By Elle Cathey, Senior Director, Product Marketing
Is the American M&A market just catching its breath after the frantic activity of 2021? Or is this the start of a more profound slowdown? For Datasite’s Q2 Corporate Update, a panel of corporate M&A leaders discussed what we can expect from the rest of the year, and how dealmakers can prepare for the challenges ahead.
Abby Roberts, Datasite’s Senior Director of Product Marketing, asked the panelists and the audience how they viewed the 9% drop in American M&A activity since February.
The speakers agreed that this only looks like a slowdown compared to last year’s breakneck pace. David Buckman, Global General Counsel for Allied Universal, said the market remains active with opportunities. Kimberly Petillo-Décossard, the Co-Chair of M&A at Cahill Gordon & Reindel, seconded Buckman’s view. 2021, she argued, should be viewed as an outlier and not a benchmark.
“We’re seeing some deceleration, but I think it’s more of just a ‘yellow light, proceed with caution.’” she added.
Audience poll respondents were a little more split, but close to half agreed that the recent drop in activity was either a minor blip or a return to normalcy after a banner year.
What factors are driving the current downtrend? The experts offered a few possibilities.
Petillo-Décossard noted that increased antitrust enforcement is sparking caution among strategic buyers. David Garrity, President and Head of Research at FYEO, also mentioned the impact of inflation and economic uncertainty.
“We’re looking at a decelerating economy,” he said, “and if we’re going to have stagflation, how are we going to be able to generate the necessary returns?”
Buckman agreed that economic anxiety may hinder some deals. He also cited uncertainty around the cost of labor, driven by talent shortages and inflationary pressure on wages.
The panelists also identified some positive trends for M&A. For Buckman, the most important was the availability of capital among institutional and private equity sources. Garrity also suggested that renewed strength in the trade-weighted U.S. Dollar exchange rate may be driving cross-border activity in Europe and Asia.
Based on poll responses, the audience overwhelmingly viewed inflation as the biggest headwind and dry powder as the biggest tailwind.
Roberts asked what M&A teams should be watching out for as the year continues. Garrity responded that cybersecurity is increasing in importance as hacks and ransomware attacks become ever more common. Buyers best avoid acquisitions that might result in the acquirer becoming their customers’ weak link by conducting necessary in-depth cyber-risk scoring of targets as part of due diligence.
Petillo-Décossard added that ESG considerations are looming ever larger in the diligence process. That’s especially true as the SEC revises its rules around public disclosures.
“ESG due diligence is an integral part of the dealmaking process at this point,” she said. “You see it hitting valuations, you see it hitting integration.”
And, of course, the regulatory stance of the current administration bears watching. Along with antitrust regulation, Buckman mentioned that labor laws are changing around things like minimum wage, PTO, and sick leave. In the absence of federal legislation, many cities and states are imposing their own standards, forcing corporations to adapt to a shifting regional labor landscape.
Given the tensions and stresses of recent years, Roberts asked the panelists to address the emotional aspects of mergers and acquisitions.
“Emotions tend to be front and center in everything we do,” Buckman replied. Buyers have to be conscious of the difficulties that sellers may face in letting go of what they’ve built, as well as the uncertainty of employees about their job security.
He offered some suggestions for best practices during the integration process. Transparency around the possibility of headcount reductions is key, he noted, together with a willingness to honestly evaluate talent on both sides of the deal.
The panel also talked about handling stress as a dealmaker. The intense pace of 2021 pushed a lot of people to their limits, and though the slowdown is throwing some for a loop, it also offers a chance to reassess.
“It’s nice to be able to take a deep breath, quite frankly,” said Petillo-Décossard. She and Garrity advised seizing the opportunity to look at bigger-picture strategic questions now that the urgent pressure to close deals has abated. And, of course, spending some of that newfound free time on life outside of work.
Looking back at the key dealmaking challenges they’d identified, the speakers offered a few pieces of practical advice.
On the cybersecurity question, Garrity stressed the importance of looking for points of weakness along the entire supply chain. Along with proper handling of access credentials, he advised paying attention to vulnerabilities like coding errors and “internet of things” devices as well as the extent to which the target’s workforce is distributed and using their own devices (e.g. laptops, cellphones).
Petillo-Décossard looked at ESG concerns, laying out the big questions that her firm tries to address with every client. Industry-specific risks came first, followed by location-based issues, ethical sourcing concerns, and finally public disclosure risks. She noted that this is difficult to do remotely - “a lot of it is just getting a sense of the culture of an institution, and that’s hard to do over a screen.”
Finally, Buckman expanded on his approach to post-merger integration.
“Our integration philosophy is really driven by a desire to ‘pull the Band-Aid off quickly,’” he explained. Completing integration rapidly minimizes the uncertainty for both employees and clients and allows buyers to realize synergies that much faster. Buckman said a company accomplishes this through a highly structured, formalized approach, drawing heavily on project management disciplines.
“It never goes quite exactly as planned,” he noted, “but a strong process allows you to manage the unexpected.”
Despite some causes for caution, the panel’s overall forecast for the remainder of 2022 is optimistic. Though we’re unlikely to reach the heights of last year, the prospects for M&A activity remain robust. Stay tuned for further insights from Datasite as we see how the coming months unfold.