DealTech: Dealmakers Get Comfortable in New Environment – VDR Insight

by Rupert Cocke with analytics by Santosh Shetty
Mergermarket
June 27, 2023
https://www.mergermarket.com/intelligence/view/intelcms-zfmv3r

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Global M&A activity has declined as interest rates have gone up, but early signs suggest that dealmakers are becoming more comfortable in a new macro-economic environment, according to providers of virtual data rooms (VDRs). 

Dealmakers typically open a VDR six months or so before announcing deals, which gives VDRs a unique perspective on upcoming volumes. Markets have been “remarkably resilient,” according to SS&C Intralinks’ Senior V.P. and Co-General Manager, Bob Petrocchi, who sees year-on-year growth in deal announcements in 3Q23. 

Meanwhile, lower valuations and distressed situations are expected to be the biggest drivers of M&A activity in the second half, according to Datasite’s CEO Rusty Wiley. Bolt-on acquisitions, divestitures, carveouts or exits, and strategic partnerships will be the most prevalent deal types, he added.  

Global M&A volumes have fallen sharply in the first half of the year as dealmakers have struggled to factor in a new interest rate environment, according to Mergermarket data.

Volumes for the first half are USD 1.3tn so far, just ahead of the USD 1.1trn registered in the first half of 2020 as the COVID-19 pandemic took hold. In the first halves of 2018, 2019, 2021 and 2022, the figure was north of USD 2trn. 

Datasite CEO Rusty Wiley 

How has the volume of new VDRs on your platform progressed through the first half of 2022?  

It’s been a turbulent time for dealmaking, where supply chain challenges, geo-political issues, soaring inflation, and increased borrowing costs slowed activity and increased caution from buyers. Regional bank failures also sparked some concerns about the state of the financial services industry. At the same time, M&A has been busier than the news cycle suggests, and we are starting to see green shoots of activity.  

Specifically, M&A sale launches on the Datasite platform, which annually facilitates around 14,000 deals, including M&A, restructurings, and IPOs, have remained more buoyant month over month than publicly announced M&A activity. For example, deal kickoffs ticked up 5% in March despite the banking industry turmoil. 

Given that it takes an average of six months to close a deal from opening a VDR, what do you think deal volumes will be like in the second half of the year?  

Headwinds in the latter half of 2022 are subsiding and there is a thawing of the market with companies looking to seize opportunities. New projects on our platform are picking up, as buyers and sellers become clearer on consumer demand, revenue projections and valuations. In fact, a recent  poll by Datasite shows that lower valuations or distressed situations are expected to be the biggest drivers of M&A activity in the second half, while bolt-ons, divestitures, carveouts or exits, and strategic partnerships will be the most prevalent deal types. In terms of sectors, supply chain challenges from the Covid-19 pandemic sparked a deal frenzy in the industrials sector that has yet to slow down. As a result, industrials sell-side M&A has steadily gained market share over other industries, and not surprisingly there has been an 84% increase in average monthly deal kickoffs on the Datasite platform since 2020. Increased activity is also expected in the technology and healthcare sectors.  

Have you noticed any interesting trends recently?  

Effective due diligence is back in style. Choppier market conditions, rising interest rates and challenging financing conditions have resulted in dealmakers spending more time preparing deals and conducting due diligence. Due diligence times have lengthened by a median of 24 days since 2021. Pre-2022, a race was on to complete M&A due diligence as quickly as possible. Now the pendulum has swung in the other direction and taking time pays off. M&A deals with longer prep and due diligence times on Datasite are more likely to report a successful outcome.  Additionally, cross-border activity is rising as companies invest more internationally to strengthen global supply chains. For example, a weaker UK pound is spurring more cross-border deal activity in the UK, as it becomes more attractive to foreign buyers.