After last year’s explosion of M&A activity, everyone’s been wondering whether the streak can continue. Now the first quarter of 2022 is in the rearview mirror, and our view of the months ahead is taking shape. Datasite and Financial Times teamed up to produce a panel discussion on how the US market is doing and where it’s headed.
The speakers agreed that deal flow remains robust despite a drop from the massive numbers of 2021. IPOs are down year-over-year, but strategic and private equity buyers are doing solid business. Audience poll results reflected a similar cautious optimism - 56% foresaw only a slight dropoff in M&A activity. And 11% expected the breakneck pace to continue.
“If last year was a monsoon, this year is still a very steady rain,” said Marc-Anthony Hourihan, the Global Co-Head of M&A for UBS. Some regions and sectors are facing sharper slowdowns, though. Upstream oil and gas are particularly hard-hit, as are cross-border deals involving assets in Europe - ripple effects of the war in Ukraine.
Reporter Nikou Asgari, moderating the discussion for FT, asked whether the conflict will put the brakes on M&A activity in the US. The group felt there would be a pinch, but not a major disruption. Cary Kochman, Citi’s Co-Head of Global M&A, argued that the war’s main effect on dealmaking will be through increased pressure on an already fragile global supply chain.
Audience members expressed caution, but not panic, about the effect of the war. 85% of poll respondents expected Ukraine to have a moderate impact on US M&A, but only 8% felt it would be a significant factor.
Another potential hurdle for US dealmakers is the Biden administration’s more stringent regulatory stance. Mark Williams, Datasite’s CRO for the Americas, noted a 6% uptick in the length of deal timelines. Oversight periods have increased, and Kochman added the preliminary approach to deals has also slowed down. Potential buyers and sellers are taking more prep time to ensure they can meet potential regulatory challenges.
On the other hand, he pointed out that the larger players in the market may have the ability to push back against novel legal theories deployed by regulators.
“The core of the market, which is the S&P 500-type strategics, really have an abundance of cash…and are prepared to litigate,” he explained.
When polled, 35% of the audience felt that the antitrust focus in Washington is having a major effect on the M&A market, while 41% saw only a mild impact. 24% were simply unsure.
Another limiting factor for M&A transactions is ESG concerns, with the attendant possibility of shareholder activism. Asgari asked the panelists if they expect activist campaigns to ramp up as the pandemic recedes. The answer, by and large, was “Yes.”
“I do think there’s generally an environment that’s ripe for activists,” said Lande Spottswood, an M&A partner at Vinson & Elkins, LLP. She cited factors like volatility, down-trending stocks, and lots of underperforming de-SPACS.
Kochman seconded this view, saying activists have historically benefited from the recovery after periods of economic downturn. He expects the bounce-back after Covid to have a similar effect.
“I think we’re at the first innings of that at the moment,” he said. “And I think we’ll see a lot of that activity if the market sustains itself over the next 18 months.”
In response to these pressures, companies are becoming increasingly proactive about adopting ESG plans. More and more, it’s seen as a crucial piece of due diligence. Williams brought up a recent Datasite survey in which 22% of dealmakers rated diversity and inclusion concerns as a significant risk to deals closing.
The SPAC market formed a major portion of last year’s M&A boom but has since dropped off. Asgari asked whether we’ll see a return to pre-2021 form. The experts agreed that the SPAC process will play a larger role in the market than it once did, but the gold rush is over.
“Frankly, companies that probably weren’t ready to IPO were jumping on the bandwagon to de-SPAC because the pipe capital was there,” said Spottswood. That calculus no longer looks so attractive, but there are still lots of SPACs out there. Even if 20% or 30% liquidate without finding targets, that leaves a substantial amount of cash hunting for assets.
Hourihan agreed that the 2021 surge brought many companies public before they were ready - and he noted some of them are already back in private hands. The poor market performance of some post-SPAC businesses, combined with increased SEC scrutiny, will limit future deals to a smaller pool of targets.
The panelists foresee a strong US M&A market this year, despite a decline from the heights of 2021. Some sectors are seeing a slowdown, but there’s still a large amount of capital in search of targets. Dealmakers who can adapt to the stricter regulatory climate and the supply chain crunch will find that there’s plenty of business to be done.
Note: the link will take you to the registration page on FTLive.com to access the replay.