Herald Chen, CFO and President at global technology company AppLovin, sits down with Ansarada to discuss ongoing trends in the M&A market in the Americas.
You have a lot of businesses needing to transform their businesses, and there is access to very low-cost capital within the debt markets.Herald Chen, CFO and President, AppLovin
Ansarada: Global M&A activity surpassed all expectations in the second half of 2020 and activity has remained tremendously robust so far this year. Do you expect the high level of deal activity to continue through to the rest of this year and into 2022, especially in the Americas?
Herald Chen: Yes, deal activity will likely continue into 2022 because you have a lot of businesses needing to transform their businesses, and there is access to very low-cost capital within the debt markets, while equity markets are also performing well. There’s a lot of dealmaking to be done to accelerate transformation and allow these companies to continue to grow.
On the deal source side, you still have a lot of PE-backed businesses that need to be sold, creating M&A opportunities. And the cost to create new companies has come down quite significantly over time. This means there is a high supply of VC-backed companies to acquire, which shows no sign of slowing down from what I can see.
Ansarada: Are there any particular sectors of the economy or regions, be it in the Americas or elsewhere in the world, that you think will benefit from these M&A drivers in 2022?
Herald Chen: From my vantage point, I expect activity to remain strong in the technology sector. I’m not talking just about tech companies buying other tech companies – it’s any company that’s impacted by technology in some way, which is pretty much the whole gamut. Companies need to use technology to their advantage, whether that’s in automotive, healthcare or retail. There’s no such thing as either online or offline anymore: it’s all omni-channel.
Ansarada: It’s interesting that you bring up the technology side of things, because it does seem no matter what sector you’re in, every company has to be a technology company now to some degree or another. Do you expect digital transformation to be a key driver of deal activity over the next 18 months or so?
Herald Chen: The potential for change is vast. I think most still are underestimating what could happen. Some industries are certainly ahead of others. I see so much opportunity to improve the healthcare sector, for example. It’s among the biggest industries, with the highest growth, yet also the most complex industry, and tech transformation has a long, long way to go. We have also seen the big telecom businesses try to diversify vertically into the media world. It’s not an easy thing to do, but dealmakers are trying to pick their spots to invest in. As some of those deals have shown, this transformation will definitely have bumps along the way.
Ansarada: We have seen a massive amount of fundraising over the last 12 months. For private equity, it still hasn’t stopped. Do you think fundraising on the private equity side will continue to remain very strong in the near to medium-term?
Herald Chen: It’s been rolling and rolling for a long time, with the underlying equity markets increasing significantly over the past few decades. The ability of private equity firms to drive operational improvements and access low-cost debt means they can drive excellent risk returns at strong exit multiples. I certainly see this continuing.
Plus, the capabilities of PE firms have also improved along the way. It’s not just financial engineering – it hasn’t been that for many, many decades. It’s becoming a lot more strategic, a lot more operationally intensive to get businesses improved, and that’s driving great risk adjusted returns within the category.
Ansarada: Certainly – there’s so much dry powder in the market, anywhere between US$1.5-2.3 trillion I believe. But with all that cash comes competition for high quality assets, and the valuations are tremendously high. Do you think there will be a market correction in valuations in very hot sectors, be it tech, healthcare or pharma?
Herald Chen: I’d start by saying that underlying growth of businesses remains fundamentally strong. We have seen businesses grow very quickly despite the COVID-19 pandemic. Even the businesses that were impacted negatively by COVID are ultimately now on the other side. Fundamentally, companies are doing very well and growing at a very high rate, and valuations reflect that.
Of course, you always want to be watching your flanks and figuring out how to manage potential risks if they do come. But at least right now, businesses are growing at very healthy rates. Debt markets are very inexpensive, equity markets are strong and access to capital is high. But I think any investor – whether public or private – needs to be careful what could cause the music to stop.
Ansarada: It does seem like quite a rosy picture for now. But as you say, quite rightly, dealmakers need to keep an eye on their flanks. With that in mind, what are the biggest challenges that dealmakers need to remain abreast of in the near and medium-term?
Herald Chen: We’ve made it through a COVID cycle for now, yet whether or not governments can keep pumping that much money into the economy during future waves remains to be seen. The long-term impact on the global macro economy also remains uncertain. At the end of the day, people need to invest in assets with defensive market positions and durable businesses. Investing in the right businesses with the right growth prospects, the right team and the right markets is a winning bet.