Battered investors hope deal frenzy is here to stay

Record levels of private equity funding and cheap debt could put even more fuel on the dealmaking fire

Matthew Moulding
Hut Group founder Matthew Moulding is now a paper billionaire 

Dealmakers had grown used to the quiet. As the pandemic pushed millions of workers into lockdown, companies scrambled to protect their cash by pausing takeover plans and battening down the hatches. Global activity around mergers and buyouts was reduced to a whimper: dealmaking fell to an 11-year low in the three months to June, according to Refinitiv data.

Yet in the past week the market has roared back into life. A flurry of takeovers has helped dealmakers to a bumper September. On Sunday, Nvidia inked the largest deal in the global semiconductor industry with a $40bn (£31bn) takeover of Arm, while Gilead Sciences mounted a $21bn swoop on the biotech firm Immunomedics. 

With the Hut Group also securing Europe's largest online retail float on Wednesday, companies are defying the economic tumult to revive plans to go public. But can this bull run last? With no clear end to the coronavirus crisis in sight, and many sectors still nursing pandemic-inflicted wounds, a prolonged revival could be tricky.

The recent deal splurge has certainly buoyed stock markets. Investors reacted to the mega deals with bigger bets on blue-chip stocks, helping Wall Street and the FTSE 100 tick higher at different points this week. Alongside swoops by Nvidia and Gilead, the markets were encouraged by news that American software giant Oracle would take a minority stake in TikTok, the Chinese social media sensation ordered to offload its American arm by the US government.

The upbeat response was driven by the belief that deal activity would remain high, with tech and life sciences leading the charge. Bio-tech has been lifted by its involvement in fighting the virus, while tech companies have gained traction from accelerating the shift to online for industries and consumers. Some firms are struggling to repair their battered balance sheets, but many tech companies remain cash-generating machines. 

Mike Turner, a partner at law firm Latham & Watkins, which advised on the Nvidia deal, said the tech sector would not only emerge "head and shoulders" above other industries recovering from the pandemic, but would benefit from a wall of capital. 

Nvidia chief executive Jensen Huang

Private equity firms have amassed a record $1.5 trillion (£1.2 trillion) in unspent funds, according to Preqin data. Ultra- low interest rates from the huge amounts of liquidity pumped into the financial system from central banks is also keeping the debt markets cheap and accessible. 

"Private equity has been kicking the tyres on an awful lot of stuff as they try to get comfortable with doing more deals in the tech sector," Turner adds. "Now they are starting to pull the trigger."

Evidence of PE's appetite for tech came last month when investment firms HG Capital, TPG and Warburg Pincus took part in a £9.2bn buyout of Visma, the Norwegian accountancy software business. On Tuesday, Klarna, the "buy-now pay-later" finance company, became Europe's biggest fintech unicorn at $11bn following investment from the likes of private equity firms Silver Lake and GIC. 

Yet, some deals are less about market confidence and more about the exit route. Both the Arm and TikTok deals are examples of transactions driven by forced sellers. Japanese giant Softbank chose to offload Arm after a series of ill-fated bets through its $100bn Vision Fund. TikTok owner Bytedance risked the video-sharing app being banned in the US if it failed to create an American operation free of Chinese influence. Some say these cannot be considered genuine examples of an M&A resurgence.  

Marcus Taylor, who leads UK retail consumer and leisure at investment bank Lazard, says distressed M&A will always make up part of the market, especially in the current climate, but a combination of chief executives' confidence and the availability of capital is fuelling more front-footed activity in many sectors. 

"There is a plentiful availability of capital, and it is inevitable that people will look to deploy that capital where they can achieve an attractive return." he adds. "In particular, CEOs buoyed by a strong performance of their own company’s share price over the last few months may be emboldened to pursue acquisitions, but that confidence remains somewhat fragile in the current environment.”

For dealmakers, an increase in stock market listings is another reason to be cheerful. Wall Street handed American software company Snowflake a market value of $70bn after it floated on Wednesday, while the Hut Group was valued at £5.4bn after listing in London.

Their success should clear the path for more companies to list, although investors may still be haunted by the disappointing floats of Uber, Snap and Lyft that performed dismally soon after going ahead.

The coming months will give a clearer idea if the M&A blitz will spark a wider boom. While coronavirus will toss up more financial pain for some industries, the tech sector's importance in helping businesses survive the pandemic will only add to its strength. With private equity looking to loosen the purse strings and debt markets remaining attractive, the vital signs for an M&A revival look promising.