North America

M&A Risk in
Review
1H, 2023

1

Contents

Contents
Methodology andIntroduction

Key takeaways

Part 1:

M&A trends in the next 12monthsPart 2:Risks and regulations

Conclusion:

Key trends for the year
to come2

Methodology & Introduction

Methodology
In Q1 2023, Mergermarket surveyed 50 senior
executives from corporate development teams,
private equity firms, and investment banks. 40%of respondents were based in North America,
30% in EMEA, and 30% in Asia-Pacific. The
survey included a combination of qualitative andquantitative questions, and all interviews wereconducted over the telephone by appointment.
Results were analyzed and collated byMergermarket. All responses are anonymized andpresented in aggregate.

30%

40%

EMEA

Respondents

North
America30%

Asia-PacificIntroduction
Dealmaking conditions are undeniably tough.
Between macroeconomic volatility, market
dislocation, challenging financing conditions andincreasingly strict regulatory scrutiny, it seems moredifficult than ever to get a transaction over the line.
And yet, respondents to our survey are ready towade into these desperate straits, forecasting
an increase in M&A activity over the next 12months. Even in a down market, there are deals
to be had, propelled by underlying, long-term
trends. None are more important, it seems, thandigital transformation, which is providing a spur todealmaking in the Technology, Media and Telecom(TMT) sector, and Environmental, Social andGovernance (ESG) factors’ rapid ascent up public
policy and, subsequently, corporate agendas.
In 2022, the number of transactions in which Aon
provided advisory services and/or transaction
solutions topped 2,600. This number comes in after
2021’s historic deal volume and is more consistent
with pre-COVID deal volumes. In the transaction
solutions space, Aon secured more than $41 billionof insurance for its clients’ M&A risks around theworld. While representations & warranties (R&W)/
warranty & indemnity (W&I) insurance remains
the most prolific, both tax and litigation insurance
represent an important and growing tool in clients’arsenals, with litigation posting a record year ofactivity and tax poised to continue to help clientstake advantage of investment opportunities, inparticular those fueled by the Inflation Reduction
Act (IRA).

3

In 1H 2023, Aon provided transaction advisory and/or transaction insurance solutions on more than
1,300 deals, with approximately 460 deals based in
the US. This shows a decline of 11% in deal volume
in first half of 2023 from the same period in 2022
and a decline of 35% from the volume highs in
2021. Aon does expect to see deal volume in 2H
2023 in line with historical activity and due to anumber of factors, including increased investment
in renewable energy projects and infrastructure
following the Inflation Reduction Act of 2022, carveout activity and historic levels of dry powder at
private equity firms.
According to Mergermarket figures, 8,842 M&A
deals were announced globally in Q2 2023,
representing a 15.3% decline quarter on quarter.
However, the aggregate value of those deals was up
on the first three months of the year, rising 22.6%
from $663.7 billion in Q1 to $813.4 billion in Q2.
Regarding acquisitions of US companies specifically,
volume was likewise down quarter on quarter (2,526
deals in Q2, versus 3,058 in Q1), while total value
was up 18.8% to $339.9 billion from $286.2 billion
over the same period.
Evidently, opportunities are available for prudent
investors who are able to capitalize on current
conditions and as the market convalesces.

Key Takeaways

Key takeaways from the report

4

1
2
3
4
5
6

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.

Almost two-thirds of respondents, 64%, identify North America as one of themost attractive destinations for M&A over the next 12 months, indicative ofa flight to security on the part of dealmakers globally. At the other end of thespectrum, economically underperforming Japan (48%), inflation-laden Latin
America (42%), and post-Brexit UK (40%) are broadly identified as the least
attractive destinations for M&A.

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 andrestructuring-related deals are also expected to come to the fore (28%), with many
companies likewise narrowing their focus on core sectors and geographies (30%).

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 areturning increasingly toward alternative financing sources, including private equity(64%) and non-bank lending (38%).

Almost all survey respondents, 96%, expect ESG scrutiny in deals to increaseover 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.

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 ofreporting (42%).

Part 1: M&A trends in the next 12 months

Part 1: M&A trends in the next 12 months
Even following a period of pronounced market
anxiety, dealmakers remain upbeat about the healthof the M&A arena. Almost half of respondents to oursurvey, 46%, expect the number of deals globally toincrease somewhat or indeed increase significantly
over the next 12 months compared to 2022. A
further 20% expect figures for the year ahead toremain in line with current volumes.

Though less enthusiastic than respondents to ourequivalent study in early 2022 – when 68% of
respondents forecast an increase in M&A volumes– these findings are indicative of a deal-hungry
market, even as executives navigate a difficult
business environment.

1. What do you think will happen to the number of M&A deals globally over the next 12 months compared
to 2022? (Select one)
50%
45%

40%

40%
35%
30%

26%

25%

20%

20%
15%
10%

8%

6%

5%
0%

Decreasesignificantly(by more than 5%)

Decreasesomewhat (by2%-5%)

Remain about thesame (within 2%of the current
deal volume

In response the challenging macroeconomic
environment, geopolitical unrest, and unevenmarket performance, respondents to our survey thisyear are adjusting their strategies to capitalize on
different deal structures. Around a third say they
intend to incorporate more alternative investments(34%) and pursue more minority deals/joint
ventures (32%).
This environment also opens opportunities to
explore distressed business – 22% of respondents
say distressed transactions are likely to becomea more pronounced part of their strategy. Deals
like this can present significant risk, but there
are methods to mitigate such concerns. Adopting
strong due diligence programs across key risk areas
and a robust risk transfer strategy that leverages
transaction insurance capital is vital.

5

Increase somewhat(by 2%-5%)

Increasesignificantly(by more than 5%)

Relatedly, 28% of respondents say they arefocusing more on divestments and restructuring.
Carve-outs have seen growth as companies
prune non-core business lines and buyers look tostrengthen their existing portfolio or pursue assets
with growth potential. In these transactions, it iscritical to take a holistic view of how cyber andpeople programs are managed on both the buy- andsell-side.
Secondary transactions are also on the rise as
financial sponsors look to generate liquidity for
their investors. Aon sees this as a long-term trend.
These deals, however, present risks that may require
capital to be escrowed, potentially eroding longterm returns. In response, it is important for financial
sponsors to take a page from their traditional M&A
playbooks and leverage insurance capital to realize
a range of economic and deal benefits.

2. How is your M&A strategy adjusting this year, particularly with respect to a challenging credit and economic
environment, coupled with an uneven market performance and geopolitical instability? (Select two)
0%

5%

10%

15%

20%

25%

30%

35%

34%

More alternative investments (Secondaries, PIPEs, Other)

32%

More minority deals/joint ventures

Part 1: M&A trends in the next 12 months

40%

30%

Narrowing sector and/or geographic focus
More divestments or restructuring

28%

More distressed transactions

22%

Reducing the size of deals

22%
18%

More organic growth/inwardly focused
8%

Putting deals on hold6%

Increasing the size of deals

Given the broadly uncertain business environment, 68% of respondents say they are either likely or very
likely to take a programmatic approach to M&A, pursuing many smaller deals rather than larger, one-off
transactions. Correspondingly, only 6% say they are adjusting their M&A strategy by increasing the size ofdeals they undertake.

We might adopt this approach if we cannot find any large, one-off transactions to fulfill our deal objectives.
Our decision-making will depend on the region in which we conduct the deal and the market stability,”says a Netherlands-based partner of a private equity firm. The head of business development and M&A ofa Swedish corporate adds, “In this fast-moving business environment, we cannot wait for larger one-off
transactions that are suitable for our objectives. We have to be more proactive in recognizing the small
opportunities that are available.”
Aon sees the same pattern toward small deals, alongside a more risk-averse approach. Insurers in the M&A
space have been responding to this trend with an increased interest to cover small transactions where theeconomics were previously unattractive.

3. In an increasingly uncertain, fast-moving business environment, how likely are you to pursue many small
deals in a programmatic approach as opposed to larger, one-off transactions? (Select one)
35%

34%

34%

LikelyVery Likely

30%
24%

25%
20%
15%
10%

8%

5%
0%

6

Unlikely

NeutralFinancing prospects

Financing prospects

A run of persistently high inflation led central banks to aggressively raise interest rates over the last 12 months,
causing financing conditions to tighten and creating significant knock-on effects for key industries.
Almost three-quarters of respondents, 72%, expect financing conditions to worsen compared to 2022,
including 38% who expect them to become much more challenging, particularly in light of recent stresses
in the banking sector. These findings are marginally more pessimistic than those generated in the previous
edition of this study from 1H 2022, when 70% said they expected financing conditions to become moredifficult, including 30% who expected them to become much more challenging.

It will be a struggle availing financing for growth and for transformational deals,” admits the managing
director of an investment bank in China. “Financing for small deals will also take a while to be approved
because of the increasing market risks.”
4. How do you expect financing conditions over the next 12 months to compare to conditions in 2022,
particularly in response to the recent banking crisis? (Select one)
40%

38%
34%

35%
30%
25%

22%

20%
15%
10%
6%
5%
0%

They will be much
more challenging

They will be slightly
more challenging

They will be about
the same

They will improveslightly

In response, dealmakers are deliberating even more closely where to source funding for deals. Most
respondents, 64%, say private equity will become a primary source of financing over the next 12 months,
followed at some distance by non-bank lending/credit funds (38%) and tapping debt capital markets (34%).
Almost none, at just 2%, cite equity capital markets, down from the 12% who said they would tap these in our
1H 2022 study.

As the senior executive vice president of strategy of a French corporate puts it, “In many markets, there
are already limited financing options. Since the economic threats have increased, these have become evenmore scarce. Investors have to think about alternative ways to raise funds. They might opt for sales ofassets to raise funds for new growth opportunities.”

7

5. What do you believe will emerge as the primary sources of financing over the next 12 months? (Select top two)
70%

64%

60%

Financing prospects

50%
38%

40%

34%

30%

24%

20%

18%

20%
10%

2%
0%

PrivateEquityNon-bank
lenders/
Credit funds

Debt capital
marketsCashreserves

Bank lending

Familyoffices

Equity capital
markets

While tighter financing conditions are undeniably a challenge that all dealmakers would rather see the end of,some sectors are in a position to capitalize on current circumstances. Around two-thirds of respondents, 66%,
expect the current inflation and interest rate environment to lead to an increase in infrastructure secondary
market deal volumes over the next 12 months.

6. How will the current inflation and interest rate environment impact infrastructure secondary market deal
volumes over the next 12 months compared to 2022? (Select one)
58%

60%

50%

40%

30%

26%

20%

10%

0%

4%

4%

Decreasesignificantly(by more than 10%)Decrease somewhat(by 10% at most)

8%

Remain about
the same

Increase somewhat(by 10% at most)

Increase significantly(by more than 10%)

Infrastructure investment has been a pillar of US policy under the current administration, encapsulated inlast year’s IRA and the related 2021 Infrastructure Investment and Jobs Act. A large majority of respondents,
68%, expect the expanded tax incentives under the IRA to drive global investment in US infrastructure to adisproportionate degree compared to the rest of the world.

8

Investment in domestic energy production and sustainability in particular are crucial elements of the IRA.
Aon’s Tax Insurance practice has seen an uptick in renewable energy developers based in non-US jurisdictions
making investments in renewable energy assets in the US. The inclusion in the IRA of the transferability of
tax credits, as opposed to needing to structure a tax equity investment in order for developers to monetize
the credits, is expected to broaden the pool of companies that provide capital seeking a return in tax credits
beyond the typical bulge bracket banks. As a result, we anticipate some of the future investment in the US to
include new technologies that may qualify for tax credits.

7. To what degree do you expect the expanded tax incentives under the Inflation Reduction Act to drive global
investment in US infrastructure disproportionately to the rest of the world? (Select one)
50%

44%

45%

Financing prospects

40%
35%
28%

30%
24%

25%
20%
15%
10%
5%

2%

2%

Significantly lessdegreeSomewhat lessdegree0%High degree

Moderate degree

No change

Respondents to our survey are especially bullish on dealmaking prospects in the communication & digitalspace. More than half, 56%, believe this subsector of the broader infrastructure industry will attract thegreatest focus for secondary market transactions in 2023. This reflects a continuation of the heavy andsustained investment into communication infrastructure seen since the early stages of the pandemic.
The next most prevalent subsector is expected to be energy & utilities, followed by transport – customer
demand for related assets having recovered to or nearing pre-pandemic levels – and finally social
infrastructure.

8. Which of the following subsectors do you anticipate having the greatest focus for secondary market
deals in 2023? (Rank from 1 to 4, where 1 is the subsector attracting the most focus)
60%

56%
48%

50%
42%
38%

40%

40%
36%
28%

30%
20%

16%

10%

10%

4%

2%
0%

Communication& Digital

Energy &Utilities
1

60

9

2%
Transport

2

3

4

56%
48%

50
42%
40

22%

20%

18%

18%

38%

40%
36%

Social InfrastructureIdentifying opportunities: Sectors

Identifying opportunities: Sectors
The TMT sector has recorded remarkable growthover the last several years, reflecting widespread
technological innovation and its increasing
intersection with other industries pursuing digitaltransformation. This trend is very unlikely to diffuse
in the term.
More than two-thirds of respondents – 68%, putting
it far ahead of the next-most-popular answer –expect TMT to be one of the most prolific deal
generators over the next 12 months, in line with the
70% who said the same in our 1H 2022 study.

9. Which of the following sectors do you believe will be the most/least prolific in terms of M&A activity over the
next 12 months? (Select two for 'most prolific' and two for 'least prolific')
0%

Technology, Media & Telecoms

10%

Renewable Energy

36%
0%
30%
10%
28%
10%
12%
20%

Pharma, Medical & Biotech

8%16%

Business Services

8%
12%Real Estate

6%32%

Financial Services

DefenseConstruction

Agriculture

40%

8%

Consumer

Leisure

30%

50%

60%

70%

68%

Energy, Mining & Utilities

Transportation

20%

0%

Industrials & Chemicals

4%
18%
0%
20%
0%
20%
0%
26%

0%
8%
0%

Least Prolific

10

Conversely, the least prolific sectors this year are
expected to be financial services, cited by 32% of
respondents, and construction, identified by 26%.
Respondents in our 1H 2022 report were just as
downbeat in their forecasts for the constructionindustry, but financial services has suffered anotable drop-off. Last year it was identified as likely
to be the third-most-productive sector for M&A, but
mounting inflation and market volatility are deterring
higher-level dealmaking.

Most ProlificIdentifying opportunities: Sectors

After TMT, industrials & chemicals and renewableenergy are expected to be the next-most-prolificsectors, accruing 36% and 30% of votes,
respectively. The former’s performance represents
a notable increase from last year, when only 8%of respondents said industrials & chemicals would
generate notably high transaction volumes over theproceeding 12 months.
Regarding the renewables space specifically, most
respondents, 56%, believe solar technologies,
perhaps the most established subsector, will present
the most attractive opportunities for investment
over the next 12 months. The next-most-popular

response is battery technologies, identified by 36%
of respondents as the most attractive subsector,
reflecting rapid innovation in the space and strong
government support.
Green hydrogen technologies accrue the fewest
votes from our respondents at this time. While still in
its early stages compared to better-established solar
and wind technologies, there has been a significant
uptick in focus on hydrogen over the last 12 months
from both strategic and financial investors. Thisis an asset class that many more believe will growexponentially in the years ahead.

10. Which of the following renewable energy technologies do you believe will be the most attractive forinvestment over the next 12 months? (Select two and rank 1-2, where 1 is the most attractive)
60%

56%

50%

40%

36%

34%
28%

30%
22%

16%

20%
8%

10%

0%
0%

Solar

Battery Technology
1

11

Wind
2

Green Hydrogen

Real estate M&A

Real estate M&A
Respondents are bullish on the state of M&A in thereal estate sector. The bulk of survey participants,
41%, expect real estate M&A to increase during
1H 2023 compared to 2022, while a further 20%
expect the increase to come in the latter half of theyear. Meanwhile only 8% are forecasting a year-onyear decrease in activity.

In the first quarter of 2023, some Aon clients
paused transactions, reflecting elevated property
market valuations and the high cost of borrowing.
In fact, the cost of capital and availability thereof
were identified by 28% and 22% of respondents,
respectively, as the primary factors influencing theircurrent real estate M&A strategies.

11. How do you expect real estate M&A activity to change in 2023 compared to 2022? (Select one)
50%
41%
40%
31%
30%
20%
20%

10%

0%

12

8%

Decrease

Increase during
H1 2023

Increase, but not
until H2 2023

Remain about
the same12. What are the primary factors currently influencing your real estate M&A strategy? (Select top two and rank
1-2, where 1 is the most important factor)
30%

Real estate M&A

25%

28%

22%
20%

20%

18%

18% 18%

18%
14%

15%

14%
12%
10%

10%

8%

5%

0%

Cost of capital

Availabilityof capital

Increased
regulatory
requirements
1

Moving into the second quarter and beyond,clients will be looking for optimized pricing before
transactions are likely to increase significantly.
However, investors will need to deploy capital overthe course of 2023, which will prop up transaction
activity before a more noticeable increasematerializes later in the year and carries over into
2024.
Aon sees especially positive asset trends in thewarehousing, student accommodation, and build-torent residential subsectors. As touched on earlier inthis report, infrastructure assets, including offshore
and onshore energy, and particularly wind farms, arealso likely to be a key driver of real estate M&A.

13

Pricing
uncertainty

Inflation

Vacancy levels

2

Continued demand for logistics assets is also
visible, although there has been some regression
as occupiers contend with the rising cost of living.
Footfall for high-street retail has recovered to prepandemic levels, although challenges remain aroundmarket valuations, which continue to come underpressure.
There is a strong focus, too, on repurposing assets
to ensure they respond to changing requirements as
consumption habits evolve. Relatedly, transition risk
remains a priority for the real estate sector as clientslook to alleviate their carbon output and focus onenergy efficiency by investing in environmentallyfriendly enhancements and green technology.

Investment bankers’ viewpoint

Investment bankers’ viewpoint

Investment bankers are in a unique position
to comment on the health of the M&A market,
particularly with respect to buyer vs. seller
expectations regarding asset valuations.
According to our respondents who represent
investment banks, sellers and buyers have beenfurthest apart with respect to assessing value
during negotiations over deals in the TMT sector. All
investment bankers surveyed believe TMT assets
are overvalued, up from the 75% who said the samein our 1H 2022 study. No other sector generates
a consensus view to that degree, though morethan half of our respondents do say that assets in
consumer (63%), renewables (62%), and energy,
mining & utilities (56%) are also overvalued.

Conversely, the vast majority of investment bankers
surveyed, 75%, believe deals in the real estate
sector are currently undervalued. There is no othersector in which more than half of our respondents
believe assets are undervalued, though businessservices, at 44%, comes closest. In other large
sectors, such as industrials & chemicals (50%) andpharma, medical & biotech (44%), among others,
assets are considered by the bulk of investmentbankers to be appropriately valued.
Aon notes that the use of insurance capital canbridge the valuation divide and can encourage
sellers to accept more modest value and exit theirdeal with more cash in their pocket.

13. In your experience, how far apart have sellers and buyers been in assessing value with respect to deal
negotiations in each of the following sectors? (Select one for each sector)
100%

6%
12%

90%

19%

19%

13%

19%

25%

25%

25%

25%

80%

70%

25%

37%

44%

38%

25%

60%
44%

75%

50%

100%

50%
75%
47%

40%

63%

69%

69%
63%

44%
62%

56%

75%

30%
37%

31%

20%

13%

12%
6%

0%

19%

19%

10%

6%

Agriculture Business Construction Consumer
Services

DefenseEnergy,Mining &Utilities

Overvalued

14

12%

6%
Financial
Services

Industrials&
Chemicals

Appropriately valued

LeisurePharma,Medical &BiotechUndervalued

Real
EstateRenewable Technology, Transportation
EnergyMedia &
Telecoms

Identifying opportunities: Regions

Identifying opportunities: Regions
Regarding where in the world our respondents feelthe most attractive dealmaking opportunities are to
be found over the next 12 months, the bulk of survey
participants are quick to cite North America, which
overtakes Asia Pacific (excluding Japan), which took
the top spot in our 1H 2022 survey.

(excluding Japan) and Europe (excluding the UK),
which 36% and 32% of survey participants,
respectively, identify as among the most attractive
regions for M&A in the near term. Only 16%
describe Asia Pacific (excluding Japan) as an
unattractive destination, and just 12% say the sameof Europe (excluding the UK).

Nearly two-thirds, 64%, identify North America as
one of the two most attractive regions for M&A,
far ahead of second-place UK, with 38% in termsof positive vote share. In fact, a slightly higher
proportion of respondents, at 40%, believe theUK will be one of the two least attractive regions
for M&A over the next 12 months, indicative of
the country’s weak growth prospects, politicaluncertainty, and ongoing post-Brexit economic
dislocation.

Japan itself, however, is not viewed positively.
Almost half of our respondents, 48%, the largest
such share, believe it will be one of the two least
attractive destinations for M&A over the next
12 months. The country has been defined for
decades by stagnant growth, lackluster returns,
and corporate underperformance. Althoughpolicy-makers in Japan are taking steps to embed
higher governance standards and spur businessdevelopment, reputational change will come instages, not overnight.

In comparison to the UK, our respondent groupis less ambiguous in its partiality for Asia Pacific

14. Which of the following regions do you believe will be the most attractive and least attractive for M&A over the
next 12 months? (Select two for 'most attractive' and two for 'least attractive')
70%

64%

60%
48%

50%
38% 40%

40%

42%
36%
32%

30%
20%

22%

20%

16%

16%

13%

8%

10%

6%

0%
North America

UK

Asia Pacific,
excludingJapan

Europe,excluding theUK

Most attractive

15

Middle Eastand North
AfricaLeast attractive

Japan

Latin America

Part 2: Risks and regulations

Part 2: Risks and regulations

Rarely have prospective dealmakers had to navigate quite so many complex and disparate threats as they dotoday. From rapid technological innovation and changing workplace habits to the climate crisis and geopolitical
upheaval, the factors at hand risk affecting the length and breadth of practically all industries.
Asked to identify the top three risks that their organizations face over the next 12 months, the largest share of
respondents, 72%, cite environment, social, and governance (ESG) factors and climate change.

ESG is an important part of business activities today. However, the quality of ESG information is not up to
the desired standard each time. This increases the risks of investing in sectors that are known to be carbon
intensive,” says the managing director of an investment bank in Canada.
In a distant second and third place are a pair of technology-related risks, reflecting the already-rapid
digitalization 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 andinformation in investment processes.

The managing director of an investment bank in Germany warns that “technology risks have increased a lot
over the last few years. Some companies are using legacy technologies, and others have not updated theirtechnology infrastructure. There could be unknown cyber risks here.”
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’ side, 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 prioritized.

15. What are the most significant risks that your organization faces over the next 12 months? (Select top three)
0%

10%

20%

30%

40%

50%

50%

Technology/Cyber risk
Data and information in investment processes

42%

34%

Macroeconomics/Credit environment/Interest rates
22%

Market dislocation or disruption
Competition for investment opportunities

20%
18%

Talent/Workforce
Political uncertainty/Geopolitics

Supply chain/Vendor governance

16

70%

80%

72%

ESG/Climate change

Legislative/Regulatory change

60%

16%
14%
12%

ESG standards

ESG standards
In today’s rapidly evolving business landscape, theintegration of ESG factors has emerged as a criticalconsideration in making informed and responsible
business decisions. It is not just a responsible
choice, but a strategic imperative – considering andembedding ESG factors is no longer considered
optional. It is therefore unsurprising that thissentiment is echoed by our survey respondents,
most of whom expect ESG/climate change to be themost significant risk facing their organizations in thenext 12 months.
While this response from dealmakers focused on
ESG-related risks, it is equally important to note thatby incorporating ESG into their decision-making
processes, organizations can unlock opportunities
for growth, innovation, and enhanced stakeholder
value. From attracting conscious investors andconsumers to fostering employee engagement andsecuring regulatory compliance, embracing ESG
principles has become integral for forward-thinking
businesses.
In a transaction context, dealmakers must navigate
sterner expectations from regulators, who aredemanding greater transparency regarding how
ESG factors are considered in the investment
process. Investors, too, are raising the bar anddemanding disclosure of more granular ESG
information than ever before.

The lack of transparency in ESG reporting anddisclosures will increase ESG scrutiny during
deals. Buyers will always be somewhat skeptical
about the ESG standards sellers portray, andthey would prefer to check all information
thoroughly. This skepticism has increased due toexcessive greenwashing,” says a Canada-based
managing director of an investment bank.
As a result, dealmakers today are much more
focused on ESG issues during the investment
lifecycle, and particularly at the due diligence stage.
Almost all survey respondents, 96%, expect ESG
scrutiny in deals to increase over the next three
years, including 48% who expect it to increasesignificantly. This affirms the data illustrated inour 1H 2022 survey, when 90% of respondents
said they expected to ESG scrutiny to increase.
Moreover, all but 2% of this year’s survey groupreport that they have turned down one or more deals
due to ESG concerns in the last 12 months.

16. How do you expect ESG scrutiny to change in deals over the next three years? (Select one)
50%

48%

48%

45%
40%
35%
30%
25%
20%
15%
10%
4%

5%
0%

17

Significant increase

Moderate increase

No change

Apart from regulatory and investor pressures, growing public mindfulness about sustainability, the reputationalrisks associated with ESG missteps, and the proven competitive advantage offered by strong ESG performance
are further cementing the role of ESG due diligence as a non-negotiable part of the investment process moving
forward.

ESG standards

Organizations that fail to meet these benchmarks risk missing out on major opportunities.

As the managing director of a US investment bank explains, “Many companies do not have mature ESG
strategies. This can affect the ESG performance over time. There could be limited financing available
companies who do not emphasize good ESG practices.”
In terms of specific ESG factors being particularly important to our respondents, climate change/greenhousegas emissions stand out, with 72% citing it as one of their three key ESG considerations during investment
decision-making. Understanding a target company’s exposure and, critically, its readiness to respond to both
physical and transition climate risk is essential. This is followed at some distance by diversity, equity andinclusion (46%), community impact and engagement (32%), and biodiversity (30%).
What is also interesting about our survey findings is that none of the ESG factors were discounted by the
respondents or received a dismissively low score. Yet their relative importance and the extent to which they
may have a material financial impact on the company or transaction will depend in large part on the sector inwhich it operates. There is no one-size-fits-all approach to ESG due diligence. It must be comprehensive tocover all bases, yet set the appropriate focus.

17. Has your company turned down one or more deals due to ESG concerns over the last 12 months?
(Select one)
98%

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

2%
No

18

Yes

18. Which of the following ESG considerations are key to your organization during investment decision-making?
(Select top three)
0%

10%

20%

30%

40%

50%

ESG standards

46%

Diversity, equity and inclusion
32%

Community impact and engagement

30%

Impact on bidiversity
Business ethics

24%

Human rights and labor standards

24%
20%

Resource efficiency

19

70%

80%

72%

Climate change/Greenhouse gas emissions

Cybersecurity and data privacy

18%

Water and air pollution

18%

Suppy chain practices

60%

16%

Credit risk technology

Credit risk technology

The outlook for the global economy for 2023 is still cautious, with inflation, while down from the peaks
recorded last year, remaining a prime concern in most developed economies.
There were signs toward the end of 2022 of the exposure growth trend beginning to slow down as insurers
prepare for a return to more normal underwriting conditions, reflecting uncertainty in the economic outlook
and associated headwinds.
At the same time, the market at large continues to innovate through new specialist offerings, as well as the
addition of new players providing complementary capacity for more complex and larger risk exposures.
Company balance sheets are beginning to feel the effects of these pressures, and this is echoed in insurers’
approach to risk.
In this environment, it important for businesses to adopt more flexible and efficient financing options anddevelop a strong credit strategy to create economically attractive options for lenders. This can be achievedby capitalizing on credit solutions tools such as trade credit insurance, political risk insurance, and surety
services.
Our survey results show that global limit approval rates at the end of 2022 were down 400 basis points from2021 and down 600 basis points from pre-pandemic levels. To address credit risk, 54% of dealmakers say they
currently employ credit risk technology, up from our 1H 2022 study when fewer than half of respondents, 44%,
reported the same.

19a. Do you currently have a credit risk technology in place? (Select one)
70%
60%
50%

54%
46%

40%
30%
20%
10%
0%
No

Yes
2023

20

Credit risk technology

Of those who have adopted credit risk technology, almost three-quarters say they utilize customer relationshipmanagement software, and two-thirds employ credit risk management systems that are powered by artificial
intelligence. Only a small minority, at 15%, say they make use of open-source technologies such as R or
Python. The majority, evidently, are content with SAS credit risk modeling, which has been the industry’s
preferred software for decades.
19b. If 'Yes', what tools are you currently using to address credit risk? (Select all that apply)
100%
90%
80%

74%

67%

70%
60%
50%
40%
30%
20%

15%

10%
0%

Customer relationshipmanagement (CRM) software

Artificial intelligence-powered
credit risk management system

With that being said, many dealmakers worry that
there is still significant work to be done to get thebest out of technologies that address credit risk,
whichever type they choose to employ.

Open-source(i.e., R or Python)last 12 months and the increasing complexity of thecredit risk space.

Skills shortages can weigh heavily on organizations,with more than half of our survey respondents,
56%, identifying resourcing skilled workforces asa major obstacle. More than a quarter, 28%, by
far the largest such share, cite this as the single
most important challenge they face in addressing
credit risk using technology. In our 1H 2022 study,
resourcing skilled workforces was only the third
greatest challenge referenced by respondents,
underlining increased competition for talent over the

Navigating procedural processes, cited by 48%
of respondents overall and accruing 18% of mostimportant votes, and poor reporting, at 42%
and 16%, are also identified as key challenges.
Moreover, although only 30% of all respondents
overall cite a lack of data or system limitations, 16%
say it is the most important challenge they face.
As in other industries, the increasing volume andcomplexity of data is an issue that dealmakers must
quickly get on top of. Slow-footed organizations
risk losing their competitive edge to rivals with moreadvanced data and analytics systems.

20. What are your greatest challenges in addressing credit risk using technology? (Select all that apply)
60%

56%
48%

50%

42%

40%

40%

34%
30%

30%

28%
18%

20%

16%

16%

12%

10%

10%
0%

21

Resourcing
skilled workers

Procedural
processes

Poorreporting
All that apply

Slow model
development

Limitedinfrastructure

Most important

Lack of data orsystem limitations

Cybersecurity

Cybersecurity
Aon continues to see a high correlation between
M&A activity and cyber-attacks. One theory to
explain this is that target companies and newly
acquired entities are increasingly being brought tohackers’ attention through M&A press releases andother media exposure, while previously transactions
were more likely to be undertaken and announcedwith less fanfare and could fly relatively ‘under theradar’. Add to this cybercriminals’ expectations thatthe investment firm or corporate acquirer will havethe necessary funds to pay a ransom, and they
are perceived by malicious actors to be attractive
targets.

In this changed threat landscape, many dealmakers
often represent organizations that have themselves
been targeted by hackers and have personal
experience of the ensuing financial and operational
impacts of cyber-attacks. Appreciating thepotentially massive risk involved in acquiring acompany with subpar defenses, the vast majorityof respondents to our survey, 86%, say they arelikely 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 froma transaction.

21. How likely are you to walk away from a deal if a material cybersecurity risk has been discovered at the target
company? (Select one)
100%
90%
80%
70%
54%

60%
50%
40%

32%

30%
14%

20%
10%
0%
Very Likely

LikelyNeutralThe C-suite and investment committees are also prioritizing cybersecurity investment as a means to bothcreate and protect value. Buyers are increasingly looking to conduct cybersecurity due diligence to establish
whether a company has neglected to spend adequately and effectively on its defenses. On average, our survey
respondents say they perform a dedicated, stand-alone cybersecurity due diligence review in 80% of the deals
they undertake.
Rising technology dependency, both in the office and outside it, over the last few years makes dedicatedreviews practically essential in all but the smallest of transactions.

As the head of private equity of a firm based in the United Arab Emirates explains, “There are various
locations from which company data is accessed. After the pandemic, remote working increased, andemployees are using unsecured networks to access data. We need to conduct standalone tests to identify
all risk factors.”

22

Cybersecurity

Bad actors can exploit the smallest gaps in a company’s defenses, and often it is human error that opens
those gaps. “To some extent, companies are unaware of whether their employees are following the prescribedcybersecurity practices. Even though there are provisions to make employees aware, testing their knowledge is
not always done. These challenges are known to us only when we perform a dedicated review during all deals,”says the managing director of an investment bank in Australia.
If the target appears to have come up short in terms of its cyber defenses and procedures, this will require theacquirer to increase investment post-close to bring them up to a baseline level of security, assuming they are
sufficiently happy to pursue the deal at all.
But comprehensive cyber diligence applies not only to potential targets, but also to existing investments andportfolio companies. Among our survey respondents, most, 52%, say that annual cybersecurity assessmentsof their existing investments are sufficient for their organization. Over a quarter, 28%, say these review are
conducted twice per year, while 12% advocate quarterly check-ups.
22. How frequently do you assess cybersecurity in your existing investments? (Select one)
60%
52%
50%

40%
28%

30%

20%
12%
8%

10%

0%
Annually

23

Twice per year

Quarterly

Ad hocThe “people issues”

The “people issues”

Amid all the usual and strenuous negotiations over real assets, operations, and commercial due diligence,
the most prudent dealmakers know also to scrutinize people strategies within the context of an M&A deal,
appreciating that this can drive deal success in the long term.
Almost all respondents to our survey, 98%, say "people issues" such as talent acquisition, retention, culture,and leadership are an area of focus for their deal teams. Moreover, over half, 54%, identify this as a significant
area of focus.

23. To what extent are 'people issues' such as talent acquisition, retention, culture, and leadership (beyond legal
and compliance matters) a key area of focus for the deal team? (Select one)
60%

54%

50%

44%

40%
30%
20%

10%
2%
0%

24

Significant area of focus

Moderate area of focus

Limited or no areaof focus

The “people issues”

Culture issues have been a significant point ofemphasis for dealmakers for quite some time. In
particular, Aon is seeing the roles of diversity, equity
and inclusion grow as central ESG considerations,as was illustrated in the earlier section in this reporton ESG standards.

according to deal type and the relevant jurisdiction.
For example, Aon sees dealmakers emphasizing
culture alignment in cross-border as well as crossindustry transactions. This occurs particularly
frequently in relation to deals driven by digitalizationor acqui-hiring.

Among our respondents, 40% identify employment
law and labor relations as the single biggest
challenge in their dealmaking process relating topeople issues, far ahead of the next most frequently
cited factors.

The bottom line is that when people, programs,
risks, and liabilities are not strategically quantified
and managed, the ability to deliver on deal andbusiness objectives is jeopardized. To ensure people
issues are properly addressed, it is critical to raisethese considerations early in the deal process andthat they adequately reflect the expected complexityof the deal, laying the groundwork for long-term
success.

Second-order issues including culture alignment(24% of primary votes), leadership and talentretention (20%), pension liabilities (8%), andheadcount synergies (also 8%) will vary greatly

24. What are the biggest challenges related to 'people issues' that you look to address in deals? (Select top twoand rank 1-2, where 1 is the biggest challenge)
45%
40%

40%

35%
30%
25%

24%

24%
22%

20% 20%

20%

18%

16%
15%
10%

8%

8%

5%
0%

Employment law
and labor relations
issuesCulture alignment

Leadership andtalent retention

Pensions/Benefits/Compensation
liabilities and risk

22%

25

Headcount synergies,
restructuring, andtimingTax risks

Tax risks

Among our respondents, it appears that dealmakers
have shifted focus as to specific types of potential
tax risks in transactions that pose the greatest
threats.
In our 1H 2022 study, half of all survey participants
said that tax risk was much more acute at the timethan compared to the recent past, and a further
40% said it was somewhat more serious. In thissurvey, only 24% describe the tax risk as much
more acute, and more than a third, 36%, believe thedanger posed by tax risk is largely unchanged.
This finding is somewhat at odds with the significant
increase in the number of tax-related risks thathave entered the insurance market over the courseof 2023 – though this may be the result of growing
awareness of tax insurance among dealmakers.

25. How much more acute is tax risk to deal success now as compared to the recent past? (Select one)
50%
40%
40%

30%

36%

24%

20%

10%

0%

26

Tax risk is much
more acute now

It is somewhat
more serious

The danger posed by tax
risk is largely unchanged

Tax risks

Almost a third of respondents, 30%, the largest
such share, say that an increase in tax rates is thegreatest tax-related concern for their organization.
In our 1H 2022 study this was only the third-biggest
concern that respondents were weighing in thebalance indicating perhaps increased concern ofpotential new legislation on the horizon and related
uncertainty.

in our 1H 2022 survey, but again only 6% ofrespondents this year feel it is worthy of note.
Conversely, the second-greatest concerns overall
after rising tax rates are transfer pricing andemployee incentive awards/incentives taxation,
both of which accrue 16% of respondents’ firstchoice votes. Last year, these were the two leastconcerning tax-related issues that respondents
were asked to consider. This is consistent with Aon’s
experience with an increase in the number risks thathave entered the insurance market in these areas
over the last few years.

Instead, the leading cause of anxiety in that survey
was the proliferation of anti-abuse rules, which thisyear only 6% of respondents cite as their primary
tax-related concern. Similarly, navigating entityclassification rules was a major point of emphasis

26. How much more acute is tax risk to deal success now as compared to the recent past? (Select one)
0%

5%

10%

15%

20%

Transfer pricing

16%

Employee incentive awards/Incentives taxation

16%

12%

Global minimum tax legislation

Inflation Reduction Act

27

30%

30%

Increase in tax rates

10%

Proliferation of anti-abuse rules

6%

Entity classifications rules (e.g. S corporations, REITs, ets.)

6%Anti-treaty shopping rules

25%

4%

Litigation risks

Litigation risks

Although a large share of respondents, 44%, believe the danger posed to deal success by litigation risk today
is largely unchanged from conditions in the recent past, that leaves a small majority of 56% who view this as
having grown more acute of late, including 12% who believe is much more acute at the moment.

27. Which of the following types of litigation creates the most concern in a deal? (Select top two and rank 1-2,
where 1 is the most concerning type of litigation)
30%

28%
24%

25%

22%
20%

20%
18%

18%
14%

15%

14%
12%
10%

10%

8%
6%
4%

5%

2%
0%

Labor and
employment

Environmental

Antitrust

Data
Protection/Intellectual
property

The type of litigation that causes the most anxiety
in a deal relates to labor and employment law,
being cited by 28% of respondents, the largest
such share as their primary concern. This echoes
the increasing foregrounding of people issues forachieving deal success that we explored earlier inthis report, and bolsters the trend observed in our
1H 2022 survey, in which 22% of respondents, thesecond largest share in that study, cited labor andemployment litigation as their number one concern.
In that 1H 2022 study, only 2% of respondents
described environmental litigation as their primary

28

Financial

Export controls

Bribery andcorruption

concern. That share this year has jumped all the way
up to 24%, surpassing even the increasingly thorny
and headline-grabbing issues of antitrust regulation(18% of primary votes, down from 26% last year)
and data protection/intellectual property (IP) (14%,down from 16%).
That issues relating to environmental litigation havegrown so quickly clearly reveals the increasing
weight that dealmakers are attributing to ESG andsustainability-related shortcomings, as we haveillustrated in other sections of this report.

Intellectual property

Intellectual property
As evidenced in our survey, Aon has seen its clientsrecognize the potential for both risk and opportunityfrom their IP and intangible assets in each lifecycle
stage. In respect of innovation-driven industries
specifically, the vast majority of dealmakers
surveyed, 78%, agree that IP is a major potential
value driver in M&A transactions.

and relevance of the intangible assets, as well as
any litigation risk that may result from possible
infringement of third-party IP.

Savvy investors are seeking deeper perspectives
on a target’s IP portfolio, including the quality

Relatedly, Aon has observed an increased
interest in understanding strategic IP risk.
All survey respondents agree this must be
weighed in the balance carefully during M&A
transactions, including 66% who say this is a major
consideration.

28. Within innovation-driven industries, how would
you rate the importance of intellectual property
as a potential value driver in M&A transactions?
(Select one)

29. Within innovation-driven industries, how would
you rate the importance of intellectual property
risk as a consideration for M&A transactions?
(Select one)

80%

78%

80%

70%

70%

60%

60%

50%

66%

50%

40%

34%

40%

30%

22%

30%

20%

20%
10%

10%

0%
A majorconsideration

An average
consideration

Given IP’s growing significance as industries
become increasingly digitalized, dealmakers arelooking to accumulate more information via adata-led approach to examine the relevant patent
landscape and its constituent technology clusters.
This allows them to better identify competitors andnew entrants, and assess the breadth and validity ofthe patents.
On the sell-side, articulating value is paramountto maximizing the sale price. To that end, Aon has
observed high-growth, IP-rich companies with astrong commitment to research and development
trying to differentiate their approach to M&A.
One way they are accomplishing this is byleveraging a ‘quality of IP’ report that examines the29

0%

A majorconsideration

An average
consideration

full stack of intangible assets, including patents,
trade secrets, know-how, software, and data. These
reports can help position a company’s intangible
assets as a value driver, ultimately informing a
deeper IP narrative throughout the transaction fromprice discovery through due diligence.
During the hold stage, these same investors
aspire to build additional value through targeted
investment in IP. In sectors ranging from climate
tech through networking infrastructure, sponsors
are seeking a deeper understanding of theirportfolio companies’ patent landscapes, identifying
white space in which to strategically expand their IP
portfolios and, thereby, grow value.

Conclusion: Key trends for the year to comeConclusion: Key trends for the year to come
Although tight financing conditions and macroeconomic volatility are putting a damper on large-scale,transformational dealmaking, the findings illustrated in this report indicate that the M&A market expects
to see a broad-based uptick in activity over the course of 2023. We anticipate that numerous operationaland strategic imperatives will continue to drive dealmaking in core sectors, such as TMT, infrastructure andrenewables, with more secure, advanced economies, and especially the US, likely to benefit the most.
This does not necessarily mean that sailing will be smooth – from ESG and cyber risk to market dislocation andgeopolitical upheaval, rarely before have M&A strategies had their mettle tested by such varied risk factors
simultaneously. Dealmakers must be proactive in controlling whatever risks they can, install mitigation plans for
those outside their direct influence and use risk transfer solutions when available.
Especially in today’s testy geostrategic and macroeconomic environment, much can change in a short periodof time. But there are a few key trends that are likely to define M&A over the next 12 months, which dealmakers
would do well to scrutinize as they devise their plans.
Pivot to smaller, strategic deals
Although deal volumes are generally trending upward, we have seen a chill cast over regulatory concernsof big-ticket transactions. Instead, a more programmatic approach to M&A will come to the fore, withminority transactions and alternative structures, including joint ventures and partnerships, becoming
increasingly popular.

As the managing director of a German investment bank explains, “Getting buy-in for small deals will
be considerably easier. There is more surety about the level of returns, and the impact of external
conditions on business activities can be evaluated systematically.”
Playing up ESG propositions
ESG is now among the most important factors that dealmakers must weigh in the balance when
undertaking transactions. For many, it is the most important factor to consider, given the uptick in
scrutiny from regulators as well as consumers as devastating climate change events grow more common.
Subpar ESG metrics could vaporize 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.
Constant improvement in cyber readinessTechnology is embedded in every facet of a modern business operations. Regardless of sector, it feels
as though every company is now a technology company. But with increasing technology dependence
comes a surge in cyber risks, and it is a constant battle for organizations to keep up with the rapid paceof innovation in technology tools – and the ways in which bad actors might exploit those developments.
Digital transformation must be reinforced by proactive cybersecurity practices within companies andcomprehensive cyber due diligence on the part of potential acquirers.

30

Contact Us
Gary Blitz
Global Co-CEO, M&A andTransaction Solutions
Aon+1 301 704 4640
gary.blitz@aon.com
Alistair Lester
Global Co-CEO, M&A andTransaction SolutionsAon+44 (0) 7990 780343
alistair.p.lester@aon.com

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