A review of the worldwide M&A marketplace (2022)

Pablo Iacobelli
Carey y Cía, Santiago
​​​​​​​piacobelli@carey.cl

Report on a session of the IBA Corporate and M&A Law Committee at the 19th Annual International Mergers and Acquisitions Conference in New York

Tuesday 14 June 2022

Moderator

Adam Emmerich Wachtell Lipton Rosen & Katz, New York

Speaker

Thomas Miles Co-Head of Americas Mergers & Acquisitions, Morgan Stanley, New York

Reporter commentators

Paritosh Bansal Reuters, New York

Liz Hoffman The Wall Street Journal, New York

Sujeet Indap Financial Times, New York

After introductions from Adam Emmerich, the session was opened by Thomas Miles, who provided some summary observations on the current M&A environment. He began by showing that M&A activity is still at a high level and, although the global year-to-date (YTD) announced M&A volume is down 25 per cent from the 2021 record levels, it is consistent with pre-Covid-19 levels. He was surprised to see that despite the regulatory complexities, large transactions have driven volume in 2022. This was less surprising given that private equity participation remains very strong, accounting for approximately 37 per cent of the YTD global volume, including six transactions over $10bn of take private by private equity (PE). Activist activity remains strong, being an M&A driver to a large degree. He finished his summary by saying that, globally, the United States has been the most active region for M&A, although levels are running a bit lower than pre-Covid-19 levels.

Miles then moved to the key drivers for M&A activity and explained that market volatility levels are really high, and this is likely to negatively impact M&A in the near-term, particularly in the public company environment. He also felt that the regulatory headwinds, in the US in particular, which carry a harsh tone towards large M&A and certain sectors, may also have a negative impact, although this is hard to qualify. Another driver has been valuation correction, which creates opportunities on the buy side, especially if people are looking to the long term.

To a question from Paritosh Bansal, Miles indicated that most of the deals that were caught in the middle by this volatility have been trying to complete.

Then the conversation led to the availability of debt and its impact on M&A. Liz Hoffman asked if banks are starting to become scared about lending. Miles answered that we are living in an adjustment period, and although it is evident that the cost of capital will affect prices, there is a lot of capital available, and not only from banks. Also, the banks have much stronger balance sheets than in previous cycles so there should not be such concern. Miles added that direct lending and syndicated finance target different markets, and although they compete, they are also complementary.

Going back to key drivers, Miles said that we have a record level of capital in private equity that it is still being raised from family offices and sovereign wealth funds and that capital needs to be deployed and invested. This force will be there and it will help facilitate M&A in the future. Another driver of M&A has been the poor trading performances of many recent initial public offerings (IPOs) and special-purpose acquisition companies (SPACs). Finally, the reshaped view of geopolitical dynamics due to the pandemic and the war in Ukraine may prompt strategic repositioning of corporate assets and increase cross-border activity.

Miles then presented a snapshot of US macroeconomic factors, including gross domestic product (GPD) growth rates, inflation, interest rates, the labour market, and Chief Executive Officer (CEO) confidence. The GPD forecast has come down but remains positive and inflation is expected to be higher for longer due to higher commodity costs and renewed supply chain pressures. Together with volatility, this level of inflation is having an impact on corporate earnings. There is also an expedient hiking cycle with an expectation that the Federal (Fed) will increase its funds rate by an additional 50 basis points (bps) at the June and July meetings, with 25 bps hikes each meeting thereafter. Regarding the labour market, Miles added that it remains tight, being an important engine with strong contribution to real GDP growth but that it could feed into further inflation as wages rise. CEO confidence fell below neutral market sentiment level for the first time since 4Q20, dropping in a very short period of time from an all-time record of 82 to a very low 42.

Miles then remarked that the market is reacting to volatility with an equity correction teasing bear market and a steep valuation correction from 25x to 16x. Except for energy, most sectors have gone down in their trading performance.

Increased level of vulnerability and market decline during disruption periods leads to an increase in unsolicited M&A activity, explained Miles. The average unsolicited activity is around 10 per cent, and we are current at 14 per cent levels.

He showed that despite the M&A market in 2022 being much less than 2021, it has remained active and is consistent with history and particularly pre-Covid-19 levels, because of the drivers discussed, capital availability and strong corporate balances. Large deals are driving market volume which he finds surprising.

Sujeet Indap asked why larger companies are more aggressive. Miles thinks it's because they see opportunities; they are acting when they can as opposed to when they want, and some of these companies are very strategic. When they can do it, they do it. Looking at sectors, technology, real estate, and financial services are the most relevant. The cross-border volume is down compared to the volume historically, having been impacted by Covid-19 and geopolitical uncertainty. In the geographic split the Americas (including Latam) has been the bigger driver of activity. The cross-border activity has been down, but after the effects of Covid-19 it is expected to increase over time. The US companies saw an increase in their investments in Europe during the Covid-19 period. On the contrary, the European countries have suffered a decrease in their investments in the US, but they are still consistent. The big change has been seen in Asia (excluding Japan) because it has not had the upgrade that you can see in the US or Europe. Since 2016, Chinese activity has dropped significantly, and Asian activity along with it. It is expected that Japan will likely revert back to historical levels.

Bansal asked whether the easing of Covid restrictions may affect this decrease in volume in China. Miles said that at some point yes, it affects the M&A market, but he does not see it as a big catalyst. He added that the geopolitical aspect is the bigger factor in this matter.

Miles provided an update on the current US activism environment. He also emphasised that the momentum of activism activity continues in 2022 and that M&A-related demands remain a core thesis for activism. In addition, the intersection of environmental, social and governance (ESG) and activism continues to escalate, and the convergence of private equity and activism continued in Q1 2022.

Miles then invited the reporter commentators to ask him questions and begin a discussion. Bansal asked him what he predicts in the next six months to come. Miles suggested that if this volatility continues it is going to be very hard for M&A activity to take place, so some stability is required. We are probably going to see a short period of stop, look and listen, but many companies are going to believe that two companies together are better than one so either way we are going to see M&A, although maybe at a slower pace.

Hoffman asked about financing of M&A deals and what kind of conditions buyers are demanding. Miles answered that people are in better condition than they were in the last crisis since we are living in a very different environment than in 2008. The financial system in 2008 was much more leveraged than today and corporate balance sheets are much stronger now. There is a focus on making sure that the terms and conditions are clear because of the situation and maybe the terms will be a bit more difficult for the buyers but without affecting the deal flow or the ability to provide sellers with funding certainty.

Emmerich commented that, in his opinion, few people understood in 2008 that they were accepting a lot of funding uncertainty which is a big lesson from that crisis.

Indap then asked about SPACs. Miles indicated that of course 2021 was a spectacular time for the SPAC business. Since the Securities Exchange Commission (SEC) has put into place more rules and requirements, there is not going to be another SPAC boom, but they will continue to be occupied, provided the regulator puts some more definite and stable rules in place that people can follow. Given the under-performance and the early stage of developments those companies are at, it's very likely there is going to be a need for more capital, and there is also an opportunity here. Until now the funding had been more public venture capital but in the future this perhaps will change to more private funding, possibly M&A.

Bansal then asked about ESG and how it is playing into the M&A process. Miles indicated that ESG is becoming a popular focus for due diligence. However, it depends on the company as to where the emphasis is.

Finally, Emmerich asked about how to conciliate deals with Washington rules. He answered that there has to be more focus on antitrust regulation, and these deals will cost more. Big deals are more problematic: they take longer, there must be an antitrust review and there is an element of how that affects and how it can affect a buyer because of the deal. There are remedies that can be successful but indeed it is going to be slower.