A Volatility-filled Outlook of European M&A

Uncertain times and market volatility in 2022, following a best-ever M&A performance for Europe in 2021, are bringing about changes in deal terms and deal processes.

FREMONT, CA: The mergers and acquisition market of Europe has grown more unstable and fragile since the invasion of Ukraine in February of this year. Although there has been an increase in deal flow in Q2 after a major initial decrease in Q1, volumes are still significantly below the corresponding quarter in 2021.

The instability is also being fueled by a variety of other causes, including the corresponding sanctions imposed by Russia and Belarus, which have disrupted supplies of essential commodities like metals, wheat, oil, and gas.

A regulation affecting businesses engaging in M&A in the EU that have received financial contributions from non-EU governments or non-EU state-owned companies was approved by the European Parliament and the Council (co-legislators). The regulation will go into effect in the middle of 2023. The co-legislators also agreed on the text of the EU Digital Markets Act, which mandates that the Commission be notified before the closing of any M&A activity in the digital sector involving "gatekeepers" (large digital platform providers) and other digital platform providers, regardless of whether such activity is notifiable for merger control approval. In addition to passing new laws, regulators (such as competition agencies) have stepped up their evaluation and scrutiny of transactions using both their old and new powers, raising the possibility of legal challenges and enforcement action.

The European Commission now encourages mergers that fall below national merger thresholds to be reported to it by publishing instructions on the use of the referral mechanism outlined in Article 22 of the EU Merger Regulation. Cross-border acquirers may be discouraged as a result of greater regulations and more aggressive enforcement strategies, which are expected to affect transaction timeframes and deliverability.

Opportunities for M&A growth in 2023

Strategic buyers with plenty of cash, sponsors of private equity, and special purpose acquisition corporations (SPACs) looking to invest their collected assets. Private equity sponsors can achieve good aggregate valuation multiple returns through roll-up acquisitions, which involve acquiring and then merging multiple targets in the same market, as well as bolt-on acquisitions, which involve acquiring complementary services, technologies, or geographic areas to the originally acquired target. Transactions that do not rely on bank financing, transactions that use credit money, or transactions that can get advantageous loans because of their ESG credentials. Consolidation of companies in highly fragmented industries.

Deals are accelerated to be finished before bank rates go up or the economy gets worse. Deals in industries that are defying the general trend include technology, media and communications, renewable energy, fintech, biotech, oil and gas (where postponed local projects are reviving as governments hunt for supplies closer to home), and consumer and retail. Acquirers are buying to bring their supply chain in-house or to boost their ESG credentials, while others are doing so to survive in the current economic climate and to decarbonize or digitalize. Many companies are selling off non-core assets as they refocus their strategy, reorganizing and rationalizing their groupings to minimize costs, and realigning their structure to their updated plan. These acts are referred to as "carve-out transactions" and "reorganisations."