M&A update: Activity heats up as confidence improves

Regulatory overreach curtailed, activist investors seek to unlock value

Dealmakers continue to affirm that there is a healthy backlog for merger and acquistion (M&A) as rising market confidence on the back of improving inflation, expectations of interest rate cuts, improved deal financing conditions, and narrowing valuation gaps unleash pent up deal demand.

Global M&A totaled over $1.6 trillion through the first half of 2024, up 17% from the previous year. While broad M&A continues to recover, mega-mergers are also on the rise, with 17 deals valued at over $10 billion announced through the year.¹

The pace of private equity led buyouts has increased by 41% from last year through the first half of 2024 driven by several take-private deals improving prospects of more leveraged buyout (LBO) activity through the year.² While credit conditions and expectations of rate cuts have driven a recovery in financing conditions for acquirers, the growth of private credit, which has taken a share from traditional bank loans in recent years, is also a favorable tailwind.

Large U.S. corporations armed with bolstering balance sheets are moving forward in their pursuit of targets, with the regulatory environment and economic backdrop showing signs of normalization.

Regulatory overreach reined in

There was a notable development with far reaching and potentially massive implications for the U.S. regulatory environment at the end of June.

With the conservative majority established in the U.S. Supreme Court through the various appointments from the Trump administration, the Supreme court ruled on a case at the end of June that would overrule decades of legal precedent known as the “Chevron deference.” The deference was established in 1984 involving the oil and gas company Chevron Corporation and gave federal agencies wide powers to interpret laws and decide how best to apply them. The deference has been used in more than 18,000 federal court decisions allocating authority to federal agencies.³

With the overturn of the deference, the Supreme Court has slashed and weakened the power of regulatory agencies such as the Environmental Protection Agency and the U.S. Food and Drug Administration. From an M&A perspective the hostile regulatory environment established under the Biden administration through heavy-handed enforcement from the Department of Justice and particularly the Federal Trade Commission (FTC) could be hindered with this ruling.

The FTC proposed a new regulatory framework last year establishing new guidelines that increased the scope of how mergers would be assessed and ultimately blocked. With the overturn of the deference, the FTC and other federal regulators will have far less latitude with less regulation burden being a potential tailwind for deal activity.

Outlook

Equities continued their positive streak through June with the S&P 500 advancing 3.6% and 15.3% through the first two quarters of the year, while the Nasdaq surged by 6%.

The U.S. economy continues to fire as technology and the Mag 7 companies continue to lead equity market returns. U.S. Treasury yields fell during the month with May CPI indicating that prices were flat as inflation loosened its grip on the economy. The Fed has remained cautious as the labour market remains strong, with the U.S. unemployment rate at 4%.

In Canada the S&P/TSX Composite Index (CAD) was down 1.4% as the economy showed mixed signs, with unemployment increasing while CPI rose, driven by higher service costs.

We remain optimistic on the outlook for small- and mid-cap M&A going into the second half of 2024. As evident in the acquisition in Copperleaf, acquirers are circling many high-quality small-cap companies. As the gap between buyer and seller expectations narrows, there is increased potential for a definitive deal to be struck.

Our equity funds are involved with several companies with activists actively seeking to unlock value in the shares and urging management and boards to run a process to sell the company. As equity prices continue to rise and fixed-income markets trade with tight spreads, there is ample capital to finance deals.

Shifting political dynamics, with a U.S. election this fall and Canadian election expected next year, are also creating an incentive for acquirers to strike a deal at a bargain today given a more hostile regulatory environment, on the hope that a change in the regulatory environment will allow that deal to be approved in the future.

Notes

1. Umer Khan and Audrey Elsberry, “Large global M&A deals reached 2-year high in H1 2024,” S&P Global, July 9, 2024.

2. Anirban Sen and Anousha Sakoui, “Dealmakers optimistic on global M&A prospects despite sluggish growth,” Reuters, June 28,2024.

3. Amy Howe, “Supreme Court strikes down Chevron, curtailing power of federal agencies,” SCOTUSblog, June 28, 2024.

Amar Pandya, CFA, is Portfolio Manager of the Pender Alternative Arbitrage Fund and the Pender Alternative Special Situations Fund at PenderFund Capital Management.

Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in net asset value and assume reinvestment of all distributions and are net of all management and administrative fees, but do not take into account sales, redemption or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication is intended for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter and is provided for your information only. Every effort has been made to ensure the accuracy of its contents. Certain of the statements made may contain forward-looking statements, which involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

Image: iStock.com/KentWeakley