By Jenna Kroll, Regional Sales Manager, Chicago Advisory Team
Economic recovery in the wake of the COVID-19 pandemic has spurred a dramatic rise in mergers and acquisitions throughout the U.S. market. Datasite teamed up with Mergermarket to produce a webinar in which a panel of experts from across the industry offered their insights about what we can expect in the months ahead.
Moderating the event was Yiqin Shen, a senior reporter for Mergermarket. She opened with a question about the outlook for M&A deal volumes.
The overwhelming consensus was that the upward trend is likely to continue, with over 95% of the audience predicting either growth or strong growth.
“I believe the market for M&A is going to remain strong throughout 2021, and probably well into 2022,” agreed Rick Lacher, Managing Director for Houlihan Lokey. “The market is awash in dry powder.”
He noted that both corporate entities and private equity firms have upwards of $2 trillion in liquid capital to work with, and loan pricing and leverage levels are very favorable.
Mark Williams, Chief Revenue Officer for Datasite’s operations in the Americas, offered a similar forecast based on the company’s data on new deals.
“We’re seeing impressive levels of activity on the platform in all categories,” he said.
Deal Values and Structures
Noting that total deal value in 2021’s first quarter had reached a record figure of $536 billion, Yiqin asked the panel what factors they believe are driving up that number.
Rick posited that the sheer amount of money in search of targets was pushing up valuations.
“People are looking for good businesses to buy and are willing to pay a premium,” he said. He pointed out that even people-driven industries such as veterinary, HVAC services, and pest control are seeing extremely high multiples.
The other panelists agreed with this assessment.
“Prices are high,” said Brent Steele, a partner at Sidley Austin. “I think buyers, even under exclusivity, are worried that another buyer is going to come along and snatch away a deal.”
Referencing a study Brent conducted last year, Yiqin asked if he expects dealmakers to continue pursuing structured deals like earnouts and contingent payments to bridge potential valuation gaps.
Brent confirmed that he expected that trend to continue, though not for the reasons the study participants thought.
In the fall of 2020, he said, “respondents thought that they would more often turn to creative deal structures as a way to mitigate headwinds in the M&A market.”
Instead, dealmakers are now using earnouts to compensate for uncertainty about whether the tremendous recent growth can be sustained.
Growth Across Sectors
The next audience poll asked which sector would see the highest growth in M&A volumes in 2021. 43% voted for tech, making it the overwhelming audience favorite, with healthcare coming in last at 10%.
The panelists agreed that technology would continue to represent the biggest increase, but were more bullish on healthcare than the audience.
“TMT is definitely the number one sector for us on the platform right now, closely followed by healthcare,” Mark said.
Rick added that the pandemic has created some unexpected opportunities.
“Look at Michael’s Stores,” he said. “At the end of 2019, that business was not doing great...but as consumer habits changed, this business benefited greatly. It just completed a go-private transaction with Apollo at $22 a share.”
An audience member’s question posited the agricultural chemical sector as another space for growth, looking to Bayer’s acquisition of Monsanto. Mark agreed and noted that the Bayer-Monsanto transaction spurred a lot of moves by middle-market players in that industry.
Brent suggested that even industries devastated by the pandemic might begin to bounce back later in the year, as consumers resume spending on travel and hospitality.
“I think we’ll see more M&A activity in those sectors in the back half of 2021,” he said.
The Rise of SPAC
Yiqin asked the panel what they thought was behind the surging popularity of special purpose acquisition companies.
With a de-SPAC, Rick pointed out, companies can negotiate their price rather than simply accepting the verdict of the market, and they don’t have to release their proprietary information until after the deal is settled. Meanwhile, investors are somewhat insulated from risk due to the option to redeem shares but hold onto their stock warrants.
Yiqin remarked that the boom appears to have cooled recently.
“A little over 10 new SPACs came out in April vs over 100 in March,” she said. “What are the factors behind this change?”
Brent said that the industry was still adjusting to the SEC’s recent revision in guidance around accounting for warrants. But he didn’t expect that to fundamentally alter the economics that make SPACs so attractive. He also said that the pipe market has slowed - in part, ironically, due to the immense demand.
“There are a lot of pipe investors who...aren’t interested in committing funds to additional deals while their existing deals are still pending,” he said.
Rick agreed that the overall market would remain strong even if some of the excesses of recent months recede.
The final audience poll results were mixed on SPAC outlook, with only a slim lead for predictions of growth as opposed to stability or decline.
Audience Questions and Final Thoughts
One audience member asked if the recent rise in remote, virtual due diligence will continue. Mark indicated that he expects a new norm to take root, mentioning that companies have become comfortable with heavier use of video footage for diligence.
Another question concerned distressed M&A and restructuring. Rick replied that with the economy growing again, he doesn’t expect these factors to play a major role in the market.
Closing out the conversation, Brent summed up the overall theme: with money pumped into the economy from stimulus efforts, and both corporate and private equity firms flush with cash, “M&A will continue to boom right alongside the broader economy.”
Want to learn even more about what the future of M&A in North America looks like?