Game of two halves

‘This is my third lockdown at Latham,’ laughs Sam Newhouse, the M&A partner who left Freshfields Bruckhaus Deringer a year ago for Latham & Watkins just as the coronavirus pandemic started to tighten its grip. The observation is poignant. In the Covid-19 world, we have all become used to delineating the passage of time in unusual ways as this alternate reality smudges the lines between working and home life.

However, if you are a member of the dealmaking community, the other obvious way in which to assess the annus horribilis just gone is to tot up the number of deals you’ve done from the comfort of your dining room, study, living room or kitchen. Looking at Mergermarket data for the past year, it is clear that 2020 was a game of two halves – in essence – the initial shock of the pandemic and the swift recovery.

The headline stats are striking. While the word ‘unprecedented’ has been bandied around to the point of ubiquity, it is hard to find an alternative to describe global M&A activity levels in the second half of 2020. $2.2trn of deals were done globally in H2 2020 – the highest half-year value since records began – while in the last quarter of the year, $1.2trn of transactions were announced globally, the highest quarterly value since the effervescent pre-global financial crisis market of Q2 2007.

This was something of a saving grace after an unsurprisingly depressed first half that saw $971bn of deals done amid a 7% year-on-year decline by value and a 16% reduction in the volume of deals from 20,767 to 17,545. Although the numbers were unavoidably down, there was still a general consensus that things could -and perhaps should – have been a lot worse.

At any rate, corporate hands at Latham have little cause to complain. Business has been brisk, with the firm topping Mergermarket’s global M&A league tables, having acted on 455 deals totalling $470bn in 2020.

The market comeback was similarly pronounced in Europe, where $847.2bn was spent across 6,658 deals, a 6% increase by value compared with 2019’s $802.3bn deal value. Again, the second half saved the year, with $552.7bn of transactions 88% more by value than H1, when $294.5bn of deals were struck.

Go big and stay home

Defining trends emerged in 2020, many of which by all accounts are set to continue in the coming year. Obvious anxiety in the immediate aftermath of the Covid-19 outbreak, and logistical difficulties around due diligence and tempestuous valuations put the kibosh on big-ticket M&A transactions in the first six months on the year, but most dealmakers are hopeful that those jitters are behind them.

Robbie McLaren, global vice chair of Latham’s healthcare and life sciences industry group and co-chair of the London corporate department, says: ‘It won’t be long before mega mergers like Takeda/Shire take off again. That didn’t happen last year. There was so much gyration in the market that no-one felt confident enough to recommend those deals to shareholders.’

Farah O’Brien, co-chair of Latham’s London corporate department, is similarly sanguine of a return to form. ‘We didn’t see many large scale carveouts and auction processes because large corporates had other things to worry about. Those deals also require detailed site visits that weren’t possible during lockdown. Those big carveouts have already returned this year, although lockdown might push them back.’

Globally, the bigger picture was rosy on the back of a swathe of huge deals in the US, including AstraZeneca’s $39bn deal to acquire Alexion Pharmaceuticals, a shot in the arm for American and English teams from Freshfields Bruckhaus Deringer, Wachtell, Lipton, Rosen & Katz, as well as Macfarlanes. The deal, announced in December 2020, is especially timely as the buyer approaches the rollout the coronavirus vaccine it developed with the University of Oxford, albeit the supply issue is a political hot potato.

Indeed, transactions worth $5bn or more increased from 91 in 2019 to 111 in 2020, with 79 of those announced in H2 2020, as market confidence rebounded, the highest number of such large deals since 2015 when 127 were announced.

Deal lawyers may well be tiring of the phrase ‘Covid-friendly sectors’ but there is no escaping that the tech sector has played a huge part in bolstering M&A activity globally as corporates and sponsors jostle to invest in the pursuit of enhanced digitalisation of products and services in this time of agile working.

That trend is borne out by European tech M&A reaching $120bn across 1,230 deals last year, its highest annual value on record. It is now the number one destination for private equity cash, accounting for a 24% share of the 2020 European buyout deal count, up from 18% in 2019.

O’Brien points to advising NVIDIA on its $38.5bn proposed acquisition of UK-based ARM from SoftBank – the second-largest European deal of 2020 – as being a particular highlight. ‘Personally and from a Latham perspective it was a great deal to have done because of the history and importance of the target. The tech sector is one of the sectors that is consistently resilient.’ She also notes that the beauty of tech is that it’s not just mega deals garnering interest. ‘There has been much more interest in growth-stage and minority investments. Large funds are building out growth teams.’

O’Brien points to advising Silver Lake in Klarna’s $650m funding round as an example. There is also a sense that the upward trend in growth and minority investments is expected to lend itself to more bilateral processes given the ever-increasing aggressiveness of many auctions.

‘Buyers are staying close to management teams aiming for exclusivity. For growth style businesses, it is important to the founder who they will work with. If they build the relationship, they will want to do the deal with that partnership. That will be played out in the stats – there is much more chance of getting the deal done that way,’ says O’Brien.

Pharma, medical and biotech has for obvious reasons also been a major destination for private equity capital with 436 deals worth $71bn – its highest deal volume on record. And private equity has again proved its hardiness with valuations for buyouts remaining frothy in spite of inevitable market upheaval in the first half of last year.

Another trend defining the M&A market through the second half of 2020 was the uptick of special purpose acquisition companies (SPAC), especially in the US. While SPACs have been in the market for several years, the redoubled interest in growth businesses on the back of the tech boom has made them especially popular. Globally, 255 SPACs were launched in 2020, raising $83bn, compared to $16bn across 73 listings the previous year.

SPACs have been targeting increasingly larger deals in the past few years, with the average acquisition size growing to $1.4bn in 2020 from just $92m in 2012. As SPACs can have an acquisition limit date of up to two years, the spike in issuances means these deals will play out in the pipeline for months to come.

The regulatory and tax landscape is such that this US trend has not yet established itself in Europe, however many are expecting that to change. Says Newhouse: ‘A huge piece of the M&A market has been the SPAC deals. Latham has been involved on the buy or the sell side of most of the US SPACs. London targets are starting to look at whether they could be acquired by US SPACs. It has crept over the Atlantic.’

Latham’s recent such mandates out of the States included acting for Aeva in a $1.7bn merger with InterPrivate acquisition Corp, acting for Apex Technology Acquisition Corporation on its $2bn combination with AvePoint and AST & Science on its combination with New Providence Acquisition Corp, set to have an equity value of $1.8bn at closing.

The client goal

While it may be difficult and even insensitive to draw positives from the health crisis that continues to wreak havoc around most of the globe, few would deny that it has enabled many people to step back from the usual routine and take stock.

Newhouse calls it ‘a disaggregation of group-think’ where clients are thinking independently and strategically about their businesses during and post-pandemic. ‘People were forced to sell for different ideals, whether it was part of the strategy or to raise money. They are behaving with different visions of the future in mind. Clients are looking at businesses thrown into difficulty by the pandemic. They are thinking about what the timing is for the hospitality and travel sectors to come back.’

For those beleaguered UK businesses that are unable to stay afloat as government support dries up, all eyes will be on whether the new insolvency legislation will be drawn upon and pave the way for the long-postponed boom in restructurings and bankruptcies.

Then there is the thorny issue of client acquisition with an enforced end to in-person meetings. The solution is again about adapting through necessity. Notes Ed Barnett, London corporate partner and global vice chair of Latham’s M&A practice: ‘Client acquisition and client connectivity is challenging but everyone is in the same boat. The corporate world has transitioned to remote working pretty seamlessly. Relationship management has also transferred to different forum, like Covid-compliant walks and Zoom catch-ups. No-one will be able to say they can’t do that.’

McLaren and O’Brien also point to tightened foreign direct investment rules that have added a layer of regulatory complexity in recent years, with any Covid-related business eliciting much scrutiny. However this is not seen as a major stumbling block, rather a necessity that at worst will delay deals.

For now, the outlook of dealmakers appears positive, with an end to business disarray signaled by the steady rollout of various coronavirus vaccines within sight.

Responsible governance of corporates and law firms alike feels destined to play a greater part in business than ever before and will be the thing that truly moves the dial in the years to come.

Says Newhouse: ‘ESG and energy will be active as traditional energy companies want to change their business mix and profile. The only way to do that is M&A. Culture has defined how firms have approached this crisis. Firms with a good culture to build on have dealt with it well.’

O’Brien sums up the market sentiment: ‘This lockdown has been different from March and April last year when people hadn’t quite worked out how it worked, doing deals remotely. Now everyone can do Zoom and there is a sense that everyone knows what they’re doing and getting on with it. There is more optimism with the vaccine coming out and people are positive about what the future holds.’