In the third quarter of 2023, the market cooled more than initially expected and the number of transactions fell below the level seen in the second quarter of 2020, the pandemic period.
Inflation, rising interest rates, increased cost of capital, the ongoing geopolitical crisis and tighter regulatory oversight. All of this has further reduced M&A appetite in the market. Companies are emphasizing cost reduction and control of financial reserves, which is reflected in transactions - through increased portfolio optimization, rationalization, strategic bolt-ons (a larger company buys a smaller company operating in the same industry) and consolidation.
In the third quarter of 2023, the market cooled more than initially expected and the number of transactions fell below the level seen in the second quarter of 2020, the pandemic period. The current market environment poses a significant challenge for investors and business owners alike; they remain hesitant to commit to selling at prices below what they were in early 2022. Absorbing the new market reality and factoring it into company valuations (and therefore business owners' expectations) is chronically long. In this respect, the market development can be assessed as negative, both at the level of number and size of transactions and at the level of valuation multiples - as a product of market volatility and uncertainty combined with increased cash of non-financial companies. As a result of a gradual convergence in investor and business owner expectations, reinforced by general market cyclicality towards the end of the year, the Deloitte M&A Index forecasts a modest 7.7% increase in announced deals for Q4, to 2,624 transactions. This forecast marks a slight correction of the negative results in the previous quarter.
Based on data published by Capital IQ, the number of transactions fell to 2,436 in Q3 2023 from a total of 2,917 (recorded in Q2 this year). This represents a decrease in activity of approximately 16.5%. In addition, the total value of transactions, measured as the sum of the value of transactions completed in the last twelve months (LTM), has also fallen from the original USD 511 billion to USD 487 billion. This decline thus continues to reflect overall economic uncertainty, lower profits at the corporate level and higher costs of raising capital. The Deloitte M&A Index projected a more modest decline to 2,810 deals for Q3 2023.