European M&A keeps its frantic pace

It has been a frenetic twelve months for European M&A. The market has been buoyed by private equity, the rise of special purpose acquisition companies and pent-up demand. A roundtable of five experts discussed the challenges of rising valuations, remote deal-making and predictions for the year ahead


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Roundtable attendees
Birger Berendes, co-head of M&A for EMEA, Bank of America
Julia Crawley-Boevey, head of EMEA M&A, Dentsu International
Stephen Long, head of M&A, TMF Group
Bob Petrocchi, co-head of business, SS&C Intralinks
Claire Wills, London managing partner, Freshfields Bruckhaus Deringer

How has the past year been for M&A?
CW: We did have a pause when we first went into lockdown. After that pause it became a completely frantic M&A environment - and it still is.

BB: Absolutely. I would say the first couple of weeks into the pandemic things briefly slowed down. But then as soon as the Fed opened its balance sheet and European leaders said “whatever it takes,” that jump-started the market again.

And what about valuations?
SL: It is difficult to compete in some processes. It’s a hot market, but as a trade buyer you rely on the fact that you should understand the market better. Fundamentally, you just have to be disciplined. So there are certain processes now that we choose not to compete in because we know it’s going to be a feeding frenzy. And we work harder to find bilateral opportunities with targets that see the benefit of working with a trade buyer.

JCB: It is difficult. There’s a huge gap between sellers’ and buyers’ expectations. We’ve seen some companies that came to us pre-Covid that took themselves off the market and are coming back, and they’ve got the same valuation expectations. It’s not that those don’t stand, but what is the norm now?

BP: Yes. Justifying the multiple seems to be an interesting part of the deal right now. You can see that rigour in the amount of back and forth [between buyers and sellers]. It’s just different than we’ve ever seen. There is a lot more work going on.

CW: I think that’s right. There is a lot of examining legal documentation these days. There is a lot of competition for [great businesses] and people are having to be very thoughtful and competitive on deal terms.

Is private equity driving up valuations?
JCB: The downside of the private equity boom is that it’s driving up market expectations. So even though a potential target won’t actually seek private equity investment, they will happily take the comparable deal stats. It’s kind of a mismatch.

BB: But on the other hand, they are flush with portfolio companies, and they’ve prepared lots of companies for sale in the spring to summer last year which were then held up. Come September/October, everyone was rushing to resume those sales processes because no one knows how much longer so much liquidity is going to be in the market.

What about so-called blank cheque vehicles, known as SPACs?
BP: It really hit more significantly in the US markets. It’s slowed down a bit, but it’s been almost 10% of our new deal flow for the past three months. It’s been significant.

We have a massive pipeline of deals that are going to start to happen. So I don’t think there’s going to be any break

How difficult has the move to remote deal-making been?
CW: You can do deals on a remote basis, you can have effective management presentations, you can have effective negotiations. But is it as much fun? In some respects, it’s quite personal because you’re looking inside people’s homes. On the other hand, I think there is maybe some inefficiency from when you would normally all get together.

JCB: Yes, it’s not easy. One of the things I love about M&A is those initial meetings where you are getting to know someone and you have a really great conversation. You can do that over Zoom, don’t get me wrong. But it’s difficult when your internet cuts out or a doorbell goes. There is something about it which doesn’t quite work. As a people-person, not being able to meet people face-to-face is tough.

SL: Yes, it definitely has slowed things down towards the end of the process. I think when you get to the latter stages of any negotiation, the ability to lock people in a room for 24 or 48 hours and just get it done is quite an effective tool.

Are clients using data rooms differently?
BP: It’s clear when we look at the patterns of the usage of data rooms year-on-year, we see that the hotspots are in quality assurance and legal diligence. The other thing we’re seeing is a lot of video files and drone footage being stored in data rooms because physical site inspections are kind of an impossibility, especially for cross-border deals. It’s really about managing larger data files across the data room.

Will things go back to how they were before?
BP: My flight miles were through the roof. I’d like to go down to maybe 50% of what I was doing before. I don’t think I’ve lost all that much from an efficiency standpoint. But there’s a balance - you still need to be able to see people to know what’s happening.

SL: I think one of the factors that will play into what happens next is the CFOs of all the face-to-face companies that we work for. People convinced CFOs that, “I have to do this [meeting] face-to-face, otherwise it won’t work.” But over the last 12 to 15 months, we’ve realised that’s just not true.

Are you expecting to see any decrease in activity?
BP: We have a massive pipeline of deals that are going to start to happen. So I don’t think there’s going to be any break.

CW: I am anticipating there will be a bit of a summer lull. But I think it’s going to be a very, very busy autumn into the end of the year.

BP: I agree with that. What we tell our teams is that we hope in the last two weeks of August it will slow down. And we would expect people to take vacation as much as they can because I don’t see the velocity abating. In September, we’ll be right back where we are at
the moment.

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