Chris Hughes's View to 2023: Deglobalization Will Drive Dealmaking
Rethinking geographical priorities could reverse the corporate trend of using M&A to grow. Plus some of the writer's favorite columns.
What to Expect in 2023:Russia's invasion of Ukraine has put geopolitical risk front of mind for corporate leaders. That could see deglobalization determine M&A priorities.Boards in the US and Europe have two strategic concerns in a turbulent world — strengthening local supply chains, and allocating capital away from riskier markets and toward what they will see as the relative political and economic safe haven of the US.This would amount to an unwinding of the trends in corporate activity in recent years. Instead of deals being hatched to enter emerging markets or new product areas, the focus could shift to more selective acquisitions in relatively mature markets, with a focus on buying key suppliers or striking conventional cost-cutting mergers in regions close to home.Alongside this de-globalization will be a financial priority: de-leveraging.
Investors have been rewarding companies for keeping debt under control and that's unlikely to change anytime soon. True, the pharmaceutical majors need to do M&A to replenish their drug pipelines. But in the main, bold, debt-funded megadeals that take companies in adventurous directions are likely to be the exception.Of course, there will always be some opportunistic dealmaking.
Take the UK stock market, for one such hunting ground. Valuations are cheap and bid targets remain relatively affordable for dollar buyers given sterling is more than 10% off its 2021 high against the greenback.For private equity, 2023 must surely bring a reckoning. The seizing up of the leveraged-loan market ended the deal boom in 2022.
Hereon, the acute challenge won't be resurrecting deals, it'll be keeping afloat those buyouts of yesteryear that can't cope with cost inflation and weakening demand from their customers.Combine those dynamics with the demands of servicing high debts, and the year ahead looks set to test buyout firms' willingness to support portfolio companies when the prospect of earning any kind of return recedes. Businesses that succumbed to private equity bids toward the end of the boom — when buyers more likely paid high prices that required lofty borrowing — may be the first to go awry.There is one scenario where the buyout industry could start making new investments: a staggered recovery in the debt and equity markets. If leveraged finance ungums first, without lifting stock valuations, that would enable buyout barons to go bottom fishing.
Conversely, a bounce-back in the equity market would be a trigger for initial public offerings. The one to watch? CVC Capital Partners taking the opportunity to revive the trend of buyouts firms going public.From the year behind us:You Can't Just Take a Russian Oligarch's London Townhouse: Reforms will help the government challenge their source of wealth. But will this lead to more assets being seized?Bankers Had Their Crisis.
Now It's Lawyers' Turn: Russia's invasion of Ukraine demands a rethinking of how England's legal profession conducts itself.Gen Z, Millennials and Gen X All Basically Agree on WFH: Support for hybrid working is high across demographics. But bosses should ask why — and address the reasons.Pound Slump Makes the FTSE 100 One Big Dumpster Dive: Mid-sized UK stocks attracted private equity attention in 2021. In 2022, corporate bidders had an even bigger pool to play in. Deriding Women's Complaints on Equal Pay Is Costly: BNP's penalty for discriminating against a female banker was elevated by its mishandling of her concerns.
Banks should heed the warning.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.More stories like this are available on bloomberg.com/opinion