Confronting hard reality of higher rates

Teasing out positives from Europe’s macroeconomic situation is not the easiest task. One plus is that inflation is finally being brought to heel, with the European Central Bank’s (ECB) hawkish policy-setting yielding results.

Inflation in the euro area peaked in October 2022 at 10.6%, the highest level since the currency bloc’s inception in 1999. That rate declined to 4.3% by September. Still, this is some way off the ECB’s 2% target. The central bank has stayed the course in its mission to keep disinflation running, raising its main refinancing rate to 4.5% at the end of the quarter.

All this, of course, comes at a cost. The European Commission has lowered its growth forecast to just 0.8% for 2023 as economic activity faltered in Q2 and multiple indicators trended down. Once the strong man of Europe, Germany’s health has taken a turn for the worse, with manufacturing and trade with China waning. Overall, the European consumer continues to be squeezed by high credit costs.

M&A markets mirror slow growth

EMEA’s M&A statistics for Q3 make for sober reading. Transaction volume sank to its lowest point in three years and value was down on both year-on-year and quarter-on-quarter bases. However, one saving grace is that value is not as low as it has been earlier this year. In 2023 to date, Q1 was the lowest quarter for aggregate M&A value.

Pockets of strength, or more accurately relative strength, can be seen in areas like industrials, pharmaceuticals, financial services, and commodity-based industries. Moderately-sized telecoms plays are holding up the formerly leading technology, media and telecoms (TMT) sector in lieu of tech’s valuation slump. Cash-equipped corporates with well-managed balance sheets selectively seized upon the opportunity to scale up as the majority hunkered down.

Outside of domestic bids, US buyers are demonstrating their dominance, buoyed by a strong dollar and an economy spurred by an unshakable labor market. The valuation gap between US and European M&A markets is another draw. Oil rich investors are not to be overlooked either, with Saudi Arabia in particular contributing its fair share of transaction value, as the Middle East’s commodity revenues cushion it from Europe’s torpor.

Published in association with Datasite, Deal Drivers EMEA provides an in-depth review of M&A activity in 2023, as well as an outlook for the year ahead.

The report is also available on datasite.com.