The uncertainty we’re experiencing today is unlikely to ease anytime soon. While there’s value in exploring near-term outlooks, the much bigger question in our view is what to do with persistent uncertainty. We’ve entered a new geopolitical era, a new economic era, and we’re in the midst of a technological revolution. The biggest winners in the next decade, we think, will be those best able to embrace and navigate uncertainty and change.

Factors Shaping the Market

• New geopolitical era: The new foreign policy era we’ve entered is likely to be marked by power competition at best or power conflict at worst.
• New economic era: Markets are not likely to behave in the same way we’re used to. The age of boundless, easy money from central banks has ended, financial market fragility will persist, and the binding constraint in many areas of our economy is likely to remain with supply as opposed to demand for some time.
• Converging technologies: Within the last six months the release of transformative artificial intelligence has captivated the minds of many and begun to hit major news outlets. The impact of these technologies pales in comparison to that of the tsunami of converging tech that is to come and is certain to change the way we live, work and leisure.

Near Term Outlook

If the economy has or does enter a recession yet in 2023 it will be one of the most anticipated downturns in recent history. For months now economists have been pushing their predictions further out as a resilient labor market has supported consumer spending in the US, an extremely mild winter helped mitigate fears of an energy crisis in Europe, and mainland China’s reopening have all supported the global economy. Unsurprisingly, however, economists are now warning of an increased downside risk to both domestic and global economic outlooks amid the severe US and European banking sector turmoil of the last month, as higher interest rates have finally begun to expose points of vulnerability. An added complication, of course, is the fact that while inflation has moderated some, it remains elevated.

We all know that M&A activity has fallen sharply from the 2021 and early 2022 peak. Capital is significantly more expensive, there is a tremendous amount of uncertainty in the marketplace, and stakeholders in many industries are rethinking pricing coming off the strong seller’s market of 2021. Despite these factors many within the industry point to a robust inventory of sidelined deals that are expected to come to market in the third and fourth quarter of this year barring any major unexpected economic shocks. The US regulatory environment, also, is poised to support dealmaking in 2023 and beyond as a divided Congress limits the likelihood of new sweeping legislation and funds from the Infrastructure Investment and Jobs Act and the Inflation Reduction Act drive attention and dollars to numerous sectors including construction and road building, energy, water infrastructure, automotive and others.

The Bigger Question

A new geopolitical era

The average age of an M&A professional today is forty-four. Although there have certainly been crises and wars over the past forty-four years, the world throughout most of our lifetimes thus far has been characterized by a relatively low amount of power conflict. America was too strong and other countries too weak to really worry too much about wars or even cold wars. This understood dominance led to a relatively peaceful and predictable geopolitical environment. Whether this changed slowly with China’s rise in wealth and power over decades or all at once when Russia invaded Ukraine, revitalizing the NATO alliance and Western identity in response we’ll never know. Regardless, the relatively peaceful era we’ve enjoyed has come to an end and we’ve entered a new era that will likely be marked by power competition at best or power conflict at worst.

A new economic era

It seems very clear that the long period of quantitative easing – central banks injecting liquidity in a predictable way and maintaining exceptionally low interest rates – is in the rearview mirror for now. The financial market fragility we began to see with the collapse of cryptocurrencies in 2022 and banking turmoil beginning in March 2023 is likely to persist. In addition, while investors, firms and consumers alike have become very accustomed to an economy marked by demand scarcity we’re likely to face a greater number of supply constraints as opposed to demand in the short and medium term. This shift is driven by labor markets that simply do not function the way they used to, supply chain rewiring in response to pandemic-related business interruption as well as geopolitical fragmentation, the energy transition in response to climate change, and other factors.

Converging technologies

Technologists in Silicon Valley and elsewhere around the world are warning that a tsunami of converging tech is coming soon and that the wave is certain to accelerate a reinvention of industries and rearrangement of fortunes. The rate of growth in artificial intelligence, biotechnology and gene therapies, preventative healthcare and increasing healthspans, robotics, renewable energy, autonomous transportation and on-demand delivery of goods is at a tipping point. Breakthroughs in these areas could mean longer lifespans, greater productivity, greater affordability of goods and services, and solutions to new health threats, crunches in healthcare capacity, scaling food security, climate mitigation and countless other problems facing humanity. At the same time they could bring a frighteningly rapid churn in both blue- and white-collar jobs, a rise in cybercrime and attempts to disrupt critical technology-enabled resources and services, risks from widening misinformation and disinformation, and perhaps most concerningly a new global arms race.

Sundar Pichai, CEO of Alphabet, has said, “Artificial Intelligence could have more profound implications for humanity than electricity or fire.” There is no way to slow, stop or break the velocity of this revolution. The only control we have is to inspire and guide where it goes and how it is used.

What does this all mean for M&A?

The uncertainty we’re experiencing today is unlikely to ease anytime soon. But change, of course, means opportunity and we believe the biggest winners in the next decade will be those strategic and financial players who are most willing and best able to embrace the disruption. Disruptive market conditions and disruptive technologies fuel appetite for inorganic growth and M&A activity. There will be no slowing, stopping or breaking the velocity of change in any of the arenas discussed above. Our collective efforts, therefore, ought to be focused on leadership within our industries and taking advantage of this unique window of opportunity in a responsible way.