The article below is from our BRIEFINGS newsletter of 30 September 2020
After a challenging second quarter, M&A volumes have picked up in the second half of the year, marking a near return to pre-COVID activity levels. We sat down with Investment Banking Division’s Colin Ryan, co-head of M&A for the Americas and global co-head of Technology M&A, and David Dubner, global head of M&A structuring, about the factors driving activity.
Mergers and acquisitions activity appears to have surged in recent months. What are you seeing today?
Colin Ryan: After a significant slowdown in April and May, we have seen a significant acceleration in new deal activity over the summer. In fact, July not only represented the strongest month of 2020 but also exceeded average monthly volumes experienced over the prior five-year M&A bull market. On the back of a strong equity market rebound and supportive financing markets, recent strategic dialogue and execution activity are beginning to translate into announced volumes. So far, the fall is off to a strong start. In fact, we’ve seen a significant uptick in announced M&A deals over the past few weeks. Announced M&A volumes have broken through the $1 trillion level for the September quarter which represents a significant rebound back to pre-COVID levels.
How would you characterize the M&A activity in the market?
Colin Ryan: The M&A activity we’re seeing is broad-based across sectors. All segments of the market across deal sizes, geographies, buyer types and industries are participating in this recent recovery. Big deals are also back, as evidenced by Nvidia’s $40 billion acquisition of ARM and Illumina’s $8 billion acquisition of Grail, while the depth of the market can be seen by the rebound in number of deals. Most importantly, leading metrics, such as new solicitations and conflict checks, indicate that this trend will continue into the second half of the year. Corporate carve-outs and a general move toward portfolio rationalization are in focus, as well as partial sales where sellers retain some ownership in order to participate in future upside as markets and economies improve.
As we move into the second half, all eyes are on the upcoming US presidential election. How is that affecting corporate M&A activity?
David Dubner: With the upcoming elections, many of the companies we speak with are assessing the potential for US tax reform and tax rate increases—which, we believe, is a tailwind for M&A activity in the current environment. That’s because former Vice President Biden’s campaign has proposed a tax plan that would increase corporate and individual rates, which may be implemented in some form if Democrats win the presidency and win a majority in both the House and Senate in the November election. From a corporate perspective, higher tax rates would lead to lower after-tax cash flows, which—all else being equal—would reduce a US buyer’s ability to pay and reduce a US seller’s valuation. As a consequence, M&A dialogue continues at a frenetic pace as more companies attempt to position themselves across a host of possible regulatory, economic and pandemic-related outcomes.
So how are the elections impacting strategic activity?
David Dubner: Broadly speaking, an increase in the US corporate tax rate may make tax-efficient structural alternatives, such as spinoffs and joint ventures, more attractive. In addition, Biden’s proposal also includes a Global Intangible Low-Tax Income tax rate which would essentially double the tax rate that US companies pay on non-US earnings. If enacted, that creates an incentive for companies with a geographic footprint outside of the US to bring operations back to the US—a move that some companies are already evaluating as they seek to gain greater control over their supply chains amid the pandemic. From a sell-side perspective, we’re seeing companies and financial sponsors consider accelerating capital gains and carried interests through sales of non-core businesses, while other value investors are looking across the public and private markets for assets to invest in. Many large corporates are also reevaluating their cross-holdings, or investments in other companies, and are seeking to monetize those investments.
What types of investors have been the most active in M&A?
Colin Ryan: Strategics have been at the forefront of market activity but we have also seen private equity engage in more creative deals such as PIPEs (private investments in public equity) and other partial control deals. One of the most innovative segments of the market has been the flurry of SPAC (special purpose acquisition company) M&A transactions, with over $83 billion of volume this year. The upcoming election and the potential impact on longer term tax rates is a keen focus for both corporate and private owners of assets and we expect to see an active sell-side market over the next several months.