We recently conducted an interview with David Harvey-Evers on the current M&A environment and activities. Below is the transcript of the discussion.
Question: David, we'd like to talk about M&A and your activities in that field. What do you think has been driving the increase in M&A activity that we've seen in recent years?
David Harvey-Evers "Well, of course, at the moment, it's not exactly a boom market for M&A, but that's more a function of recent interest rates and the market volatility has resulted from that in the last six months or so. But prior to that, obviously, we had a long period of growth in M&A activity and really the underlying features of that depending on how far you want to look back at the ultra-low interest rate environment and the benign financial conditions that existed since the financial crisis back in the year 07/08.
I mean there were some other features that have developed over that long period. The growth in shadow banking activity in private capital markets, you know largely driven by private equity and venture capital activity and that in turn has led I think to what you see is a net decline in a number of listed companies as a number of them have been taken private and that's a large wall of very cheap capital that has led to primarily in the technology sector but technology led challenges and almost that be segmented to the market and funded by private capital and a number of companies looking and choosing to remain private. There's been a significant amount of M&A activity that's back those trends."
Question: So if we look at the current environment and some of the challenges that the companies are facing, what is your impression about those challenges and obstacles?
David Harvey-Evers: "Well, I think right now, mostly it’s the uncertainty over the outlook. The really big question is if we are heading into a recession or not. That's both in the US and in Europe and in certain areas of Asia. As inflation is being tamed, are we going to continue to see more increase in interest rates? Those are the big sort of macro factors and some of the consequences that happen as a result of that very rapid rise in interest rates, bank failures like Silicon Valley Bank, Credit Suisse, etc. I think personally it's a little overdone right now, but it's the perfect excuse for a number of people not to take any action or to wait and to pause for now. It looks like that's leading to a fairly significant amount of pent-up demand. There are plenty of companies who appear to be weathering the market conditions just fine and there is stabilization, I guess you'd call it in financing market conditions. So we're all set for a potential resumption later in the year of much more active M&A markets.
Question: Given the low activity, is there anything that companies can do to be more prepared?"
David Harvey-Evers: "I don't think there's anything that companies can do much to drive M&A activity per se. But what they can do is be ready with a response either to approaches if they're on the receiving end of them, having a very clear view of their performance, their outlook, their position in whatever market they're in and the valuation that they believe is relevant and applicable to them. And also have an understanding of what financing market conditions are like, because I think that's instrumental to getting M&A down.
Question: In your experience, looking at M&A deals across the board, what do you think are some of the factors that make M&A successful?
David Harvey-Evers: "I think success is always going to be a matter of perspective, whether you're a buyer or seller, the price that's been paid or received and the strategic position that results from a successful M&A transaction. There's always a saying that both sides of the deal are equally happy or unhappy about the outcome, then it's probably the right one. What you don't really want is an imbalance on one side. From a deal perspective, having a very efficient deal or a deal that runs smoothly. One where the outcome is achieved relatively quickly and smoothly has to be considered more successful than one which is a protracted difficult for actions. There are a number of factors that are likely to affect that. Probably first and foremost pragmatism by both parties to a transaction, you know being realistic about what you want to achieve, what you want or what is documented and the contractual points that relate to that. You know, the level of preparedness on both sides, either with the availability of information or coordinated teams acting in a relatively efficient, pragmatic and coordinated fashion. And then of course the strategic logic of any combination. If 2 plus 2 is going to equal 5, then you're more likely to have a successful outcome than something which is where there's a clear imbalance of perceived benefit or motivation."
Question: Switching to the regulatory landscape, how do you think regulation is affecting M&A activity right now? Do you see any impact or any change in the framework that is affecting the trends?
David Harvey-Evers: "The regulatory landscape is pretty slow-moving, so it's quite difficult to identify very clear trends in regulation which are affecting things at any specific point in time. However, I talked earlier about the public markets versus private markets. Public market regulation, the UK take-over code or the equivalent in the US or any other jurisdiction is something that is a deterrent to M&A for private buyers particularly. It doesn't mean the regulation is a bad thing, it just means that it has the potential to put off buyers because any public market M&A process is necessarily open to competition because that's the way the rules generally work. There's a perceived lack of certainty over the outcome because ultimately it's in the hands of the shareholders whether to accept or not or whether a counter-bidder comes or appears. There's a fair degree of public disclosure that goes with it. I think all of those things have led to a rise and further growth in private market transactions. Off-market transactions, ones that aren't public, the growth in private equity necessarily is resulted in a lot of portfolios where any asset in a private equity portfolio is necessarily for sale at some point. So there's a lot of, there's been a huge increase in secondary activity trading between private equity firms. Those are some of the bigger-picture regulatory issues. The trouble is that regulation is necessarily a bit reactive. It's not terribly quick. And financial markets, because the financial incentives involved tend to be quite quick and quite innovative. Generally, as we say in the UK, you see regulators closing the stable door after the horses are bolted. So once a problem has appeared, then they start figuring out how they're going to address regulation to look at this. And you've seen that with bubbles in technology, company valuations, bank failures, and crypto fraud. There's a whole range of issues, all the boom in SPACs, which SPACs have existed previously, they got away, then they came back, and they were seen to be something which was financial innovation, but not necessarily one that was a particularly positive one. So I think regulation will be reactive, it'll come and go. I don't think it fundamentally affects, the rationale for M&A. It may affect a little bit the way in which it's done over time. But right now I don't anticipate there are any major changes coming other than gradual evolution in things like regulation of crypto markets."
Question: If you're looking to give some advice to companies, are there best practices or tips that you think are really important to keep in mind?
David Harvey-Evers: "Personally, I think companies or business owners shouldn't be overly distracted by the immediate market circumstances or conditions that prevail. Yes, it can throw up opportunities in terms of valuation. But often, conditions and market conditions change quicker than you're able to react to them in an M&A context. M&A is not a particularly rapid process by its nature. So it's better to have a clear view of what you're looking for, you know, if you're a buyer, look what you're looking to add organically to your business, have a clear view on what you're prepared to pay for it. If you're a seller, recognize the limits of what you can achieve on your own and be pragmatic about sharing what you might call the sort of strategic premium that is paid or typically payable on the acquisition of the company. And if buy and sell as I said earlier, are reasonable and pragmatic, then that's going to yield a much more satisfactory M&A process and M&A environment. You know, distractions such as specific financing conditions, you know, are going to throw things off track a little bit potentially. But trying not to get bogged down in sort of fundamental differences of opinion or illogical or non-pragmatic perspectives is probably the main thing that people can do and just be prepared and ready. I think a lot of a good deal of M&A processes are around working efficiently."
