Cheryl Chan, a mergers and acquisitions Partner at Davis Polk, talks to Ansarada about the current state of the M&A market in the Americas, as well as predictions for next year.
The market is white-hot and has been for quite a while now.Cheryl Chan, Partner, Davis Polk
Ansarada: What is the current state of the global M&A market?
Cheryl Chan: The market is white-hot and has been for quite a while now. Last year when COVID first arose, there was definitely an immediate pronounced slowing down of the market for a period of time. There was a spate of litigation to terminate existing deals as well as general uncertainty as to what COVID would mean, both of which put a real pause on deals.
But since the end of last summer and all the way until now, we have been seeing a really sustained period of M&A activity. It’s such a hot market that buyers are
being extremely competitive in seeking deals. We are seeing a lot of buyers trying to pre-empt bids to try to bypass the auction, to get exclusivity with the target
and sign on an accelerated schedule, by being competitive with price and terms. Between low interest rates and the fact that companies’ stock prices are high,
whether they are buying through cash or equity, it seems like there is a lot of capital out there for them to use.
Ansarada: Do you think this high level of activity – and high valuation multiples for assets – can continue at this pace next year?
Cheryl Chan: When things first started picking up last year, there was definitely a sense that maybe this was just driven by pent-up demand. I don’t think most
people thought that the activity levels would continue at such levels for such a long period of time. But I think that COVID has brought into focus that there is disruptive technology out there that could be highly valuable. In addition, the rapid way in which COVID keeps evolving has produced a constant stream of new “winners” in different industries, both of which continue to drive deal flow.
Our sense is that people are on the hunt for new, interesting products or companies that are transformative – and they are willing to pay high premiums for that. It’s a trend that was started before COVID, but COVID brought it into greater prominence. So, at least in the near term, I think people will keep considering what is necessary to remain competitive in this market and continue to evaluate if they need to pivot away from what they currently do in order to survive, and M&A is a good way to accomplish this. There are many interesting targets out there that have the ability to be transformative for companies, which may command much higher valuations than people might have thought in a pre-COVID world.
Ansarada: What about companies in sectors that have been negatively affected by COVID? Do you expect greater levels of distressed-related M&A activity?
Cheryl Chan: Last year, there was definitely a lot of distressed M&A. There were many industries that were negatively impacted by COVID, like retail and oil and gas. What we have seen this year is that some of these sectors are rebounding significantly. A lot of them have really recovered from where they were a year ago and doing pretty well now in the new environment, some even better than pre-pandemic.
So, from our perspective, distressed M&A has slowed down significantly. Leisure and travel were very badly hit last year but given the changes with US travel policy,
I think it will pick up again. It wouldn’t be surprising if pent-up demand leads to a rebounding in those sectors, although things might change depending on whether there is a new COVID variant or work-from-home mandate.
Ansarada: What is the biggest challenge for M&A practitioners in the coming year? Is it still the pandemic and possible new variants? Or should dealmakers be worried more about issues like tax reform, inflation, or other challenges?
Cheryl Chan: I am not sure there was any event that drove changes in deal terms and documentation in M&A in recent times as much as COVID did. But the market has evolved now to deal with it. So, going forward I think the pandemic itself probably won’t affect deal terms because of all the change and evolution that happened last year.
One thing that we are looking at very closely, and which could present a challenge to M&A, is the antitrust regulatory environment. We have already seen fairly significant changes on the legislation front, as well as in the FTC and the DOJ in dealing with M&A transactions.
For now, demand is not dampening, but we are monitoring this closely. I can imagine that if we see a significant case in which the antitrust regulators implement the legislation in a way that is unexpected, that may change dealmaking behaviors. I can see that making people pause their M&A activity.
Ansarada: What types of changes to regulatory or enforcement are you most concerned about?
Cheryl Chan: We are looking most closely at US antitrust. There are a number of reasons for this. They have stopped allowing for early termination in terms of
waiting periods, for example. The FTC has also recently indicated that they may send warning letters to companies even after the waiting period has ended, which is a change from prior practice. Another recent announcement is that if a company becomes subject to a consent decree in connection with an M&A transaction,
all future transactions would also be subject to the approval of the regulatory authorities going forward.
Although in practical terms, we haven’t seen this impact transactions as yet, these are significant developments. At the moment it’s all hypothetical as to whether deal flow would be affected, but the legislation is now in place – and it’s a question as to what actually happens in practice.
Ansarada: What about the SPAC trend? There was such a boom in SPACs over the past 18 months, but this has dropped significantly. What is next for SPACs?
Cheryl Chan: I am not sure anyone could have predicted the unprecedented volume of activity in the SPAC space last year and at the start of this year. Nor the very rapid dampening of activity after new regulations and SEC pronouncements came in.
I do think SPACs are going to find it more challenging moving forward. There will be more regulatory scrutiny. It is hard to imagine that they would go back to the same high levels of activity we saw early this year, but I think there is now a well-worn path for them and there will always be industries and companies that would benefit from the structure. SPACs make sense for some companies, and in an environment where the flow is more manageable, it is possible that more of them would have a chance of succeeding, as well. So, I don’t think they will go away.
But that being said, there are a lot of SPACs out there looking for targets. So at least in the next year or so, they will continue to be driving M&A. After that, I suspect it will come down to a more normal and sustainable level – maybe that’s not a bad thing.