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.

"In the midst of a dynamic M&A environment where market multiples are falling, there is a unique opportunity to acquire assets at attractive prices. Experienced investors and companies can consolidate, diversify and optimise their portfolios."

-Jan Brabec, Partner, Financial Advisory Services, Deloitte Czech Republic

Given the changing market landscape, there are compelling reasons why strategic investors should consider acquisitions. A clear indicator of this opportunity is the downward trajectory of market EV/EBITDA multiples, particularly for strategic investors. The record high of 18.2 in 2021 has fallen to 17.5 in 2022 and further to 11.5 in 2023. In contrast, while market multiples for Private Equity investments have also seen fluctuations - moving from 18.2 in 2021 to 21.6 in 2022 - the decline to 14 this year underscores the general shift towards financial transactions. For companies and investors who are able to decode these trends, the picture is clear. The market downturn is an opportunity for M&A activity, as companies can take advantage of current developments to consolidate, diversify and expand their portfolios, all while optimizing costs.

According to the latest data, inflation in the eurozone fell to a two-year low, while the European Central Bank raised rates to their highest level since 2008, indicating that rates are nearing their peak. Supply chains have largely recovered and PE firms are still holding record amounts of "dry powder".These positive factors may help boost investor and strategic player confidence, especially as they expand their M&A activities. The markets therefore remain eligible for a gradual recovery.

"The market is affected by a number of negative influences, especially inflation, interest rates and geopolitical uncertainty. As a result, many companies are focusing on cost reduction and financial resilience. The third quarter of this year has been slower in M&A, but with several recent positive factors, there is potential for a market recovery in the final quarter of this year. The Deloitte M&A Index forecasts favourable year-end growth, which I see as a glimmer of optimism in these uncertain times."

-Miroslav Linhart, Managing Partner, Financial Advisory Services, Deloitte Czech Republic

In the current volatile market, active portfolio management remains key to improving corporate strategies and optimising business models. Strategic acquisitions, partnerships and, above all, divestments and carve-outs remain an essential part of risk management. Investors must continue to carefully evaluate their corporate portfolios and consider divesting non-core assets as part of ongoing transformation strategies. Such steps allow companies to adapt and thrive in an ever-changing environment. Therefore, in the period ahead, we can expect to see a primary increase in transactions in the mid- and small-cap market - driven primarily by the active implementation of strategic growth programmes. These transactions will form a solid foundation for future positive market developments.

This type of transaction will be boosted in particular by factors that can mitigate the general risks associated with market realities and create new investment opportunities. These include:

• M&A activity continues to be boosted by cash balances; at the midpoint of this year, unallocated private equity dry powder balances stood at approximately USD 2.49 trillion. Investors, currently holding record amounts of capital, are expected to use these funds to make strategic acquisitions.
• Cross-border mergers and acquisitions are expected to return, suggesting an increased number of transactions between companies from different countries. In 2022, the global economy faced many challenges, such as a receding pandemic, the war in Ukraine, trade tensions between the US and China, and diverging economic conditions in different regions. As a result, cross-border deal-making was significantly impacted and saw a significant decline. However, as several of these factors gradually fade away, a recovery can be expected.
• There is an increasing focus on environmental, social and governance (ESG) factors, which are increasingly important to investors and consumers. As a result, companies are expected to incorporate ESG considerations more strongly into their M&A decision-making processes.

About the M&A Index The Deloitte M&A Index is a forward-looking indicator that predicts future M&A market numbers - the number of announced deals over a given period - and identifies key factors influencing deal-making conditions in the European market (characterised as the EU27 + UK). The model compiles data from various global databases, including Capital IQ, Mergermarket, Pitchbook, Eurostat and many others. It uses a combination of statistical and algorithmic tools to provide a comprehensive view of M&A market activity. The index consists of market indicators - specifically those relating to macroeconomic realities, liquidity and general market dynamics. Despite the increased volatility of recent periods - caused primarily by the exogenous effects of the coronavirus pandemic and the war in Ukraine - the model retains statistical and econometric relevance and credibility.