International M&A trends – deal drivers and hotspots
July 2021 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
July 2021 Issue
The second half of 2020 saw an unprecedented fightback in dealmaking following the stasis caused by the pandemic. And as far as deal data for Q1 is concerned, the bull run that began in Q3 2020 seems to show no signs of slowing. Mergers & acquisitions (M&A) in the first three months of the year broke the $1 trillion barrier for the third consecutive quarter and we know that Q1 numbers are among the largest ever recorded (according to Refinitiv).
Numerous tailwinds seem set to continue to drive dealmaking over the rest of the year. Firstly, inexpensive financing is still readily available from banks and capital markets, or by way of private investment in public equity (PIPE) financing. In addition, there are a number of businesses that have traded strongly throughout the pandemic and are increasingly considering the use of their stock as acquisition consideration in combination with debt financing, such as AstraZeneca’s acquisition of Alexion.
Secondly, we are increasingly seeing investors viewing M&A as an efficient means for many corporates to achieve short-term rises in trading multiples – through bolt ons and divestitures – and they do not seem to be put off by greater levels of global regulatory scrutiny which might otherwise lead to uncertainties in dealmaking. This is partially driven by active managers who are under pressure, as money continues to shift to passive funds, to drive growth, encouraging them to push issuers in their portfolios toward M&A.
Shareholder activism post-pandemic is also back on the agenda, which is a natural driver of deals. Added to that, there is ever greater alignment between passive strategy groups, such as BlackRock, State Street or Vanguard, and ‘true’ activists, particularly when activists espouse their allegiance to environmental, social and governance (ESG) matters, which means more potential for passives to support the M&A alternatives pushed by activists.
Thirdly, the events of 2020 have polarised the corporate world, and we are now entering a time of winners and losers – this will result in overwhelming pressure to be grouped with the winners. We are hearing more chief executives feeling compelled to turn to M&A as a vehicle to achieve this outcome. Especially in coronavirus (COVID-19) affected industries, corporates are seeking to emerge as consolidators and we are increasingly expecting a rise in mergers of equals – antitrust approvals permitting – as corporates seek scale to ride to recovery. Where there are mergers there are also divestitures – these are more often being mandated by antitrust authorities or pre-emptively being taken on to mitigate future scrutiny, both within and outside the context of transaction clearances.
Lastly, there is clearly renewed aggression among buyers as market uncertainty recedes, especially from private equity funds needing to deploy capital, and from newly raised special purpose acquisition companies (SPACs) with a finite lifespan during which to execute a deal. That means that sellers of quality assets will continue to have leverage to dictate terms with many pursuing the ‘triple track’ strategy of looking at an initial public offering (IPO), buyout or business combination with a SPAC in parallel.
There are currently more than 400 US SPACs looking for targets, representing hundreds of billions of dollars of firepower – taking into account expected PIPE financing – and they are increasingly broadening their horizons in search of deals. Since the start of 2020, almost one in five business combinations with US SPACs have involved a target outside the US, and most of those combinations have been in the last quarter, for example Cazoo chose to combine with a US SPAC, valuing it at $7bn, rather than go down the route of a London IPO.
That said, we are also sometimes seeing considerable disconnects in valuation expectations because of hype around buyer eagerness, uncertain macro factors or divergent forecasts of a business’ recovery coming from investment analysts, management and industry bodies. We are already seeing a greater tendency to try to lean on deferred value instruments such as earn-outs and contingent value rights to bridge the gaps, and more corporates entertaining the possibility of hostile bids where they cannot reach a meeting of minds.
It seems there are, though, ever greater headwinds to getting M&A deals over the finish line. The introduction of enhanced foreign investment restrictions around the world, including the material expansion of Committee on Foreign Investment in the United States (CFIUS) reviews, a new mandatory and suspensory regime in the UK and the EU’s foreign direct investment (FDI) Screening Regulation, have been a feature of recent months, and these will lead to greater scrutiny of cross-border deals. Pharma, biotech and other health-related activities were added to FDI watchlists during the pandemic and will likely remain there during the recovery.
The fast-moving nature of some of these restrictions can make potential issues harder to spot in diligence and we are seeing parties being wary of accepting ‘hell-or-high-water’ obligations to get through FDI processes. We tend to find that while many FDI concerns can be addressed by behavioural remedies, there may well be a knock-on impact on valuation, particularly from a synergies perspective.
In Q1, technology, media and telecoms was the top sector for M&A activity once again, accounting for around 30 percent of global M&A activity by both value and volume, according to Refinitiv. We are now starting to see antitrust authorities globally turning their attention to tech. Many deals involve large tech companies buying start-ups that could have become competitors had they remained independent. These have tended to fly under the enforcement radar, either being too small to be reported or because agencies were not minded to review them. That is now likely to change with the EU, UK and US all increasing their focus on these ‘killer acquisitions’. We are expecting to see much closer engagement between authorities as they look to align on new theories of harm to challenge deals and, where needed, to play to each other’s procedural advantages to build the strongest cases.
Also, the UK Competition and Markets Authority (CMA) has been stepping up its cooperation with international counterparts in a wider sense and has established a reputation as a regulator willing to tread its own path on deal approvals, with CMA decisions contributing to the collapse of a number of global, and often US-centric, deals. Brexit also now means that more transactions face parallel reviews in both London and Brussels.
What all this increased scrutiny and cooperation means in practice is that boards of bidding companies, as well as start-up founders and investors looking for an exit, need to conduct more thorough risk assessments from the outset of transactions and put in place contingency plans to deal with any regulatory challenges. We do not see this execution risk deterring M&A; rather it must be reflected in the deal terms, and those M&A players that recognise the risks and prepare for them will gain an advantage in the market as a result.
Kate Cooper is a partner at Freshfields Bruckhaus Deringer. She can be contacted on +44 (0)20 7936 4000 or by email: kate.cooper@freshfields.com.
© Financier Worldwide
BY
Kate Cooper
Freshfields Bruckhaus Deringer
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