1. Cross-Border M&A – The era of migration transactions comes into full bloom.
Many companies listed outside the US would trade today at higher multiples to earnings and other applicable metrics if they were listed in the US and, even more so, if they could make it into the S&P 500 (which does not require that issuers be organized under the laws of a US state).
The result will be a continuation of these trends:
- Exchange hopping. Issuers listed outside the US will increasingly obtain a second listing in the US, and then migrate over to having the US listing as their primary listing and thereby take advantage of index eligibility that comes with this migration.
- Using excess cash to arbitrage multiples. US-listed companies will use their excess cash to buy targets outside the US. When those earnings become housed under a US-listed company, they will trade at the US-listed company’s higher multiple. Even when paying a premium to the non-US listed entity’s trading price, there will be room for a win/win for the US buyer and non-US target holders, especially if there are some synergies. Buying outside the US will mean digesting terms and takeover rules that are more target-favorable than in the US, as well as often having to undertake more acrobatics than the US M&A regimes require for acquiring 100% ownership. The trading multiple arbitrage will make the effort worth it.
- Stock combinations to back into a US listing. Stock for stock combinations (including mergers of equals) between US-listed and non-US listed companies will provide an efficient way to reap synergies and get that non-US company listed in the US with the multiple bump and index inclusion advantages.
2. Leveraged M&A – The secret sauce is coming together.
The secret sauce of any M&A boom in 2024 will be leverage. The key will not be interest rates, but the size of the debt checks that will be available. Many acquisition financing lenders that rely on syndicating their loans were left with “hung” debt in 2022 and we’ve been hearing for over a year now how that debt needs to be slowly syndicated at a loss before we can return to consistently large debt checks to support leveraged M&A by strategics and private equity.
In the meantime, private credit has stepped in to fill the void, but many strategic buyers and middle market private equity players are not fluent with how to use private credit to build out their pro forma capital structures in connection with leveraged acquisitions.
In 2024, family offices and sovereign wealth money will continue to help boost the equity checks for acquisitions, and bidders in 2024 will up their games on navigating the world of private credit and creating “mosaic” capital structures (i.e., with mezzanine and other investments between the common equity and the senior debt) to get to larger takeovers.
Moreover, 2024 will be the year when both (i) the competition from private credit pushes the syndicated bank loan market to reinvigorate and (ii) the competition and excessive dry powder within the private credit world pushes private credit funds to loosen up on the terms and size of their loans and other investments senior to the junior equity.
The beneficiaries of this trajectory in 2024 will be public company LBOs and leveraged M&A by strategics.
Sales of unlisted, private equity portfolio companies may not benefit. Although there are lots of pre-IPO portfolio companies held by private equity that are overdue for an exit, we will not necessarily see an explosion of these exits through either public listings or sales. The IPO market is still rough for companies that rely on growth forecasts over near-term profitability. In addition, the robust secondary liquidity market will serve as a welcome alternative to sales of portfolio companies. Private equity fund managers will frequently rely on NAV loans and other sources of secondary liquidity at the fund manager levels as the means for returning cash to their LPs, rather than forcing sales of their portfolio companies. We may even see fund managers start to merge because they believe that a combined fund manager with a larger, more robust package of portfolio companies will be better positioned to receive favorable NAV loans.
An important wildcard in this equation will be the US Financial Stability Oversight Council’s proposed rules to rein in the activity of private credit funds. Such rules, if adopted during 2024, may present a headwind for prospects for leveraged M&A.
For a more analysis of what to expect from the private capital world, see Freshfields Private Capital ’10 for 24’: 10 Things to Keep an Eye on in 2024.
3. Regulatory – There is a path.
During what the antitrust bar now refers to as “the before times” (i.e., when Lina Khan was an academic and Jonathan Kanter was in private practice) whenever an antitrust expert would warn a board, “It is going to be very hard to get this merger approved by the antitrust agencies,” the board would typically respond, “Then work hard!”
Then came this current era of bipartisan support for heightened antitrust enforcement in the US, alongside a European Commission and UK CMA that regularly vie to outdo each other in their fervor to create obstacles for M&A. Moreover, during the last two years, we witnessed the energetic development of foreign investment regulatory regimes in virtually every developed country. During this new era, boards have pivoted away from the view that any antitrust hurdle ought to be surmountable if advisors have the right work ethic. This current era has been characterized by board rooms that reek of intimidation by the nightmare of agreeing to sell their companies, being tied up for 18 months by interim operating covenants, and ending up as “damaged goods” without closings and with only the receipt of regulatory reverse termination fees.
2024 will be the year when the M&A world pivots once again by exhibiting confidence that we’ve figured out how to manage the fear of this nightmare:
- Bidders will regularly come prepared with detailed action plans and substantive analyses to proactively put to rest regulatory paranoia in target boardrooms.
- Target counsel will realistically assess risks by discussing not only the likelihood of an agency trying to block a merger, but also the dual likelihoods of prevailing against the regulators in court in the US and of being able to cut predictable settlement deals with the regulators outside the US.
- Merger agreements will contain more detailed undertakings that provide more comfort that there is a pathway to expediting processes with regulators.
- Parties will more aggressively and proactively deploy “fix it first” and “litigating the fix” approaches to minimize regulatory approval risks.
4. Dispersion breeds activism and now finally M&A.
As investors return to equity markets and cause continuing upticks in stock prices, all boats will not rise equally. Dispersion will make it easier for activists to identify those listed companies lagging their peers, and the activist attacks on these laggards will characterize 2024. The results will initially be changes in board and executive management composition and most likely operational and strategic shifts, including cost cutting and reallocation of capital. Pushing for sales of listed companies was not the preferred strategy of activists in 2023 (and indeed many activists launched campaigns to oppose sales of companies during the last year). Instead, the focus in 2023 was consistently on cost-cutting and margin improvement.
In 2024, as leveraged M&A picks up (see item 2 above), activists are going to pivot back to the days when they would regularly complement their pushes for operational reforms with threats that wholeco sales will be necessary if those reforms do not result in quick improvements to performance and shareholder returns.
5. Optimism in board rooms leads to hostile M&A.
Upticks in stock prices during 2024 will feed optimism in board rooms about standalone plans and that, in turn, will make resistance by target boards to takeover entreaties more common. At the same time, in the board rooms of bidders, directors will continue to feel pressure from investors to use their companies’ excess cash and highly-priced equity to do accretive acquisitions wherever available. In addition, board room optimism leads to taking risks on allocating capital to acquisitions rather than the more conservative approach of share buybacks. The result is that we are going to have more companies committed to acquisition strategies in 2024, while at the same time we will have more of the companies on their lists of targets remain enthusiastic about their stand-alone prospects. The result will be a boon for unsolicited and hostile M&A. Many M&A advisors over the last several years have done very well nursing friendly combinations. There will be a premium for M&A advisors who are expert, from prior eras, on unsolicited M&A tactics.