By Esther Barlow, Sr. Director, Field Marketing - Americas
Mergers and acquisitions in the United States have surged to record levels over the past year, but as a new administration’s priorities take shape, observers are seeing reasons for caution. In partnership with Financial Times, Datasite invited several industry experts to share their thoughts on how these changes will affect M&A prospects.
Moderator Ortenca Aliaj, the M&A correspondent for Financial Times in the US, kicked off the discussion by asking the panelists what they thought were the biggest drivers of the ongoing boom in deals.
Mark Shafir, Citigroup’s head of global M&A, responded that the primary factor has been the global glut of liquidity. Daniel Zwirn, founder and CEO of Arena Investors agreed with Shafir and added that the risk of an inflationary fiscal policy has made buyers eager to spend their cash reserves.
“People are looking to shop,” he explained, “whether it’s financial or strategic buyers.”
Do SPACs Have a Future in the M&A Market?
The panelists looked at the changing role of SPACs, which played a huge role in M&A growth at the start of the year before dropping off sharply. Most felt that a true bust is unlikely, though these deals won’t return to the outsized levels seen in Q1.
Zwirn felt that the market is maturing, evolving, and pursuing more sustainable strategies. He said he expects to see both an increase in structured deals and a decreased emphasis on speculative, high-growth businesses - as he put it, “a lot less spaceships and flying taxis.”
Monetary Policy and Private Equity
Turning to the private equity world, the experts looked at the possibility that interest rates might tighten and curtail the recent boom. Both Aliaj and Shafir noted that valuations are unusually high - around 16 times EBITDA globally. “You could argue that this market is very reminiscent of previous late-stage bull markets,” Shafir said. “At some point, you have to say, ‘How long will it last?’”
Zwirn added that the boost in multiples has been propped up by “a very bloated and bubble-y market in CLOs”, enabled by the Fed’s willingness to intervene when the market showed signs of trouble.
The picture is further troubled by - labor shortages, commodity price inflation, and political deadlock. “None of that is a great cocktail mix for a sustainable run in M&A beyond the next quarter or two,” said Shafir.
Sarah Morgan, Partner and Co-Head of M&A and Capital Markets at Vinson & Elkins said that her firm’s clients are already anticipating a potential crunch, a prospect that is pushing more companies to get deals done now. Mark Williams, the CRO for Datasite in the Americas, echoed this assessment. “We’re on pace to do over 11,000 transactions this year,” he said, adding that many of those deals are oriented toward refinancing.
A New Regulatory Regime
Aliaj asked about the impact of increased antitrust efforts from the Biden administration.
“In general, things are a lot slower,” Morgan said. “There’s a lot more questioning, there’s more uncertainty, more risk.” She added that the scope of FTC questioning has expanded to include broader inquiries about pricing, supply chain, and ESG.
Companies are responding by digging deeper into those issues during due diligence. All experts agreed that regulatory issues are high on the list of dealmaker concerns.
Shafir noticed that this is also leading to an increased willingness to litigate - since the courts are precedent-based, they may act as a check on aggressive regulatory enforcement. He pointed to examples like the ATT-Time Warner merger or the recent case against Facebook as examples.
Of course, this protection could be weakened if more restrictive legislation makes it onto the books.
Tax Fears Not Yet a Factor
Despite some concerns about prospective tax hikes, the panelists didn’t see this as an issue that’s currently having a major effect on outcomes. “It’s not entirely certain what, if anything, will pass,” Morgan said, “or when it’s going to be effective.”
Shafir agreed, saying that some of his clients have said something to the effect of “Show me a bill that’s in committee...and then I’ll start to really react.” And according to Williams, Datasite’s platform hasn’t seen an increase in tax-based questions.
Only 29% of audience respondents felt that regulatory or tax concerns would be the biggest driver of deals in the next year. The largest fraction - 38% - pointed to competitive consolidation as the primary factor, while another 24% expected market correction to play the largest role.
The speakers fielded a few questions from the audience about the outlook for M&A in particular spaces. The first was about transatlantic deals. Shafir replied that with a total value above $1 trillion and a 26-27% share of the market, those transactions “aren’t going away anytime soon.”
Another question focused on the US digital infrastructure field. Morgan answered that the market is currently white-hot. “How long that’s going to last...may depend on the infrastructure bill, but it’s very robust right now.”
One viewer circled back to the impact of regulatory scrutiny on ESG diligence. The consensus was that it’s become a major part of the agenda for dealmakers, a trend that’s only likely to increase over time. Environmental concerns are currently the highest priority.
Responding to a poll question about the effects of climate change on geographic strategies, 44% of the audience anticipated a greater interest in local and regional consideration, while 35% expected a shift toward markets less impacted by climate. 21% highlighted the importance of physical proximity in selecting acquisition targets.
Looking to the Future
Given the concerns cited above, the experts were in agreement that the sky-high volumes and valuations we’ve seen over the past few quarters are likely to drop off over the next year. Of course, this still leaves room for a fairly healthy field. Zwirn pointed out that even if M&A starts to decline, other transactions like restructurings are likely to increase.
“It seems impossible that we could continue the completely insane pace of M&A transactions that we’ve experienced this year,” Morgan said. “Across the board, that is pushing people to get transactions done now.”
Look for more insights from Datasite as we see these trends play out in the months ahead.
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