M&A predictions
and guidancefor 2023

Sell or spin?
The strategic
alternative to M&A

Signs of recovery
in debt market
emergeM&A monitor
January 2023

What we expect
for the year ahead

Climatecrisis drives
dealmaking

M&A monitor

January 2023

Looking ahead
followinga challenging
year for M&A
In this edition we reflect
on dealmaking trends in2022 and look ahead to2023. We consider themacroeconomic andgeopolitical impact on the
M&A landscape this year
and focus on the challenges
ahead as signs of recovery
start to appear.
Given the challenges in the dealmaking environment,
we examine the merits of spin-offs as a meaningfulalternative to M&A for companies considering
strategic divestments. We look at how illiquidity andvaluation challenges could affect dealmaking as thedebt market readjusts, and we explore the trends
in energy M&A as businesses transition to net zero.
Finally, we round-up the year-end deal data.
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January 2023

M&A monitor

M&A
predictions
and guidancefor 2023
Tension between
institutional shareholders
and boards about strategic
alternatives
We are emerging from several
consecutive years where both activist
shareholders and boards have been able
to regularly count on institutional
shareholder support for all-cash sales ofcompanies at premia to recent trading
prices. We will be entering a different
environment in 2023 – where longterm, institutional shareholders haveacquired their shares over the last
several years at prices that not only are
significantly higher than prices that
represent a healthy premium tocurrent trading prices, but also far
exceed the ranges where financial
analyses of the newest internal,
management forecasts are putting both
intrinsic values and future stock prices.
Against this backdrop, we are notnecessarily going to be able to rely on
institutional shareholder enthusiasm
for cash sales of companies just because
the transactions satisfy the traditional
criteria of meaningful premia to recent
trading prices and falling within theranges of intrinsic values and future
stock prices derived from internalmanagement forecasts. The
uncertainty and downsides that will becharacterizing the forecasts thatmanagements present to boards at theoutset of 2023 will be fueling thistension between the approaches ofboards and the approaches of

institutional shareholders to salesof companies in 2023.
These tensions between boards andtheir institutional shareholders overstrategic alternatives may come as asurprise to many corporate clients.
They will have run sale processes
consistent with the latest guidancefrom Delaware Chancery decisions.
In addition, many will have recently
upped their games on shareholder
engagement, “thinking like activists,”
improving their investor relations
messaging, being more transparent
about longer term targets (rather thanmanaging the markets only fromquarter to quarter or even from fiscal
year to fiscal year) and making
shareholder-friendly governanceconcessions in a tactically wise manner.
Nevertheless, we need to prepare forbattles in 2023 for shareholder
approvals of negotiated sales of publiccompanies for cash consideration.

Ethan Klingsberg
Partner, New York

Sebastian Fain
Partner, New YorkWe are going to be spending a lot moretime in 2023 convincing ISS, among
others, why cash mergers merit theirsupport. We may even start trying tostructure more transactions as tender
offers to avoid ISS recommendations,although regulatory timelines willcontinue to push us toward one-stepmergers. Get ready for this tension.
Advisors’ board presentations willshow everything to be in order for awell-founded merger and then thechorus of objections emerge following
the announcement.
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The playbookof the antitrust
regulators is
now clear:“Throw sandin the gears”

Commodification of private
equity and the adventures ofreliance on direct lenders
and on equity commitmentsfrom the Middle East andsovereign wealth funds
The leveraged acquisition playbook forat least the outset of 2023 is going to be
characterized by herding numerous
direct lenders into leverage packages
and negotiating supplemental equity
commitments from the Middle Eastand sovereign wealth funds. The coreprivate equity commitments arearguably commoditized at this point;
it’s the senior side of the capital
structure and the supplemental equity
that are going to require hard work.
Although the commitment papers fromthe direct lenders in 2023 may look
similar to those from the commercialbank lenders that dominated much of2022, the differences (and the
additional burdens) will include theintensity of the diligence, theuncertainty of whether these lenders
are “in” until much later in the game,and the sheer number of direct lender
shops that may be needed to make thisformula work given the relatively small
checks each direct lender fundtypically writes (due to the absence offollow-on syndication of theircommitments). The big private equity
bidders have internal teams that cancoordinate this activity, but will middle
market private equity buyers andstrategic buyers in need of leverage
have the wherewithal to shepherd all
this in 2023?
Meanwhile, the importance of moneyfrom the Middle East and sovereign
wealth funds to fill out equity checks
from the core private equity players isgoing to require special focus on CFIUS(as will the fact that some of the US
private equity funds receive significant
capital from the Middle East and Asia)and making sure that the entities
signing these commitments are not justunfunded vehicles.

Outmaneuvering antitrust
regulators in 2023
The playbook of the antitrust
regulators is now clear: “Throw sand in
the gears” – i.e., do everything possible
to delay the transaction until themerger agreement’s “outside date” hits
and one of the parties decides that it
would be better to pull the plug andreceive or pay the reverse break-up fee
than extend the outside date. (Given
antitrust paranoia, it is fair to expect
reverse break-up fee structures, forbetter or worse, to be pervasive inmerger agreements in 2023 even in theface of strong antitrust undertakingsby buyers).
In 2023, we will see merger parties
better prepared to counter the
regulators’ strategy successfully. More
M&A clients will adopt, from the outsetof their merger discussions, clear
strategies for:• fix-it-first remedies,• expediting responses to document
and information requests from antitrust
regulators,• proactive management and leverageof the UK CMA-EC-FTC/DOJ triangle (asopposed to having these agencies
leverage this triangle against us), and• most importantly, engagement inlitigation against those antitrust
regulators that throw up roadblocks.
The “sand in the gears” strategy of theregulators will not work when clients
get their act in order upfront on these
items, and clients are now realizing this.
Merger parties have learned the hard
way that being reactive and planning on
the fly plays into the “sand in the gears”
strategy of the antitrust authorities, andthat success is within reach byproactively managing timing risks(through expedited handling of requests
and other process matters) andsubstantive risks (through fix-it-first)
and, most importantly, by having a clear
litigation action plan to ensure success.
In the past, boards, when considering amerger, would rather shutdown merger
discussions than have to plan out inadvance litigation strategies for
obtaining antitrust clearance. That willchange in 2023. The antitrust agencies
have challenged merger parties toenhance their approaches to overcoming
regulatory impediments, and thechallenge will be accepted in 2023.

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Reverse-CFIUS, CFIUS andforeign investment andnational security regulations– the minefield expands
The word from our colleagues in
Washington is that the US government
now wants to figure out how toregulate or at least start monitoringclosely not only inbound foreign
investment (CFIUS) and the sale andlicensing of sensitive technology andother key resources (OFAC; export
control), but also outbound investment
generally. The objective of this “reverse
CFIUS” idea is not to restrict cash
outflows (e.g., China has plenty of cash),but to regulate and monitor the spreadof US legitimacy, managerial know-how
and other intangible benefits to aforeign company that come fromhaving, say, a name-brand US private
equity house or a marquee US brand inits stockholder profile. This regime has
yet to be promulgated but it is coming
in 2023. Who knows what kinds ofreciprocal restrictions (on investing in
the US) other countries will impose on
their local sources of capital as a
response? As one China-born CEO of a
US-based public company put it to me
in December: The US and otherwestern governments want to borrowideas from the Chinese government.
Meanwhile, the scope of CFIUS andnon-US foreign investment and national
security regimes continues to expand
on a monthly basis. Many merger
parties in 2023 are going tounderestimate the magnitude of theeffort necessary to figure out not only
all the foreign investment clearances
required but also their impacts on
timing and substantive execution risk.
There will be embarrassments andfrustrations in 2023 on this front.

Leveraged spin-offs – thedefault choice for separationtransactions in 2023
Investors will never let go of their push
for portfolio rationalization andseparation out of non-core assets.
Leveraged spins are going to be one of
the alternatives of choice in 2023 foraddressing this objective.
Even with prices obtainable in straight
divestiture sales and carve-out IPOs
way down during the initial months of2023, there will always be the spin-off
alternative if the non-core asset inquestion is sufficient to float on its
own, even as a small cap.
Investors will continue to love tax-freespin-offs because they permit theshareholders to retain both upside
opportunity and liquidity in the SpinCoand because most SpinCo’s will be able
to navigate the tax restrictions toposition themselves to be sold quickly
at a premium when markets eventually
become frothy again in the coming
years. Meanwhile, despite limited debt
markets, leverage-lite is still usuallyavailable to put on the SpinCo andenable the parent to keep the cash
proceeds to boost the core business thatremains behind. (See the following
article in this edition for more detail on
this strategic alternative to M&A.)

Mergers of equals – willboards be heroic in 2023?
Here’s where the difference between
what “should” happen and what “will”
happen may differ in 2023. If you are adirector looking at management’s
outlook for the next 15 months, there’s
a good chance that you are thinking, “I
don’t want to be a director of anunderperformer for 2023.” Onesolution is to find a complementarycompany facing similar challenges,
determine if there are some attractive
revenue and cost synergies, whether
antitrust clearance is doable, whether
the two corporate cultures arecompatible, and, if these boxes can all
be checked, then do an all-stock merger
based on a fair, relative valuation. That
often means an at-market exchange
ratio, but may mean something slightly
different after further analysis of
trading multiples. In any event, the key
to such an all-stock merger-of-equals
transaction is not any premium tomarket trading prices in the exchange
ratio, but the value generation forshareholders from the synergies andmultiple potential bumps.
Yet, it takes heroic boards andmanagement teams to get these deals
done. Why? Because, by definition, 50%of the directors and executives fromthe two companies are going to be outof a job or in less glamorous positions
at the combined company by the day
after closing. These are the deals that“should” be happening in 2023 andmany directors know it. Whether they
“will” happen remains to be seen. To
the extent they do not happen, we will
start to see more dispersion among theunderperformers in 2023 and those
directors and executives at companies
performing poorly relative to peers in
the tough times of 2023 will be prime
personal targets for activists and will
wish they had been cheerleaders for an
accretive merger of equals even if itmeant not having a personal role at the
combined company after closing.

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January 2023

M&A monitor

Sell or spin?
The strategic
alternative
to M&A
Kate Cooper
Partner, London

Jonathan Carver
Senior Associate, London

Spin-offs can present an attractive alternative to M&A forcompanies considering strategic divestments and given
the challenges to dealmaking in the current environment –illiquid capital markets presenting financing issues,counterparties struggling to agree pricing assumptions in
an uncertain macro environment and regulatory hurdles
to deal execution continuing to grow – we expect this tocontinue into 2023. This is particularly the case in sectors
such as industrials and pharmaceuticals, which are
dominated by conglomerates that have grown inorganicallythrough acquisitions and in which these separatebusinesses have retained some degree of independence
and separation from the wider group.
Spin-off transactions can be structured
in different ways but ultimately involvethe distribution by a listed company ofshares in its subsidiary (the SpinCo) to
its shareholders, thereby establishingtwo separately owned and managed
companies. They are attractive tocompanies if there is a belief that thetrading value of the group is less than
the sum of its parts and this value canbe realised if otherwise distinct
divisions or businesses are able to trade
separately. Often, the SpinCo will
benefit from refreshed management
focus, or may be freed from costs or
regulatory constraints associated withthe remaining group that previously

weighed on its valuation. The spin may
also attract new investors with amore specialised focus. It is alsofrequently the case that the tax basefor the SpinCo assets held by theparent company is low because they
have been held for a significant periodof time. This again leads to pressureon achieving a satisfactory valuation
multiple in a M&A transaction tojustify the tax on the capital gain,
which is difficult in the current
environment. Conversely, a spin-off
will usually be structured to be
tax-neutral for the parent, and themarket can be left to its own devices
to determine the appropriate valuation
over time.
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M&A monitor

Companies should also expect anincrease in share price volatility inthe short-term following the spin-off
as the market adjusts to repricing
the separate investment proposition
presented by each company.
Tread carefully
It is worth bearing in mind, however,the potential pitfalls in achieving a
spin-off. An obvious factor that willneed to be considered is the potential
for dis-synergies to be created by
duplicating public company andback-office functions and overheads,
and whether these may outweigh theperceived benefits of other cost savings.
Companies should also expect anincrease in share price volatility in the
short-term following the spin-off as themarket adjusts to repricing the separate
investment proposition presented byeach company, and as investors takethe opportunity to adjust portfolios.
Company boards may be reluctant toproceed with a spin when equity capital
markets are uncertain, with thepotential embarrassment factor toconsider of a post-spin drop in shareprice, that may leave investors unhappy
that a third-party sale was not pursued.
Also, the effect on the inclusion of theparent company and SpinCo in relevant
share indices needs to be considered.
While a board may have greater
confidence that a spin will complete
compared to a third-party sale whichis conditional upon antitrust or otherregulatory approval, our experienceadvising multinational conglomerates
on complex spin-off transactions showsthat a pre-spin reorganisation may
still trigger foreign investment filingsin many jurisdictions around theworld. Depending on the nature of thetransaction, it may be reasonable toexpect these to principally be technicalfilings rather than substantive approval
processes, but the cost and resource
impact should not be overlooked.
Additionally, issuers will need toconsider the jurisdictions in which
its shareholders are based to determine
whether the spin-off requires aprospectus or other disclosure
documentation to be prepared underoverseas securities laws, or a waiver
to be sought from applicable securities
regulators. The impact of such
regulatory processes can be significant
and should be planned for wellin advance.

long-term transitional support
arrangement for the SpinCo, thespin-off might seem less appealing
than a sale to a strategic acquiror that
may be more able to support SpinCo
with its existing infrastructure fromday one. The complexity of setting up
both short- and long-term transitionalarrangements, putting intra-grouparrangements onto arm’s length terms
in a tax efficient manner, or creating
the distributable reserves needed at
the parent company level to spin theassets to shareholders are just someof the factors that contribute to thetypically long lead times (as well as
costs and management time) required
to achieve a spin-off. All this needs
to be appropriately weighed against
a sale which may be simpler incertain respects and through which
the company will receive at least
some proceeds.

Preparation is key

Whether or not a spin-off transaction isthe best course of action for a company
looking to dispose of a business unit will
depend on a multitude of factors, but
as we look ahead into 2023, we expect
it will remain a meaningful alternative
to M&A for a wide range of companies.

The extent to which the SpinCo is
integrated within the parent company
will determine the level of post-closing
transitional support that is required –if separating the businesses will require
the parent to commit to an expensive

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Signs of recovery indebt market emerge
After a record-breaking deal year for private equity in 2021,
2022 was rather different. The impact of the war in Ukraine
was felt in many countries as supplies of energy, food andother commodities became more precarious, leading toincreased costs and rising inflation. The low interest rateenvironment that supported leveraged investments overrecent years ceased with many central banks around theworld ending quantitative easing and raising interest rates.
Additionally, government debt levels remain elevated as aresult of state support provided during the pandemic.
Against that background, debt andequity investors slowed down
investments as they re-assessedvaluations, projections and return
expectations. In Europe, this led toreduced buy-out activity throughout
most of 2022, both as a result of the
gap in valuation between buy-side andsell-side and the reduced availabilityof debt in the syndicated loan and bondmarkets. Direct lenders were able togain increased market share as equity
investors looked for liquidity andopted for certainty on price and terms
in an uncertain market.
Lack of liquidity and investor
confidence has meant that processes
to obtain committed debt financing in
2022 have taken longer than usual.
Negotiation with a large number of
direct lenders – and sometimes CLOs
directly in parallel – has been required
to ensure that financing commitments
are obtained on common terms by
the relevant bid deadline. Many direct
lenders required frequent renewalsof committee approvals, leaving equity
investors uncertain as to the quantum
and terms of debt for the proposed

investment until signing, affecting
equity investors’ ability at times toprogress terms meaningfully on theacquisition side. As investor confidence
improves, we expect timelines will
return to normal and processes forsyndicated debt and direct lending
deals will be run in parallel, withfewer direct lenders needing tobe approached.

Michael Josenhans
Partner, Frankfurt

Alexander Mitchell
Partner, London

Carol Van der Vorst
Partner, London

Alternative capitalproviders on the rise
We expect private credit providers
to continue to grow assets undermanagement and to continue toprovide an alternative source of credit
for transactions in competition withthe syndicated loan and bond markets.
Positive signs of initial recovery in thedebt markets and increased new deal
activity have appeared towards theend of 2022. As we move into 2023,
investors are hopeful that a newnormal will be found on debt pricing
and valuations – which will be oneof the key challenges for the new year
– with increased deal activity
expected as a result.
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Climate crisis
drivesdealmaking
Heiner Braun
Partner, Frankfurt

Mirko Masek
Counsel, Hamburg

In the wake of COP27, companies across the globe arereassessing their net zero plans, science-based targets, andoffsetting strategies. At the same time, the use ofhydrocarbons continues to rise and is some distance fromits predicted peak. As a result, investments in hydrocarbons
are still expected to be a mainstay of 2023. That said, we also
expect many companies to remain on course with plannedtransitions to net zero, either because climate change isjeopardising their business, or they can see commercial
opportunity from being part of the solution – or both.
Beyond hydrocarbons?
The energy sector had a bumper year
in 2022 with profits rising to newheights, due to tensions between China
and the West, the war in Ukraine, andglobal supply issues, resulting inrocketing energy prices. Against thisbackground, we have seen continued
investment in hydrocarbons, as many
players focus on security of supply anddiversified sources of energy rather
than face the consequences of energy
shortages or unscrupulous suppliers.
Driven by continued strong global
demand for energy, especially in Asia,and ever-increasing demand in Europe,
investments into upstream LNG as well
as related downstream infrastructure
are forecast to keep growing for the
next few years. Whilst hydrocarbons arestill expected to be a source of energy

for years to come, the recognitionof the threats of climate change meansthat policymakers are increasingly
steering capital away from carbon
intensive businesses. The combinationof ESG pressures, Europe’s taxonomy
regulation and central banks’ policies
are leading many investors and banks
to decarbonise their portfolios. This
opens up opportunities for investors
to focus on the transition fromhydrocarbons to renewable sources
rather than avoiding carbon-intensive
assets. We therefore expect increased
investment activity. To succeed,
investors will need to navigate theevolving regulatory backdrop of
subsidising, capping and restricting
energy supply and prices, and increased
scrutiny under foreign investment
and national security regimes.
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Public grants
are being madeavailable tobridge theprofitability gapof decarbonised
industrial
applications.

Sustainable balance –with momentum

Outlook for 2023
and beyond

It is increasingly recognised that theclimate crisis will only be solved
through international collaboration.
The G7 climate club initiative as wellas the Inflation Reduction Act in the
United States are evidence that moreaction is needed to achieve the goalsof the Paris climate agreement.

We expect investment into renewables
to remain in high demand.
We therefore expect to see newpartnerships and increased competition
for renewable or other decarbonising
investments. The focus on renewables
will sit alongside the expected
continued investment in hydrocarbons
in the short and medium term.

To achieve net zero, the search is on
for scalable and cost-effective green
technologies. Public grants are being
made available to bridge theprofitability gap of decarbonised
industrial applications. One notable
example is the United States DOE’s‘Hydrogen Shot’ programme, whichstarted in 2021 and seeks to reducethe cost of clean hydrogen. Anotherexample is Europe’s requirement tobalance short to mid-term energy needs
with longer term green energy targets.
This dilemma becomes evident in thepush for investment in fast-track new
LNG import terminals. This new
infrastructure, if operated for the usual
25 to 35 years, would be in stark
conflict with the net zero ambitionsof the European Union, unless they canbe converted from LNG supply to the
supply of hydrogen or its derivatives.

Investment in the developmentof innovative technology is key toachieving net zero. Whilst somemarkets are open to exploring
technologies that may be perceived
as controversial or experimental,
such as fracking, carbon capture andutilisation/storage or new nuclear
solutions, others are more reluctant.
Overall, we believe investment in thisarea is likely to increase, particularly
in novel green technologies.
Finally, volatility in energy prices aswell as in new regulations will keep
the players in the sector on their toes.
Constant monitoring and adaptation,
both when developing and investing
into new assets or managing existing
portfolios, will be key to success.
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Global M&A Q4 2022,
activity by sector
8

7

1

6

M&A

5

value

2

4
3

SectorValue $bn

%

1 TMT

920.2

23.87

2 Industrials and materials

737.1

19.12

3 Consumer*

544.5

14.12

4 Financials

469.3

12.17

5 Energy and power

367.9

9.54

6 Real Estate

298.9

7.75

7 Healthcare

298.7

7.75

8 Infrastructure and transport

218.3

5.66

3,854.70

100

Total
* Includes retail

7

8

6

1

5

4

M&A

volume2
3

SectorVolume

%

1 TMT

9,906

24.17

2 Consumer*

9,358

22.83

3 Industrials and materials

8,154

19.89

4 Financials

4,315

10.53

5 Healthcare

3,250

7.93

6 Real estate

2,379

5.80

7 Energy and power

2,115

5.16

8 Infrastructure and transport

1,513

3.69

40,990100

Total* Includes retail

Source: Refinitiv | Data correct to 3/1/23 | Sector is not disclosed in some deals, so will not match next page

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Global M&A Q4 2022 – value and volume
Global*USA*†

Europe*†Asia-Pacific*†

M&A value

M&A value

M&A value

M&A value

M&A deal volume

M&A deal volume$3,855.04bn $1,732.24bn
41,004

10,215

Top 3 deals$958.44bn$832.28bn

M&A deal volume

M&A deal volume

12,892

Top 3 deals

13,432

Top 3 deals

Top 3 deals

1 Activision Blizzard/
Microsoft$68.7bn

1 Activision Blizzard/
Microsoft$68.7bn

1 Atlantia/

2 VMware/$68.3bn

2 VMware/$68.3bn

International/
2 Firmenich$20.7bn
Koninklijke DSM NV

2 Ramsay Health Care/ $22.1bn
Investor Group

3 Housing$60.4bn

3 Twitter/$40.2bn

3 Swedish Match/

3 Baring Private Equity

Broadcom

Development
Finance/HDFC Bank

Inbound:

Broadcom

X Holdings I

Schemaquarantatre$17.2bn

Philip Morris
Investments

Inbound:most targeted markets$52.1bn$60.4bn

Development
Finance/HDFC Bank

$7.5bnAsia/EQT

Inbound:

Inbound:markets investing into
US companies

1 Housingmarkets investing into
Asia-Pacific companies

markets investing into
European companies

US
10,215 deals$1,732.2bn

US8,387 deals$1,526bn

UK
2,310 deals$269.2bn

China (mainland)
3,383 deals$241.4bn

UK
3,185 deals$386.7bn

Canada336 deals$37.7bnUS1,600 deals$192bnJapan
3,324 deals$113bnChina (mainland)
3,719 deals$272.8bn

UK
259 deals$25.6bn

Italy
568 deals$65.1bn

India
706 deals$110.3bn

Outbound:Outbound:US
11,250 deals$1,875.2bn

US
8,387

UK
2,901 deals$330.5bn

China (mainland)
3,630 deals$257.3bn

Outbound:Outbound:markets US companies areinvesting into

most acquisitive markets

markets Asia-Pacific companies
are investing into

markets European companies
are investing into

$1,526bn

UK
2,183 deals$257.1bn

China (mainland)
3,488 deals$240.5bnUK
537 deals$72.1bnUS
761 deals$88.1bnIndia
1,171 deals$113.8bn

Netherlands
177 deals$34.7bn

Italy
667 deals

$72bn

Japan
3,162 deals$108bnFinancial sponsor M&A – top 3 deals with buyside financial sponsor involvement

1

2

3

$52.1bn$22.1bn$16.4bn

Atlantia/
Schemaquarantatre

Ramsay Health Care/
Investor Group

Citrix Systems/
Investor Group* Deal value includes net debt of target | † Includes domestic deals | Source: Refinitiv | Data correct to 3/1/23

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