cite technology/cyber risk as a main point of concern, and 42% say the same of risks concerning data and information in investment processes. 

In comparison, political uncertainty/geopolitics (16%), which is currently garnering a great deal of media attention, and legislative/regulatory change (14%), a thorn in dealmakers’ sides, are hardly considered to be major risks at all in 2023.

Evidently, respondents feel that other hazards, over which they have more control, must be prioritised.

Some 72% of respondents expect financing conditions to worsen compared to 2022, including 38% who expect them to become much more challenging.

In response, dealmakers are turning toward alternative financing sources, including private equity (64%) and non-bank lending (38%), according to the research.

How to manage the risks

Dealmakers should be proactive in controlling whatever risks they can, install mitigation plans for those outside their direct influence and use risk transfer solutions when available, the report suggested.

Subpar ESG metrics could vaporise a deal – reviews will have to be more thorough than ever before, with dealmakers turning increasingly to expert external advisors to fill any resource gaps during ESG due diligence.

Deal making and broader digital transformation must be reinforced by proactive cybersecurity practices within companies and comprehensive cyber due diligence on the part of potential acquirers.

Amid all the usual and strenuous negotiations over real assets, operations, and commercial due diligence, the most prudent dealmakers know also to scrutinise people strategies within the context of an M&A deal, appreciating that this can drive deal success in the long term.

“Dealmaking is about balancing risk and return,” said Alistair Lester, global co-CEO in Aon’s M&A and transaction solutions business.

“With strong risk mitigation processes in place, including a multi-disciplined approach to due diligence and the strategic use of insurance capital, dealmakers are able to transform their risk into [an] opportunity to improve their deal outcomes.”