Outlook to Finnish M&A markets during H2/2023

At the end of H1 it is possible to look back at our Finnish M&A Survey 2023 and whether our estimates proved to be accurate. According to our study in which we interviewed more than 100 Finnish CEO, board members, 47 % estimated that the M&A activity during the 2023 would be lower than what it was during the same period year earlier. As we also estimated great uncertainties relating to the development of interest rate levels typically affect deal apetite, also inflation, global uncretainties have pushed down valuations from the peak levels, which make negotiations more difficult. However, as M&A have typically been very adoptive to a new situations, we do not expect the current environment to last long and we would assume some increase in activity during the H2 although there unlikely be deals like last year where in some cases deals were due diligences were performed and agreements negotiated even without exclusivities. 

Definitely certain trends raised from the year 2023 deals, which are mostly also present in the M&A survey:

• The percentages of limitations of liability are on the rise, at least for SME transactions and we have seen particularly strict positions in particular towards compliance type requirements. Why this deal point is increasing? At least according to our study changes to key deal terms—including representations and warranties insurance, earnouts and indemnification caps— is clearly seen as a trade of when there is a drop in valuations
• In the case of private owners, we have recently seen various mechanisms for earn-outs and reinvestments, but what is especially mentionable, are the personal commitments, for which sellers have been required to provide a guarantee. In any case, this year a far higher proportion are considering selling their business compared to last year. Also as one of the mechanisms, as valuation discussions have become more complex due to the small downturn, the amounts of reinvestments have been seen to be increasing respectively from 30-40% level upwards 
• By sectors, technology and energy are expected to remain active while on the other hand, construction is expected to continue more uncertain. Valuation gaps exist between the sellers and buyers due to transition from bullish market to bearish but dealmakers are seeing earnout mechanisms and reinvestments as tools to fix the valuation gaps. 
• While the ESG and whistleblowing are still not perceived to have an impact in Finland yet, ESG related matters are taken into consideration more and more in transaction processes. Divestiture, liquidation, carve-outs, exits and bolt-on acquisitions are seen as most prospective opportunities in terms of deal types.

The increase in the number of sellers who did less well financially should create more opportunities for more prosperous companies. For most of 2022, mergers have become less attractive to many private equity firms as the higher cost of debt makes it more challenging to leverage yield barriers. However, there is plenty of funding in the capital investment industry and we will certainly see its utilization during the next year. One longer-term dealmaking trend that is still ongoing is investing in technology. Improving technology can help companies reduce costs and attract new customer bases, both of which become more critical in a bleak economic climate. Industries where technology can disrupt or bring efficiency, such as healthcare, financial services, supply chain and energy management, can also expect healthy operations. The expected rapid growth of data science and analytics companies can support investments in these fields. In these sectors we also at Trust have quite a lot of prospective deals in the pipeline.