Ben Mandell
Hello and welcome to Strategic Alternatives, the RBC Capital Markets podcast. I'm excited about our conversation today around the current environment for M&A and our outlook for deal making in 2025. I'm Ben Mandell, global head of Mergers and Acquisitions at RBC, and today I'm joined by several of my partners, we’ve got Larry Grafstein, deputy Chair of Global Investment Banking at RBC and frequent guest on our podcast. We have Mark Rushton, whose European co-head of M&A, and is joining Larry and I again this year to provide his perspective on the UK and European markets. And last but not least, we have Hank Johnson, who's US co-head of M&A and has been a critical part of our success and growth in the US market over the last 13 years. So welcome gentlemen, and thank you for joining the chat about what lies ahead in the world of M&A. We're recording this on November 20th, fresh in the wake of the US election. So we obviously need to spend time on the impact and expectations under the incoming Trump administration with what we now know to be a Republican sweep of Congress. But before we dive into that, I just want to set the backdrop around M&A volumes so far through 2024. Globally M&A volumes are up around 15%, which is impressive on its face, but that's off a low comp period in 2023. And interestingly, we saw deal volumes down around 20%. So we saw the average deal size increase, which was particularly evident earlier in the year. And while those are the global metrics, they're directionally consistent in terms of the experience across our core regions in the US, Europe, and Canada. We started the year with good levels of activity coming off a strong Q4 in 2023, but the first half of 2024 began to slow. And then somewhat surprisingly, we've seen a pickup again in Q3 despite historical data that led us to expect more of a slowdown leading into the US election. So that brings us to where we are today, midway through the fourth quarter and a few weeks past the election where we saw an immediate strong reaction in the US markets to the positive, including uplift for many of the banks on the anticipation of a stronger deal environment. So Larry, let’s start with you, what do you make of the reaction?
Larry Grafstein
Well, I think there's been experience with Trump in the past, and if you were to try to summarize his economic policy, which obviously has a lot of cross currents, it's always been pragmatic. And I think when you look at the market reaction, you see a couple of things. First, you see a hope that he will be pragmatic overall vis-a-vis economic policy, although he's clearly, there's always going to be an element of unpredictability as to exactly how things like tariffs will unfold. But I think secondly too, there's a recognition that there's a reset of the cost of capital and we've seen this even before the election to some degree, but we see the 10 year continues to be at levels north of 4% in the United States and a belief that that's probably going to persist even as the Fed cuts rates, the longer term rates have gone up. And that's a little bit of a concern about inflation overall, a little bit of anticipation of what Trump's policies might be. And I would just say generally that in a way the artificial environment was the environment of 0% interest rates for almost 15 years. And I think there's a consensus regardless of the US election outcome that we're now in a different era. So I think the reaction has been pretty stable. There's obviously a wait and see aspect to these things, but overall Bayou just went through the statistics for 2024 overall, I think as we'll discuss today, we see a pretty robust feeling of confidence about the deal market looking ahead to 2025.
Ben Mandell
Hank, do you share the optimism that Larry talks about?
Hank Johnson
I generally share the optimism that Larry hit on and clearly the public markets responded positively. As you both noted. M&A naturally isn't as instantaneous, but we're optimistic against the backdrop of lower corporate tax rates and anticipation of a more business friendly environment. We also see companies that have been on the sideline, they need to continue to seek acquisition-fueled growth, portfolio optimization. But at the same time we recognize that we have to be cautious around the impact of tariffs, new HSR rules, some of the presidential appointments, and so there's a checks and balances, but we have cautious optimism.
Ben Mandell
It's interesting from a Canadian perspective, Canada and the US are each other's closest international partners. Hank, you and Larry both talked about tariffs and that's a real concern from the Canadian seat. The US is our most important partner. If Trump makes good on his promise to increase tariffs, then that would almost certainly throw the Canadian economy into a recession. And I think the hope is that not every industry is painted with the same brush and not every country is painted with the same brush. And we will see, in his last administration, he had looked to redo or potentially terminate NAFTA. So I think we're watching that closely to see what happens and the impact that that has on trade and the Canadian economy. And the other factor at play for Canadians is around the exchange ratio. And right now we're sitting at a four year low compared to the US dollar, which on the one hand it makes Canadian goods cheaper, which helps mitigate the potential impact from some of the tariffs, but it also pushes up the cost of imported goods. And I think interestingly, this idea of goods being cheaper potentially puts Canada on the radar of Americans in particular in terms of hunting for assets and businesses given the combination of the strong US dollar strong valuations for US companies and the cheap cost of financing in Canada where government rates are lower than where they are in the US now. So I think there could be an increase in inbound cross border activity into Canada. Mark, curious your thoughts around the potential impacts in the UK and Europe more broadly.
Mark Rushton
I mean the interesting thing, following the announcement of the election, actually European stock market actually went negative in comparison to the states which went up. Now what does that mean? It would suggest that clearly the European investors have taken a more cautious view and are still trying to digest what it actually means. I think the key elements that are driving their view clearly is the impact of tariffs, which from a European perspective is somewhere in the region as stated 10 to 20%, but also not just within Europe, but also China is a very important trading partner of Europe. And actually if the tariffs in China are actually higher than that, then that will have a direct impact on the European economy, so that more persistent inflation may also result interest rate reductions being delayed. And generally just an overall view that there's a lack of growth. Now within Europe itself, I mean there are the political factors in play, the labor government has just come into power in the UK. They've just rolled out a new budget which has actually increased significant taxes on businesses within France and Germany, there is political uncertainty and obviously the situations in Ukraine and Middle East are close to home and clearly they have an economic impact on the outlook as well.
Larry Grafstein
I think there will be some pressure from the Trump administration on European countries to spend more on defense. It's been a major theme of Trump since he got into politics really. And it'll be interesting whether that's linked to trade policy because Trump also, as we all know, is a negotiator and that would be something that I think is a high level theme. The linkage between trade and defense and defense spending is something we all have our eye on.
Ben Mandell
And I think, Mark, you raised an important point about China and I think that that's really more of the crosshairs of the Trump administration and may give hope to closer partners like Canada and the UK and other European countries around the importance of strengthening trade packs with the US in order to mitigate against some of the potential blowback from much heavier tariffs in China. We focus a lot of this conversation so far on the US election. It's been a bit of an interesting year in that there were over 60 countries around the world that had national elections in 2024. One of the things we obviously look for with the new governments coming into power is policy decisions that we're going to make and an important consideration for M&A that we often discuss is around the regulatory environment and what's the ease or difficulty of getting deals, deals approved. And the more common ones that we look at in that are generally around antitrust or foreign policy, foreign investment decisions. In the US we've seen pretty aggressive antitrust enforcement under FTC chair, Lina Kahn in the US although with her term having expired, there could be a shift in the regulatory approach depending on her successor. And then on the foreign investment side, I think there's been a trend globally that's persisted since the onset of Covid around deglobalization and more protectionist policies that we're putting in place. And I know in Canada we've certainly seen a more active and enforcement under the Investment Canada Act and the National Security Act in terms of reviews that are either used or threatened. And clearly there'll be differences in how those are administered under different parties and in different countries. But, you know, expect those main themes to generally persist and to have continued scrutiny, particularly around investments from China, which again we talked about as being in the crosshairs of some of the trade policies. Larry, maybe starting with you for your thoughts around expectations for the regulatory environment that we may be moving into under Republican Congress.
Larry Grafstein
Yeah, I think particularly because not only did Trump win, but he has a Republican senate, a Republican house, the overall regulatory environment for business independent of the impact on mergers and acquisitions is definitely going to be lightening up. And we've all seen the reports about Elon and Vivek with their department of governmental efficiency, but if you look at some of the actual proposals, they're heavily deregulatory. So for example, when in Trump's first term he tried to implement a rule that for every new regulation you cut two regulations in the us. Now he's saying for every regulation, new regulation, you cut 10 regulations. In the US the task force that again, it's just advisory for Musk and Ramaswamy, they're looking at not just shrinking departments but eliminating certain duplicative departments and programs. And of course who knows how that will play out in Congress, but the thrust is very much to shrink the government. If you shrink the government, by definition, there's less bandwidth in the public sector for regulation. And that's definitely something that all the Republicans at all levels agree on, even amid certain disagreements on microeconomic policy that you see among Trump supporters. So the regulatory environment is going to be much different, at least for the next two years, while the Republicans control both Congress and the White House. And then secondly, antitrust. We have certain industries that will be in certain types of deals that will not be subject to the same scrutiny. We've talked about the current administration, the Biden administration's whole of government approach. What did that mean? That meant that they wanted to assess and evaluate any given M&A transaction, not just on the basis of antitrust law, but also how it affected labor, how it affected environmental things. A so-called whole of government approach was really another way of saying, look, we're going to look at lots of different aspects of transactions and make it tougher to actually get to the finish line. There's not going to be a whole of government approach under the Trump administration in this Congress. There will be antitrust enforcement though, and there's still a certain amount of, maybe suspicion isn't the right word, but at least skepticism and concern about the power of big tech. So that's one area of antitrust enforcement that won't necessarily diminish. There's other industries such as defense contractors where certain people in Trump's inner circle are concerned that we don't have enough defense contractors in the US. And so they're a little concerned about excessive concentration there. But overall, and of course I'd love to hear Hank's views on how it affects our sponsor clients and their transactions, but overall there will definitely be less aggressive antitrust enforcement.
Ben Mandell
Hank, any comments about what you're hearing from sponsor clients around any concerns they may have on this topic?
Hank Johnson
Well, I think from private equity, taking a step back, and Ben you commented on the volumes in ‘24, private equity activity is recovering. There was an increase in take privates over the past year, which is encouraging. We are all still waiting for the wave of exits to happen that we've been talking about. Everyone knows the record dry powder, but also the record backlog of assets held. And so we do expect that to come sponsors the financing markets improving will be the biggest driver, right? And the rates coming down in the near term will help sponsor activity. From an HSR and an antitrust standpoint, the HSR changes will have more detailed filing requirements, so it'll be a longer path from signing to closing. But I don't think even though there's been a recent increase in the serial acquirers, it impacts some private equity firms. I think we are very constructive on the outlook for private equity.
Ben Mandell
Yeah, hard to have a conversation about M&A without talking about private equity right now. And it feels like we've been calling for an uptick in activity for a while now. And so I guess at some point we will end up being right, but the conditions certainly seem primed for that in terms of some of the things you talked about, like record levels of dry powder and the financing environment and extended hold period. There also just seems to be more bullish rhetoric right now out of the top PE firms, both in terms of comments being made, but also signs of action around that. And we've seen a number of large private equity firms leading in deal making, particularly with large take privates as you mentioned, which has been a real theme. And Blackstone has been busy, and we've been fortunate to have worked with them on a number of deals around the world, including the 24 billion Aussie dollar acquisition of Australian data center operator air trunk as well as on the acquisition of Tricon REIT based in Canada. So just to name a few. So it does seem like there are signs for liftoff. Mark, any thoughts on that?
Mark Rushton
Yeah, look, in Europe we've seen a significant improvement in sponsor activity as interest rates have started to fall and confidence has improved. Look, as you've mentioned, debt financing markets are open, albeit at higher levels than they have been historically, but that's the new normal and the significant dry powder to deploy and actually some pressure to actually now go out and deploy it. The issue in terms of the key factor why we've seen a lack of transactions has been the buyer sell evaluation gap. This gap still does persist, but it is narrowing. A lot of the transactions that we've been involved with recently with sponsors have included some type of earnout structure to try and just bridge that valuation gap. This works relatively well when you can actually get it on paper, but in terms of actually getting it and getting it on paper is sometimes easier said than done. Look, sponsors we've seen have also been very selective in terms of where they're focusing their time in auction processes. We've seen typically higher dropout rates, and therefore there's been a shift more to bilateral discussions. But really where you see high quality assets on the block, we actually have seen quite a lot of competition. And that just goes to the point around they're being very sponsors, being very selective. There's a large forward pipeline of sponsor assets to be sold just given the lack of recent M&A activity and we expect these assets really to come to market. One is as the valuation gap gets narrower, but also LPs are looking to put pressure on return of capital and that in itself will reinvigorate the capital raising environment and therefore the cycle can continue or restart so to speak.
Ben Mandell
I want to turn the conversation to some of the industries. We've seen technology, healthcare, energy, FIG, have been very active in M&A. I think there's expectations that that may continue. There's been a consolidation theme playing out in energy, which I think that'll end at some point, but no signs of that slowing down just yet. But Hank curious if there's any other sectors that you're focused on.
Hank Johnson
Well, I mean one sector which touches all the different geographies and is in the press all the time is the AI, datacenter and even Bitcoin demands on the grid. And so we see all those are huge users of power, but we see those as growth engines, will drive a lot of M&A, a lot of capital consumption, and it's going to be energy from a generation standpoint, from a distribution standpoint, but there's also going to be a lot of transactions that are in the picks and shovels, if you will, just the suppliers are making it all happen. And so that's a broad-based ecosystem that we see touching multiple industries but also multiple geographies. You referenced AirTrunk with Blackstone Australia data center mean Mark and I have talked about our data center platform, which is clearly very global.
Larry Grafstein
Massive amounts of money going into infrastructure, which is really that theme, right? And so we see very large ambitions on the part of some of our clients, not just Blackstone, but BlackRock, which bought global infrastructure partners this year, Brookfield of course, and Apollo and others. So we see continued demand for that, and that's not always M&A per se, but it's often major financing for almost joint ventures between corporates and financial investors. So there's a lot of that. And then I think there's always some quirky industry impacts of a change of administration. One that I think people are thinking about this time is the effect on health regulation if RFK is the secretary of HHS. How does that affect some of the consumer companies that are involved with packaged foods or fast foods or what have you? So again, will that affect M&A activity? Potentially. Sometimes people do M&A as we all know for defensive reasons, but I think in the energy and infrastructure space, it's very much people playing offense. And then as you say, Ben, tech and healthcare are always strong. Trump is nothing if not a real estate person. So I think he'll probably try to have policies that are good for the real estate environment and we've seen very mixed pressures on different sectors of real estate, notably commercial real estate recently. But the hope is that they can work through that and improve the environment for that. And again, one of the main thrusts of what the Trump administration is talking about doing is stimulating domestic manufacturing in the US. So, that can definitely lead to M&A activity as well as an attempt for people to build new factories and get a bigger presence within the US.
Hank Johnson
Yeah, I think we are mean, we're constructive on our broader industrial clients. With that regard, I think another area that housing related is we're still in a severely underbuilt environment. Building products has been a big area for our firm. And then as you also think about the real estate related, we think this is, and it has follow-on effects across the economy, we can also have follow- on effects from an M&A standpoint. We'd like to see the mortgage rates come down and we think that could spur some activity and also M&A activity.
Mark Rushton
I think we spoke earlier, Hank mentioned earlier in Europe, we're seeing a lot of AI growth obviously in data centers is extremely busy in that sector. We've also seen increased activity in FIG and industrials and services. Home building is to Hank's point, another key area that we're seeing growth in and we can see consolidation occurring there. I think the other element that we've seen within Europe is actually the P2P activity has been a real focus, especially given the relatively lower valuations of European stocks versus North America. And it goes back to my point earlier around high quality assets and in particular we've seen an increase in competition for listed assets when they come into play in 2024, there are around 30 competitive European P2P deals and this compares to only seven deals in 2022. So we see that really, that's something that I think will continue into 2025. I think the other point around Europe is the energy transition sectors are still exceptionally active as Europe looks to drive to net zero. But I think actually within the States that may well not be the case as much just given with new administration coming in.
Larry Grafstein
We talk about something like FIG, obviously a very broad sector in RBC, we completed the large acquisition of HSBC Canada, we're integrating that in our enterprise, but it's not just banks in FIG, it includes insurance, it includes asset management, notably asset managers to some degree. There's a generational shift. A lot of people that have grown up through the boom of the last, either the last 30 or 40 years or, the last 15 years of 0% rates, now have to think about what they do with their companies.
Ben Mandell
One of the things we often talk about in terms of having an important impact as a driver for M&A is on confidence and certainly lots that we've all discussed here today that speaks to expectations for more active M&A deal environment, particularly in the U.S. But there is still uncertainty that swirling about some of these policy decisions, the timing of those, who the individuals will be and what impact they'll have in the various sectors that they're overseeing. Not to mention some of the macro impact around rates and inflation and how that all plays out. Any concerns about that? Giving pause to parties on doing some of the M&A deals that they have lined up?
Larry Grafstein
Inflation's a tough genie to put back in the bottle. And the hope is as we sit here that actually we're on a path to stabilize prices. But that's a concern and it's particularly a concern if it spins a little bit more against us and that requires a tougher monetary policy which could lead to stagflation. And there's a lot of election analysis that suggests that we actually have at least for much of the economy a concern about near recessionary conditions. So if that turns against us and the market breaks, that can certainly be a damper on activity. Of course, there's always geopolitical events that are beyond anyone's control, potentially at least anyone than the US and that can also have an impact. And we all know that we're still in a volatile world geopolitically.
Ben Mandell
An ever present reality for public corporate clients is having to face or be prepared to face activists and activism's been on the rise this year, particularly in Canada and the us not quite as much in Europe, but still a factor there that's influencing boardrooms and I think we expect that that rise will continue. A lot of these campaigns tend to focus on looking at trading performance, operational execution, balance sheet strength, governance and the portfolio mix. Curious, Larry, your thoughts on how boards can prepare themselves around activism?
Larry Grafstein
Look, I think that activism is here to stay. It's ubiquitous. It is here through up markets, down markets, all different types of administrations and political configurations and not just in the US or Canada, but obviously Mark, even in certain Asian markets and European markets, we see that as a factor. We're also though I would say at least a decade into corporates being proactive about activism defense, and so doing your own vulnerability analysis, talking to advisors, not just bankers. And we're obviously involved with a lot of clients talking about these things, but also counsel, also PR firms, investor relation firms, proxy firms. There's an awareness out there on the part of boards that activism is here to stay, it's part of the landscape and it's a fact of life. And so those who face the facts, you can't really solve a problem unless you face a problem. And I think there's now a much more kind of broader recognition certainly in corporate America, maybe corporate Canada, that getting out in front of these things is the right way to do it and that sometimes you're going to have to compromise with aggressive shareholders because that's the better part of wisdom. Also, I think there is an underlying fundamental phenomenon that is driving activism, which is that it's been hard for active fund managers in contrast to passive index managers to outperform the market. And so in many cases, activists are the symptom, not the cause. The activists are reflecting discontent on the buy side and the buy side. I think we all agree, we've been around a long time. All of us is much more sophisticated than was when we joined Wall Street. They do their own work. They of course listen to intelligent sell side analysis, but they very much do their own work, but they only have so much patience and the pressure on them to justify higher fees than what the index funds take is real. And so that kind of fundamental phenomenon is not going away.
Ben Mandell
I think what we've found is, I mean first of all, what you're seeing in terms of live situations, it's almost like looking at an iceberg where whatever is out there in terms of being announced that there's so many more below the surface that either there's private conversations happening on, but you have to be certain that activists are running these screens. And I think where we've done well by our clients is thinking like an activist and doing the work around vulnerability assessments to have those conversations where we bring together the right expertise between amongst ourselves and our M&A partners on advisory expertise, combined with the deep sector expertise that we have from our coverage partners, and then importantly insights from our ECM team and trading partners around market flows and the thoughts from some of those institutional investors. So agree, I think it'll continue. Mark, curious, we see slightly lower activity levels from activists in Europe. What are some of the nuances or things to think about there?
Mark Rushton
I think I like your analogy around the iceberg. I think in Europe a lot happens below the water level. Whilst I think in the states it tends to, well it obviously happens below the water level as well, but more is above water. For example, in the UK there's the corporate broking angle is actually very active. Every listed company effectively has at least one, if not two corporate brokers who are strategically engaged on an ongoing basis with clients and basically almost a second ear to the board. And we get in front of, we are active corporate brokers to a number of large companies, but across the piece we run that vulnerability analysis, and we are engaged with them actively in just giving them some perspectives of shareholders. I think the other piece that I'd add is European activism, although it's a lower level versus the North America, it's still there. In terms of in 2023 it was the busiest year for a European activism. 2024 is tracking to similar levels. Where we see it quite frequently now or very, very commonly is within M&A situations. We've got significant experience in Europe of actually advising boards on this topic when activists really do come in when a deal is announced and they look to shake the tree, so to speak. So look, overall, I think we expect activism to continue to grow, but I think there is that nuance between how things are dealt with in Europe versus North America.
Larry Grafstein
Yeah, there's no stigma anymore to an activist or any buy-side investor coming out against a deal aggressively with very forceful advocacy, often. And that's just a fact of life now as well in almost any M&A situation. There's also much less deference to the business judgment of management and boards ironically, even though boards and management are, as Ben said, much more proactive about trying to be market friendly. But this has been a bit of a mini revolution in the capital markets and it's like all revolutions, it has long lasting impact.
Ben Mandell
Certainly a lot harder to be a board member in this market and in this environment versus a decade or so ago. Guys, this has been a great conversation. I really appreciate you all joining for this. We've covered a range of topics and while each region and specific factor has nuances that will influence how much activity there is, I think we all generally share an optimism around corporate and sponsor M&A to be active in 2025.
Joe Coletti
Thanks for listening to Strategic Alternatives, the RBC Capital Markets Podcast. This episode was recorded on November 20th, 2024. You can listen and subscribe to Strategic Alternatives on Apple, Spotify, or wherever you get your podcasts. See you all next time.