Axios Pro Rata: M&A deal DC likes

Plus: Valuation views | Saturday, October 01, 2022

Open in app View in browser     Axios Pro Rata By Kia Kokalitcheva · Oct 01, 2022 Welcome to the first day of Q3! This week, we're talking M&A. 👋 Reminder: Feel free to send me tips or comments by replying to this email or on Twitter @imkialikethecar. Today's Smart Brevity™ count is 1,262 words, a 5-minute read.     1 big thing: Mergers fees are the only antitrust common ground Illustration: Gabriella Turrisi/Axios   There's been years of big talk from Washington about tamping down on mergers that stifle market competition. Now, a bill that's actually likely to reach the president's desk is focused on the only thing everyone could agree on: upping regulatory merger fees (and funding for regulators). Why it matters: It highlights the ongoing gap between Washington and the business world, and among various lawmakers (and the lobbyists they listen to). Driving the news: On Thursday, the House passed the Merger Filing Fee Modernization Act, a bill that helps state attorneys general bring antitrust cases in the venues of their choice. It also requires merging parties to notify antitrust regulators if they're subsidized by entities that are "strategic or economic threats" to the U.S. The Senate, which has passed its own version of the fee bill, will now have to vote to approve the House package. The White House's full-throated endorsement of the House bills means President Biden is most certainly going to rubber stamp them. The big picture: In the last several years, Washington's scrutiny of big tech companies has largely coalesced around calls to stem what critics view as various anti-competitive behaviors. Some proposed laws have focused on the slew of marketplaces these companies operate, like mobile app stores and e-commerce websites. But mergers and acquisitions (M&A) has also been a popular target, with lawmakers arguing that big acquisitions do a lot of harm to consumers and the market. Zooming in: Increasing fees on transactions above $5 billion and lowering them for small deals, is about as uncontroversial as it can get. Even lobby groups that typically work to keep M&A activity as free-flowing as possible didn't spend much (if any) energy talking to lawmakers about it. Instead, they're much more worried about bills like the Platform Competition and Opportunity Act, which would prevent big tech companies from making new acquisitions — an obvious disaster if you're one of those companies, or a smaller one hoping to get bought by a Silicon Valley giant. Between the lines: Whether tech M&A is bad for small startups, the markets in which they compete with Big Tech, consumers, and other stakeholders is where the biggest disagreement gap lies. While critics focus on cases in which large tech companies acquire nascent potential competitors and shut them down, startupland views this exit option as a critical incentive to keep entrepreneurship going. Yes, but: Even this set of bills had some critics. "These bills are detrimental to law-abiding Americans and give more cash handouts to radical agencies pursuing Biden's progressive agenda, like the FTC," NetChoice vice president Carl Szabo said in a statement. The U.S. Chamber of Commerce and other business groups also opposed the bills. The bottom line: That we need to regulate M&A is about all anyone can agree on right now.     2. What they're saying: M&A edition Illustration: Shoshana Gordon/Axios   On Wednesday, Dan Primack and I got to chat with Forerunner managing partner Kirsten Green, and Citi vice chair of M&A Christina Mohr, about what's going on in the market. Some key insights from Green include the following: VC-backed startups and M&A: I think that this year, this is kind of in some ways a really good environment for M&A. It's an environment where people are coming out of the pandemic with strong balance sheets and valuations are in flux… And so I think that it's a time where strategics are thinking about, is it an opportunistic time for us to go in and access new channels of business, form new partnerships? And I think from the other side of the table, companies ... are looking at ... a depressed price and wondering if now is the right time to accept some interest in their business. Lower private valuations: I do think that people are slow to accept the reality that the value of their company is something different or less than it was before... There's enough conversation about it at this point in time and there's enough uncertainty in the market coming from so many different directions … you have to kind of, I think, take a step back and be realistic about the environment that we're in. VC investing in 2022: This year is a lot more constructive. And I think we're having … a lot more success engaging in real substantive conversation with companies — the last couple of years … the market had a layer of euphoria around it… And it's just hard to keep your energy up, but it's hard to keep your discipline up in that market and still do really great deals versus this year where you're having a lot more conversations about the business model, the business environment, how you might navigate the challenges ahead. Founders stepping back – a "For Sale" sign? Absolutely not. I actually think it's really good hygiene that is becoming more kind of acceptable practice for leadership transitions to happen. The person that starts a company versus the person that takes the company public, the skillsets that are needed, and that in ... those two ends of the spectrum are really different.     3. What they're saying: Part Deux ... and now some highlights from Citi's Mohr: Reason for the slowdown: I think that there is obviously uncertainty with respect to both the progress of the stock market, the progress of interest rates, and certainly, some of the geopolitical triggers have slowed deal-making somewhat... The real question you're asking is what's the likelihood of a recession next year? And I will leave that to the economists. But what I can tell you is that even during recessions … our financial strategies groups have looked at dealmaking during all of the recent recessions going back through the last five — and what we see during a recessionary period is a decline in deal-making. Reasons for deals still happening: It's clear that this year was driven by technology, which, depending on whether you're looking in North America or globally, was somewhere between 35% and 40% of the volume. Certainly, it was driven by financial sponsor interest … financial sponsor cash on hand is real, it's at the highest level it's ever been. It's around 2.4 trillion, which is multiples of where it was in 2000, 2017 at about a trillion. Looking forward ... what you'll see is corporate acquirers who always have historically used these types of recessionary periods to build their business ... In fact, when you look at the history of transactions that are done during recessions, they've outperformed those during the great class of M&A transactions. Potential targets: So some of our clients are down as much as 60% and 80% from their highs of last year. So certainly there's that dynamic of 'when can I get to a stock price that allows me to continue to use M&A to feed my growth, reward my employees to operate in the same way that I have historically' ... I think companies do start to think about 'is there a better platform on which I can build the capabilities that I've already built over and above what I do today?' Prediction for 2023: I think we'll see. Investment-grade strategic acquirers continue to dominate the picture. I think we'll also see transactions from financial sponsors. They have probably a little more equity or a little more creative financing.     A message from Axios Subscribe to Axios Codebook     Decode key cybersecurity news and insights. Dive into breaking news and long-term trends in the field, from ransomware and phishing to privacy and data protection to national security and disinformation. Subscribe for free     📚 Due Diligence Axios Markets: Downer (Axios) Adobe defends its $20 billion deal for Figma (Axios) Back to business: health care M&A activity expected to accelerate (Axios) Exclusive: Warren, other lawmakers ask FTC to block Amazon deal (Axios)     🧩 Trivia In lieu of a trivia question this week, I leave you with the collection of newly released text messages between Elon Musk and various others regarding his attempt to acquire Twitter: Read the messages!     🧮 Final Numbers Data: Dealogic. Chart: Axios Visuals     A message from Axios Subscribe to Axios Codebook     Decode key cybersecurity news and insights. Dive into breaking news and long-term trends in the field, from ransomware and phishing to privacy and data protection to national security and disinformation. Subscribe for free   🙏 Thanks for reading! And to Javier E. David for editing and Patricia Guadalupe for copy editing. 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