Let’s make a deal. Lots of them.
2021’s first half witnessed the highest volume of M&A in more than two decades (figure below), Goldman observed, in a note dated Friday evening.
On the heels of 2020’s historic corporate debt binge and frantic equity issuance, corporate cash balances are swollen. In fact, cash/asset ratios have not only recovered from the pandemic slump, but now sit near record highs. Some of that cash is being deployed on M&A.
“YTD, $1.9 trillion of deal value for US-based acquirers has been announced,” Goldman’s David Kostin remarked, “the highest volume of M&A by this point in the year since at least 2000.”
Notably, just over a quarter of completed deal value was in stock consideration through July 15. That sticks out historically. As Kostin noted, when multiples are elevated, the acquirer’s stock is obviously more valuable in transactions, and multiples are stretched to extremes. History suggests around half of completed deal value would be in stock consideration given the S&P trades near 24X on an absolute basis (figure below, from Goldman).
On the other hand, acquirers are paying up. “In the last two decades, the mean deal premium to pre-bid price has been 32%,” Kostin went on to say. This year, for deals worth $100 million or more, that figure is 44%, demonstrating just how hungry buyers are. They’ll pay up for acquisitions in the post-pandemic world.
Obviously, SPACs are an important part of the evolving story. 2021 has already seen more than $100 billion in equity capital raised from almost 340 SPAC IPOs. That’s on top of last year’s issuance. Goldman estimates there’s still almost $120 billion of cash sitting in nearly 400 SPACs looking for a target. SPACs, Goldman said Friday, “could drive $800 billion of M&A enterprise value during the next two years.”
Although nosebleed valuations are a headwind for cash M&A, record-low borrowing costs leave the door wide open for debt-funded cash acquisitions. You can thank, in part anyway, the Fed for that. By extension, that’s another way Fed policy is contributing to deleterious societal trends, assuming you think consolidation and monopolistic M&A isn’t desirable.
On that latter point, Goldman noted that “company managements may find the prospect of growing by way of acquisition less appealing in a stricter regulatory environment.” Last week, “proud capitalist” Joe Biden effectively demonized consolidation in a 31-page executive order aimed at promoting competition across the economy.
“The initiative will affect firms in a variety of sectors, primarily by making it more onerous to complete deals as regulators review the competitive implications of proposed transactions,” Goldman said, adding that “hurdle rates for mergers will be higher and deal break fees greater than they would have been prior to the executive order [while] firms whose business models have previously relied on external growth may pivot to organic growth initiatives to boost profits.”
Dealmaking was a big boon for Wall Street in the second quarter. The word “bonanza” was bandied about. Advisory revenues jumped 83% at Goldman thanks to completed M&A (figure below). IB backlogs, the bank said, were up sharply from year-end and hit a record at the end of June.
The bank ranked first globally in announced and completed M&A, worldwide equity and equity-related offerings, common stock offerings and IPOs.
“We’ve maintained a No. 1 ranking in completed M&A for 19 [of] the last 20 years and have been the leader in equity underwriting for nine of last 10 years,” David Solomon said, on the firm’s Q2 call.
At one point, UBS’s Brennan Hawken asked Solomon about policy risk. “We’ve seen a bit more hawkishness on the anti-trust side, not only with the recent executive order, but also with some of the actions tied to certain deals,” he began. “What kind of an impact do you expect this might have on volumes and velocity in the M&A market broadly?”
“I mean, obviously, the executive order serves [as a] roadmap for a whole bunch of policy priorities that the current administration would like to get done over the next four years that relate broadly to competition [and] consumer protection issues,” Solomon said. “It’s a broad and ambitious range of ideas. It’s something that I think we’ll have to watch very, very closely.”
