Navigating the Current M&A Cycle, Regulatory Impacts, and 2025 Market Dynamics for Corporate Development Leaders

0:00Today's episode is brought to you by SMP Global Market Intelligence. Find insight at every data point with the enhanced SMP Capital IQ Pro platform. It's the leading data solution for strategics and investors alike. Discover critical data sets, including coverage of over 54 million global private companies, plus AI-powered tools to streamline your workflow. It's no wonder 85 % of companies in the SMP100 are clients. Learn more at spglobal.com slash pro insights. That's spglobal.com slash pro insights. Hey M &A scientists. Let's talk about one of the biggest time and cost sinks in deal making. Contract review.

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2:24I'm Kisan Patel and you're listening to M &A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M &A deals.

2:48Welcome to the M &A Science Podcast, where we learn from the best in M &A to uncover proven techniques for enterprise value creation. If you're interested in optimizing your M &A practice or want to join our community of forward-thinking M &A practitioners, visit mascience.com and subscribe for a free weekly newsletter. If you want to keep up with us on the go, head over to LinkedIn and follow M &A Science. I'm your host, Kisan Patel, CEO and founder of Deal Room and chief scientist at M &A Science. Today, I'm joined by Joe Mantone, US Financial Institutions News Desk Manager at SMP Global Market Intelligence.

3:26If you're not familiar with SMP, they're a global financial information and analytics company traded on NYSE under SPGI. Joe's going to walk us through some insights from the recent M &A equity offerings market report and dive into current trends, challenges, and strategies for corporate M &A practitioners. Joe, how are you doing today? Very well. I'm doing great. Thanks for meeting me over here at Midtown, hosted by VRC for providing a space to do our podcast today. If you're not familiar with VRC, Valuation Research Corporation, check them out. Joe, Thanks for taking the time to have this conversation.

4:04Can we kick things off a little bit about your background? Sure. Thanks for having me here. It's a great podcast. You guys put out some really good content, so it's an honor to be here. My background, I'm a trained journalist. I got started in journalism at a pretty early age. When I got cut from the high school baseball team, I realized I wasn't going to play second base for the Yankees, so I started looking around for other options. I first got into sports journalism, but then pretty early in my career, I started working for business publications. And I've been doing that for more than 20 years now, I'd say.

4:36I got my first exposure to M &A coverage when I was at the Wall Street Journal. At the time, I was working the night shift. My job mostly consisted of taking articles that were going to paper the next day and putting them online. Sometimes the day shift would need help. And at the time, the journal had this blog called The Deals Blog, and it was run by Dennis K. Berman. I'm not sure if you're familiar with that name. He's an editor for the journal who went to Lazard. He's at a private equity firm now. So I helped out for that blog for the week. It was a great experience just covering deals for the journal.

5:09And then from there, I joined my current team and started covering investment banks. And what's great about working for S &P Global Market Intelligence is we have a ton of access to data, and we're constantly trying to figure out ways to leverage that data. And as you mentioned, the quarterly research paper that we do on M &A and equity offerings, that's a project that I helped start and I'm the lead writer for that. With that, we just look at deal trends and what's sort of driving the activity. And something else that we do is we put out these annual big picture reports that kind of look ahead for the next year, the forward looking and look at what's going to shape, what are the themes that are going to shape different topics for the next year.

5:49And for that project, I worked on the M &A paper. You've been doing this for a while and you're knee deep in data. That's what I'm hoping to learn from you is get a different perspective today. Can you give us like an overview of where the M &A cycle is today? I look at M &A very broadly. I know a lot of your guests on here are practitioners. And for practitioners, they're in the trenches working on deals. And for them, I know it always seems very busy. But when you take a step back and you kind of look at deals from the totality, sometimes you get a different perspective. Right now, I would say it seems like things are improving from an M &A standpoint.

6:23And we've definitely seen an increase in M &A, but it's off a very low base. When we look at the global M &A picture, we're still in the midst of the downturn that started in 2022 when rates started to rise. The current activity is nowhere near the record-setting levels of 2021. At that time, the deal activity was topping about a trillion a quarter, and the number of deals averaged around 14 ,000. We're also pretty below the pre-pandemic levels when the quarterly totals are around$800 billion. There are about 13 ,000 deals a quarter. But that being said, we have seen some positives in the data.

6:58The second and third quarter of 2024, we saw an increase in the number of deals. The increase was small, but it was notable because we hadn't seen that since 2020, where we saw two straight quarters in a row where there's quarter over quarter growth. The third quarter also had year-over-year growth in the number of announcements. And that was the first time that happened in 10 quarters. I'm talking about the third quarter because the fourth quarter, there was a bit of a slowdown with the US election that it was more of a blip. So when we take a step back and look at the activity, where it's increasing, we're nowhere near the top of the market, there's plenty of room to grow.

7:32But we're definitely moving up off the low point, which kind of looks like right now the low point was the third quarter of 2023. Is there any signals or trends that differentiate this downturn from the previous downturn? The last time we saw a sustained downturn in M &A was post-grade financial crisis. And from a level of activity standpoint, it feels similar to the 2012-2016 timeframe. Companies at the time were risk-averse. They were still... The shock from the financial crisis had not worn off. The activity wasn't terrible during those years, but it was just bumping along pretty lackluster.

8:08And that's how it felt the last couple of years. Executives have just been worried about the economic outlook and just not pulling the trigger on deals. But a big difference between now and then is the interest rates are higher. Interest rates were so low for so long that even though they're coming down now, they're still very much higher than they were from anywhere from 2008 until 2022 when the rate hiking cycle began. With the higher rates, it just makes the M &A math more challenging. Yeah, the interest impacts it. Cost of money goes up, and people think twice about the terms of their deals.

8:42Certainly. Given this recent report, what are factors that are driving the increase in global M &A announcements, and what headwinds are still slowing growth? In 2024, we did see an increase in large deals. It really started in late 2023. The fourth quarter, there were some large oil and gas deals then, and then it carried over to 2024. There were 11 deals that had a value over$10 billion in the first quarter of 2024. And going back to 2018, there were only three quarters that had more deals than that above$10 billion. Then those quarters were, it wasn't a lot higher. It was about, it was 12 to 14 deals in those quarters.

9:24So it was a pretty big start to the year for large deals last year. And the number of large deals did slow as 2024 went on. And again, that was part to do with the U.S. election. As the election neared, the number of deals slowed down, but activity picked up almost right away. Prior to the election, the U.S. had been the driver behind the increase in large deals, which I thought that was interesting just because there was so much increased antitrust scrutiny from the Biden administration. It was surprising to see those deals come to market. Under a different regulatory regime, the growth could have been even higher.

9:58So that was certainly a headwind in 2024. for regulators and interest again. From your perspective, what's currently missing from M &A activity? Are there areas where dealmakers should be particularly focused or vigilant? M &A is just not quite firing on all cylinders. We've seen pockets of growth and spikes in certain areas. For instance, M &A activity in Europe jumped in the second quarter, but then in the second half of the year, it fell down. The opposite was true in Asia. Activity was slower in the first half, but picked up in the second half. What we didn't see in 2024 was them increase together and stay up.

10:38It was offsetting each other. We kind of saw something similar in the US when looking at different sectors. Some colleagues of mine, they work for a team called 451 Research, and they do a ton of work on M &A in the business IT innovation space. They focus on tech M &A. Something that they have been highlighting is how some serial acquirers, some tech companies who have been serial acquirers in the past have been pretty much sidelined recently. One interesting stat that we had in the M &A Outlook paper was that Microsoft, Adobe, and Oracle collectively spent$78 billion across 99 deals between 17 and 21.

11:17Each of them did a small deal in 2023 and then were silent in 2024. They were pretty much sidelined. But other areas like oil and gas was very active. Again, just not firing on all cylinders there. Something we've been hearing a lot of chatter about is the lack of private equity activity. It does seem like there's a turn there and things might be picking up from the private equity standpoint. PE has a ton of capital to put to work. In 2024, we did see a number of large deals from private equity firms. It was one of the most active years for private equity-backed M &A transactions of$5 billion and up.

11:55And also, So a lot of what we do is we listen to earnings conference calls of executives. Over the summer, it seemed like there was a bit of a tone shift from private equity. Our private equity news team puts out this sentiment analysis that's based on language used by executives and analysts' earnings calls. We look at Apollo, Blackstone, Carlyle, and KKR. Pretty consistently, their sentiment was trailing. Their average net positivity sentiment was trailing the S &P 500. But in the third quarter, it pulled even. it got decidedly more positive. I really think what was happening there was private equities was waiting on the sidelines before a change in the rate cycle.

12:34And then once it came and then their tone shifted. We've seen the Fed recently pivot to lower rates. How do you see this impact acquisition, financing, valuation? It's certainly a catalyst for M &A. The net take home is that bid-ask spread just narrows. And that should definitely facilitate more deals, just lowers the cost of acquisition and financing, which gives buyers more wherewithal. And that can certainly boost valuations that the sellers receive. And we have seen evidence of it already. Headed into December, our data shows that the implied enterprise value, the EBITDA on global M &A, had really stepped up to what it was earlier in 2024.

13:17And actually, by the end of 2024, it was pretty much close to the 2021 levels, which kind of did a double take when I first saw that. But yeah, it was pretty interesting how quickly it changed. Interest goes down, even it goes up. What should M &A practitioners consider in terms of financing strategies in this changing environment? Explore options. One of our big picture reports focuses on credit. I didn't work on that report. We have a talented team who put it together. And what they were talking about in there was how the overall credit market is growing and new structures are developing. We saw, obviously, there was a proliferation of private credit funds that have come to market in the last few years.

13:57But now we're starting to see more partnerships. Citigroup and Apollo had announced a$25 billion fund. That's an example of one of those. And the private market is just really helps companies that may have otherwise faced unfavorable terms in the public markets so it can bring together alternative arrangements. Private credit also stepped in because banks had stepped back recently in recent years and banks have been tightening their lending standards after the March 2023 liquidity crisis. And they were pulling back because there was concern about credit quality getting worse. And that really helped the private credit funds fill the gap there.

14:34But what's happened though, the deterioration in credit really hasn't come to light. Banks have been in pretty good shape. I do think banks are going to get more aggressive on the lending front. They're looking for long growth right now that just will give companies more options out there from thinking about financing. With all these private credit funds, you have a good point. There are so many of them now, every level, whether you're doing a really big deal or even a small deal, do you think that's going to tighten up? Definitely the increased competition will make it more challenging for them.

15:04But the fact that banks are trying to do those partnership funds, there's interest in keeping some of that going along the lines. Your report highlights a recent drop in equity issuance. Could you share insights into the investor sentiment behind this? Are there any indicators for a rebound in IPO activity? We did start to see some pickup in IPOs during the third quarter of 2024. For US IPOs, the total value raise in the third quarter was higher than the previous two quarters, which was kind of interesting because normally activity slows during the summer months, but the bulk of activity came in July.

15:41And in August, volatility spiked, and we had that weaker than expected jobs report. And there was after that volatility spike, then the IPO market sort of became a wait until next year story. We had the pause around the election. And then once you roll into the holidays, everything is just the windows to the IPO are smaller. But to answer your question, I really do think 2025 will see a pickup. It's just been quiet for way too long there. And there's a lot of pent up demand. From what you've seen, how does volatility affect corporate buyers approaches to equity financing and public market exits?

16:16Yeah, I mean, the volatility just makes everything more tricky. The demand for shares you're trying to exit might not be there and the pricing might not be at the level that you're looking for. If you're doing a stock transaction and you get the price right, investors could reward the buyer's stock. And then both the seller and the buyer could actually see some benefit from it. Volatility definitely has an impact on equity deals, but also volatility also has a significant impact on M &A deals in general. When there's volatility, executive confidence just gets weakened about the economic outlook.

16:50At the end of the day, volatility is just not good for all transactions, I would say. This is a bad taste and the appetite for doing public-to-public type of deals and then even delaying some of these IPOs. Absolutely. Asia-Pacific saw notable deal activity growth that you mentioned while Europe faced political and regulatory uncertainty. What can corporate M &A leaders learn from these regional dynamics? I think the point that we're trying to make in the report was that the M &A recovery has been a bit uneven, even though Europe had a very strong second quarter, but it came back down. It was offset by the growth in the Asia-Pacific.

17:24To me, it just seems that corporate M &A leaders are being selective about the deals they pursue. It's not 2021 or 2007 where it's just deals everywhere. It's just finding the right transaction and pursuing them. Do you foresee cross-border M &A becoming more prominent or geopolitical concerns still holding things back? A big question is how tariffs will impact the market. We're expecting to see the Trump administration utilize tariffs more again. There is a school of thought out there that tariffs can lead to more deals inside the U.S. The thinking is that companies based outside the U.S. will look to do deals inside the U.S.

18:06to avoid tariffs. But once you get into this era of protectionism and trade wars, regulatory approval can become more challenging. So larger companies might be able to feel like that they have the resources to withstand a drawn-out regulatory approval process and the expense of it. But smaller companies might be better off turning to joint ventures or some sort of partnerships. So it's quite possible that we can see an increase in the transaction values across border deals when we look at the big picture. But you might just see fewer deals because, again, the bigger companies might feel like they can pull it off, while smaller companies might not want to dedicate the resources to it.

18:51It's interesting the impact of these political dynamics, how they're going to affect corporate M &A strategies. How do you see this playing about more specifically domestically and abroad? Elections do matter, and government certainly plays a role and can impact M &A. But what I would say is that overall, the economy is the biggest driver to deal-making. M &A slowed down during the early part of the Obama administration. That was driven by the fallout from the great financial crisis. M &A slowed down in the early 2000s during the Bush administration, but that was fallout from the dot-com bust.

19:25Under the Biden administration, the slowdown was largely driven by the need to raise interest rates to combat inflation. However, there is no denying that the Biden administration has been more aggressive in challenging mergers and making and drawing out the process. It brought up some novel arguments, even some of the smaller deals under the Art Scott-Rodino Act. Some of those processes were drawn out. And there was just an increase in the amount of information that was demanded. Second requests. And this had a chilling effect over some deals. I mentioned earlier, large tech deals. There certainly, we certainly saw fewer deals come to market there.

20:05There is definitely a lot stricter antitrust measurements. What's your view in the current census on the issue? and any perspective on how M &A teams should be preparing for the heightened regulatory scrutiny? I don't know how lasting of an impact the Biden administration will have on M &A. Most of their changes were about interpreting or adjusting guidelines. They didn't have a lot of success in court. So there was not a lot of, there's not much in the way of precedent set in cases. I believe with the Biden administration, there was more coordination with global regulators, and we'll probably see less of that from the Trump administration.

20:48That's one thing to think about as we go forward. That being said, I think it's sort of an open question on what the antitrust is going to look like under the Trump administration. The tech industry is certainly expecting to face more antitrust scrutiny. and during the first Trump administration, we certainly did see some challenges to deals. You know, the numbers didn't go down to zero or anything like that. The consensus is more along the lines of, we'll kind of wait and see what happens. Everyone's more bullish on M &A right now. If there's a tax relief given the company, that's obviously going to give them more ability to make acquisitions.

21:26And if we're going to stimulate the economy, that bodes well, but interested to see how the anti-trusting is going to play out. It is. That's tough to say. what specific strategies are there for mitigating regulatory risk? Have you seen anything, especially with these industries that are more prone to it, like tech and finance? So the one area that I'm most familiar with there, I would say is financials. And one strategy that we've heard banks talk about a lot is reaching out to regulators before announcing deals. On their deal calls, they're telling their investors that we've been talking to regulators, we feel confident.

21:58And they're saying that because the deal has been elongated the process, And that basically adds expense to deals. But reaching out to regulators and getting a comfort level is something that banks have been doing before announcing a deal. Getting ahead of it. Yeah, for sure. Well, I think it's really cool how you guys analyze earning calls. Is there any insights that you've picked up from recent earning calls that could point to evolving M &A strategies or shifts in corporate priorities? The area where I focus on a lot is investment banks' earnings calls. We definitely saw or heard a shift in their tone as the year went on.

22:32in 2024. The early part of the year, executives were talking about how 2024 is more about gradual improvement in M &A after two down years. But then the outlook became more bullish as the year went on in the outlook for 2025. And this was even before the presidential election was just driven by the rate cutting cycle. And again, it's not just corporate activity where there's being more bullish they're also talking about an increase in private equity activity the headwinds that they keep talking to you about is is the global conflicts around the world and just the closing times are being elongated but the private equity piece is really interesting because the increase in private equity and how much of a of an impact that they have on the overall deal environment it's pivotal for the investment banking business that's really interesting that you extracted that Yeah.

23:24You know, one of the things that your report mentioned was that the iBanks are very much focused on recruiting. Like what indicators would you pick up from that in terms of the broader landscape? What tends to happen during the slower M &A times is the advisory focus firms, the firms that are just focused on M &A and providing advice. They tend to pick up more talent in the slower times. The larger bulge bracket firms are cutting costs and that can lead to some talent becoming available. Also, iBankers have a little bit more flexibility to move around when there's less deal activity. If you're not working on anything that's imminent, you're in a better position to move and sit out that period of time on your garden leave.

24:05And for the hiring company, the hope is that new hire can get set up during the slow time and is ready to take advantage when the activity picks up. one of the recent MOLIS earnings call, the CEO was talking about how headcount can get elevated during slower M &A times. And just because you need more staffing to service clients who have deals that are stuck in the pipeline. He was saying, we take on an assignment 18 months later, we can't just drop it. We have to have people to service that client. I definitely think that the headcount gets a little bit more, it goes up during the slower times.

24:38And then for those advisory focused firms, I think they just view it as a time to pick up talent. What are some practical takeaways that corporate M &A teams can use to prepare for the upcoming year? So something to think about right now is the assets that you covet that are backed by private equity, check in on them. Our private equity news team recently put out a chart that showed the average holding period for a buyout portfolio company is at a 10-year high knockover. Those private equity firms, they need to move those assets. They have LPs that want to see some capital returns and the lack of capital returns that they're giving those LPs that hinders their ability to raise new funds.