Last month, we discussed the unprecedented levels of M&A activity. In this blog, we will dig into some of the details surrounding funding and the effect that SPACs have on the environment.
Sponsors Lead the Way
This year, sponsor led M&A activity is higher than we’ve ever seen. It’s double what it was last year at almost $1,900B, and almost double the previous high (2018) at $1,027B. Sponsors account for over 36% of global M&A volumes this year; their highest share ever.
Sponsors and corporates are also well armed for opportunities ahead. Private Equity has over $1.1T in NA available funds for deals, and $2.3T globally. Corporates have a record $2.0T in cash sitting on their balance sheets.
SPAC Deals Fuel the Surge
A significant part of tall this deal making is SPACs, which we discussed last month. We thought SPACs would reduce from earlier this year, and they have. January thru March were huge for SPAC IPO volumes and the numbers have come back to more normal levels, but October and November have picked back up. In SPACs alone there will be over $750B of M&A over the next coupe of years. One key item in SPACs is that the cash raised can only be held for a period of time, and then the money must be returned. The money is held in a trust and is secure. If there’s no deal the money is returned to shareholders. The process is call de-SPAC. So, these SPAC s are under intense pressure to get a deal. SPACs create an intense deal environment just by their own nature. For example, in 1Q 2023, over $80B in SPAC funds expire and must be returned. In 3Q 22, there’s $49B to expire, and $86B by 4Q 22. Right now, we are averaging about a 65% SPAC redemption rate. Its intense right now, and based on what we see, it’s not slowing down.
Cross Border Changes Balance Out
Cross Border M&A activity also improved in November. Cross Border M&A activity is at its second highest levels ever, with volumes improving in November. What’s interesting about cross border activity is that it used be Asia with all the activity, and due to trade issues with China, the amounts from that region have reduced. Europe has taken over most of the activity. Right now, we’re at about $1.4T, which is double 2020, and may break the record from 2007 at $1.6T. We will see what happens.
Premiums Disconnect
One of the interesting dynamics in dealmaking is premiums. Right now, premiums are elevated, with YTD average about 1.3% over the long-term average. Normally what will happen in pricing is that once equity prices increase, then premiums compress. However, this dichotomy hasn’t happened yet, which is unique. Equity prices are high, and so are premiums. So, it’s no wonder when you look at Median Firm Value to EBITDA, that we are over 2 points over the long term trend! My view is that given this out performance, I’m not sure it will continue to go higher. It certainly could, but given these elevated levels, I’m in the group that thinks we either remain here or trend lower.
Cash Is King
One final interesting point on deal making I will highlight is the use of cash on deals. Right now, the use of cash as a deal currency continues to rise, with all cash deals accounting for 63% of November’s transactions, up from 52% YTD. Cash and cash stock account for 75% of the market. This is also giving rise to alternative lenders, asset-based investment lenders that create superior return for their investors. What’s causing this? Liquidity, and we’ve talked about liquidity before. As long as there is so much dry powder, government infused liquidity, we will have this increase in cash deals.
Outlook
My view is that the effect of cash, the effect of so much liquidity in the market, is cause a significant increase in deals. Also, given that we have so much cash still available, the deals will most likely continue at this rate for the foreseeable future. We are at such an elevated rate right now; I do have a hard time seeing it increase from here.
Maybury Partners, LLC 