Global M&A lurches back to life

Keywords Studios, a UK-listed company that provides services to some of the largest developers of video games, has had a challenging past year.

The company’s share price started to weaken in May last year over concerns about how artificial intelligence might affect its business. To add to the pressure, short sellers — investors who profit when a stock drops — made it one of the most targeted listings in the UK.

Swedish private equity group EQT was watching closely. Last week, Keywords announced that it was in advanced discussions on a £2.2bn acquisition by EQT, having previously rejected four of the buyout investor’s overtures.

There is more than just opportunism at play here, however. At £25.50 per share, the latest proposal represents a premium of over 70 per cent to Keywords’ share price prior to the announcement. It is also a big uplift since its initial public offering in 2013, which valued it at less than £50mn.

The proposed acquisition is just the latest sign of a revival in takeover activity as previously timid companies and investors start to find the confidence to pursue major mergers and acquisitions after a period of economic turbulence.

“The market is definitely coming back, corporates are risk-on, there’s an appetite for big deals,” says Mark Sorrell, Goldman Sachs’ global co-head of M&A.

Global takeovers this year have totalled $1.3tn, an increase of 23 per cent compared with the same period last year, according to data compiled by the London Stock Exchange Group.

That total has been powered by mega deals, with acquisitions worth more than $10bn increasing 75 per cent year-on-year to $338bn.

Landmark bids have included oil and gas producer ConocoPhillips’ $22.5bn acquisition of Marathon Oil and Spanish bank BBVA’s hostile €12bn bid for domestic competitor Sabadell, which also owns TSB in the UK. There has also been Australian miner BHP’s attempted £39bn acquisition of UK-listed rival Anglo American, which collapsed this week.

However, advisers acknowledge that the recent rise in deals comes after the worst performing year in a decade and caution that major political and economic uncertainty still hangs over the mergers market.

The biggest variable is the outcome of the US election, where a second Trump administration would be expected to be more accommodating towards large takeovers than another term of Joe Biden, whose economic team has stepped up antitrust enforcement.

In the UK, where the opposition Labour party is the strong favourite to win the July election, business leaders have many unanswered questions about the policies a new government would pursue.

And in the background, the series of interest rate cuts from major central banks that had been expected to start this year continues to be pushed back amid sticky inflation figures.

While M&A volumes are at a two-year high, they are well below the record levels seen during the pandemic and trail activity at the same point in more normal years, such as 2019.

“I don’t think we’re seeing a flood of new deals getting announced yet. We’re just rebuilding the pipeline and it’s going to take a few months to get through that,” says Melissa Sawyer, global head of M&A at New York law firm Sullivan & Cromwell.

Much of the deal rebound has taken place in the US. American transactions account for 57 per cent of the total globally, up from 46 per cent a year ago and the largest percentage of overall M&A in a quarter of a century.

To further sustain this sense of recovery, 18 of the top 20 deals so far this year involved a US target.

Activity in Europe has also risen, recording a 31 per cent increase this year over the same period. The UK has been a particular hub for dealmaking with M&A up 74 per cent annually — even after excluding the failed mega-mining deal.

UK takeovers have been fuelled by lower valuations on the London market, which has been out of favour with global investors since the Brexit referendum in 2016.

This past week the owner of the UK postal service Royal Mail agreed a £5.3bn takeover by Czech billionaire Daniel Křetínský, while US-based International Paper in April agreed a £7.8bn purchase of the UK paper and packaging group DS Smith.

“It’s different here than we had originally anticipated at the beginning of the year because UK M&A — particularly in the public arena — is very active,” says David Avery-Gee, head of the London M&A practice at law firm Weil, Gotshal & Manges.

“There’s a lot more confidence in London and that’s partly because equity capital markets are performing pretty well, but we still see that for traded companies there is a valuation discount relative to the US,” he adds. 

Outside the US and Europe, it has been rockier. Asia-Pacific M&A is down 26 per cent this year, falling below $200bn at this point in the year for the first time in 11 years.

The takeover deals reached this year have also not been evenly spread across sectors or transaction types. Energy and power transactions lead all industries, while telecom and consumer industry deals have dragged.

One particular area where dealmaking has recovered more slowly than expected is by buyout investors. Through the first five months of the year, the value of deals struck by private equity hit $286bn globally, an increase of more than 30 per cent on the same period the year before.

“We are reasonably optimistic based on what we are seeing,” says John Maldonado, a managing partner at Advent International. “It is a healthy mix of sponsor sellers, strategic sellers and some public companies.”

While the number remained some way off the $486bn record set in 2022, it still marked the fourth-highest value of transactions by buyout groups in at least 20 years, the data shows.

Dealmakers say the rebound might have been even stronger were it not for the delays in cuts to borrowing costs and disagreements over valuations.

“You don’t have the same frenzy as 2021 or 2022. It’s on a selective basis,” says Eric Liu, head of EQT’s North American private equity business. “Private equity firms have a lot of capital to invest.”

A major part of the hold-up in PE dealmaking can be attributed to a continued slowdown in private equity firms selling assets to each other, a type of transaction that grew rapidly in an era of ultra-low interest rates. 

A mismatch in price expectations between buyer and seller has led to a number of so-called pass the parcel deals falling through, including potential transactions involving pet food company Partner in Pet Food, commercial laundry company JLA and holiday resort group Center Parcs, the Financial Times previously reported. 

“Buyers generally are being more cautious,” says Dean Mihas, co-chief executive of US private equity group GTCR. “A much higher rate of processes [deals] fail because sellers are hoping to get a certain valuation.”

While activity has picked up in terms of the overall value of transactions, the number of deals inked by buyout groups fell nearly 50 per cent year-on-year over the same period. 

Still, dealmakers say it is inevitable that private equity groups will continue to step up transactions as they are sitting on nearly $3tn of assets globally that must be sold so they can return cash to their institutional backers.

“There is tremendous pressure to return money to investors. If anything, there is increased pressure to get deals done as time progresses,” says Romain Dambre, a partner at A&O Shearman.

Some dealmakers have stayed on the sidelines because of political uncertainty in the US, where the Biden administration has introduced a tough regulatory environment. Regulators have accused Google of using anti-competitive agreements to dominate search traffic, for instance, and have said they will take a tougher stance on dealmaking by large private equity companies.

Blair Effron, co-founder of independent adviser Centerview Partners, says several companies have posted strong earnings in recent months “which is leading to an increase in transactions”. But he adds that “the biggest transactions are still running at a slow pace until there’s more clarity on the macroeconomic and political environment”.

In particular, tougher enforcement of antitrust rules has made completing large deals much more complex.

“Regulation is still a huge issue, and people are still very worried about it, particularly in an election year in the US. I think a number of companies are hesitant to put a target on their back to become a talking point in a political debate,” says Sawyer at Sullivan & Cromwell.

“Tech has been affected more than most sectors, just because the Federal Trade Commission has been highly focused on large tech deals, and small tech deals for that matter,” she adds. “Healthcare has been affected as well.”

But some dealmakers say boardrooms and advisers are learning to live with tighter regulations.

“The regulatory environment continues to be very challenging in the US. But for dealmakers, companies, CEOs and boards there’s more certainty regarding the uncertainty,” says Ed Lee, a partner at law firm Kirkland & Ellis who works on mergers and acquisitions. Companies now have a better understanding of “what to expect with the process.”

Geopolitical instability and technological disruption have created some opportunities for dealmaking, particularly in the energy and financial services sectors, he says. The growing energy demands of technology companies, particularly the processing power needed for artificial intelligence, could spark dealmaking in sectors from data centres to traditional utilities.

“Energy companies see the need and the opportunity to scale up and prepare themselves for a changing world,” Lee says. “You’re able to withstand and adapt to change from a better position with more scale.”

While deals picked up at the start of the year, there remains the potential for a slowdown later on, especially as the US election nears in November. Typically, dealmakers have held off on major transactions around that kind of political event to allow the dust settle.

“Might the election be a bit of an air pocket? Of course it could be,” says Goldman’s Sorrell. “[But] the headline is: We’re in a recovery.”