Strategic Alternatives

“Deals are being evaluated for their effect on public policy, not just their value.”

Larry Grafstein, Deputy Chairman, Global Investment Banking

How will the rise of activist investors and universal proxies affect deal flow? How is the evolving regulatory landscape impacting current deals? Listen to the discussion for expert perspectives.

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By Vito Sperduto and Larry Grafstein
Published October 14, 2022 | 4 min read
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Key Points

  • Increasing antitrust scrutiny is extending M&A deal timelines and heightening the need to focus on certainty of closure.
  • A lag in valuations means smaller tech companies are turning to big tech buyers, though these are the deals under closest scrutiny.
  • Private equity is well positioned financially but deals in this space should also increasingly come under the regulatory microscope.
  • Shareholder activism has returned after a pandemic lull; companies with a sound, articulated strategy are best placed to handle this well.

How are the Biden administration’s antitrust policies playing out?

Vito Sperduto: One of the things we’re watching closely is how the regulatory agencies are evaluating transactions. The largest players, especially in the technology space, are getting increased scrutiny, even when they’re buying smaller assets.

We’ve counseled our clients to extend the normal estimate of the timeline from announcement to closing, because that has become the norm in the US and other geographies. At the end of the day, good strategic transactions still get done, it’s just a matter of planning properly.

Larry Grafstein: Companies outside big tech still have to be cognizant of the risks of antitrust. The most important thing, almost always, is certainty of closure. If we knew that a deal was going to happen, would we take 5% less from one bidder versus another bidder who had a big antitrust issue? Most boards advised by most law firms and most leading investment banks would take the discount in exchange for certainty. You really don’t want to go through a deal being shot down if you can avoid it. The regulators are well aware of that, and they’re trying to create that sense of deterrent.

Sperduto: Volumes year to date are off over 40% in the US, and over 30% globally. Given some of those announced mega deals, such as the Microsoft and Broadcom acquisitions, the technology sector is actually up by over 20%. It’s other sectors who are trying to figure out how to push the envelope a little and expand into key sectors.

What are the knock-on effects of the slump in valuations?

Grafstein: The drop in valuations in the venture market means it’s much more expensive to raise money, especially as venture capitalists get a little more conservative. It also means the IPO option may not be as predictably available by the time you think you might need money. That leads you to really consider M&A.

So larger companies in Silicon Valley are the logical path for private tech companies to monetize their investments, or take their business to the next level as part of a bigger entity. There will also be an incentive for these companies to sell themselves at fair prices to strategic buyers, which may lead to a lot of scrutiny in Washington.

Sperduto: Currently, there is still a lag in private valuations overall. I think buyers need to take a look at the assets they consider acquiring and figure out how they fit strategically. What happens if I don’t get this asset and someone else does? And then is there an opportunity to get a comparable asset at a different value? I think that’s going to become a bigger issue given the volatility out there.

Are corporates or private equity better positioned in the current environment?

Sperduto: Our private equity clients are more often doing transactions, but at the same time, the financing markets are difficult right now. Meanwhile a lot of our corporate clients are probably better capitalized, and there’s a window where they’re in a better position to do some transactions.

Grafstein: You would think that if you increased corporate market share enforcement of antitrust, that would give an advantage to a private equity buyer. They may be buying multiple companies within a domain, but they don’t always compete against each other directly, and they don’t approach the level of antitrust market share thresholds that all large companies do.

But in Washington there’s an awareness of this dry powder. The administration is trying to constrain private equity in a way that perhaps previous administrations have not – it’s definitely part of that net they’re extending to try to catch certain transactions.

How are companies handling the return of shareholder activism?

Grafstein: Because of the energy dislocation resulting from Russia’s invasion of Ukraine, energy policy and ESG are front and center. It’s almost impossible now to evaluate a deal without looking at that impact.

Sperduto: There was a dip in the number of true activist campaigns in the first half of this year. But the rise of things like universal proxies makes it simpler for investors to raise an issue. And there are a lot of funds that want a greater role and greater access to companies and boards.

Grafstein: Companies have become more sophisticated, because activism has been ubiquitous after the slowdown post-COVID and into the first half of this year. It has become much more embedded in the market.

Sperduto: I think the companies that are dealing with this well are the ones that have a good, articulated strategy, and are constantly reflecting on how they’re doing relative to that overall strategy.

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