2023 Mid-Year Update

Bold doesn’t need to be big: with a drop in megadeals, executives are counting on mid-market M&A to drive strategic transformation and accelerate growth.

A lot has changed since the start of the year: inflation is decelerating; interest rates may be near their apex; some banks have failed; the US debt ceiling crisis has been averted; and it seems people everywhere are buzzing about the next Big Thing in tech: generative AI. For very different reasons—from digitalization to decarbonization to doubling down on value creation—all the ferment is creating dynamic market conditions that we believe will create transformation opportunities and the right conditions for a more buoyant M&A market over the coming months.

The M&A activity ahead may not all be eye-catching megadeals, which have ebbed since hitting their peak in 2021, but rather a healthier level of mid-market deals as companies pursue their strategic growth agendas. These smaller deals can also drive transformation and growth. While cash-rich corporates remain well positioned to make larger moves, we see mid-market transactions dominating the market in coming months as CEOs use a program of both strategic acquisitions and select divestitures to transform their portfolios for the future.

We began 2023 with a cautious M&A outlook. The global economy was clouded by recession fears and rising interest rates as central bankers sought to tame record inflation in many regions. And there’s no disputing that the first half of this year has been challenging for many dealmakers, with deal volumes declining by 8% from already subdued levels in the second half of 2022. Deal volumes nonetheless remain above pre-pandemic 2019 levels.

Deal flow could open up in the second half of the year, especially if sellers focus on pre-sale preparation and readjust expectations about pricing. But for many buyers, financing has become more difficult—and a lot more expensive. That is placing more emphasis on alternative funding and how to create value from a deal.

Value creation has, of course, always been a guiding principle for dealmakers, but today, there is a real need to go deeper and identify additional—often transformational—levers of value that can help realize each transaction’s full potential. We are already seeing greater focus on strategic repositioning—for example, through portfolio optimization's, digitalization and business model changes. But some less-considered levers, such as energy efficiency, green tax credits and sustainable financing, are worth a closer look.