Blank-Check Deals, Distressed M&A To Headline 2021 Trends

By Benjamin Horney
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Law360 (January 3, 2021, 12:02 PM EST) -- The new year is expected to be a mergers and acquisitions bonanza as deal makers attempt to put the pandemic behind them, meaning attorneys must be on top of trends like the continued use of special purpose acquisition companies and an anticipated increase in distressed M&A.

The coronavirus pandemic caused a short-term slowdown in the pace of deal-making last year, but players in the M&A space didn't spend too much time on the sidelines; after initial shockwaves from the virus-induced shutdowns decimated figures for the second quarter, the third and fourth quarters of 2020 were relatively strong. As of Dec. 10, the total value of U.S.-targeted M&A deals announced in the third and fourth quarters totaled $915 billion, far greater than the $378.4 billion overall value of deals across quarters one and two, according to data provided by Dealogic.

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"There was a slowdown in the first two months post-shutdown," said Susan Oakes, an M&A partner at Holland & Hart LLP. "But once things settled into place, the deals that were on hold restarted, and we've been really extraordinarily busy."

In 2021, clients will look to build on the momentum from the end of 2020, but they'll have to do so in a landscape that has been significantly altered because of the once-in-a-century pandemic. 

"It's been such a bizarre and surprising year, with everyone trying to work from home while dealing with all this constant craziness," said David M. Hernand, a partner in the M&A practice of Paul Hastings LLP. "[We have] remained incredibly busy throughout. There's a certain amount of guilt I feel given how strong of a year a lot of the big law firms have had and how M&A has kept up and kept our teams so busy at a time when people are suffering."

There is hope that vaccines will quell the danger of COVID-19, but no one knows if offices will reopen en masse, how many companies will ultimately go under or whether the world will ever go back to what was once considered normal. Regardless, deal makers are hungry to make up for lost time, and they are surveying a sea of both healthy companies and distressed assets battered by the pandemic.

Here, Law360 explores the biggest M&A trends attorneys should be keeping tabs on in 2021.

It's Going to Be a Deal-Making Frenzy

There is pent-up demand from buyers of all kinds that were forced to put deal-making plans on hold last spring, but much of the uncertainty that existed in 2020 is no longer hanging over people's heads. Not only is the pandemic now baked into business planning, but the election of Joe Biden has reassured many potential investors. 

"Now people are going to revisit the theses they originally had in 2020 and say, 'OK, it's 2021 and we have a new administration with more predictability,'" said Sander C. Zagzebski, a partner in the corporate and business practice group at Greenspoon Marder LLP.

The enthusiasm from deal makers can be seen in the results from Deloitte's Future of M&A Trends Survey, which polled 1,000 executives at U.S. corporations and private equity firms between Aug. 20 and Sept. 1, 2020. According to the survey, 61% of those polled expect M&A activity to return to pre-COVID-19 levels within the next year.

Even if the vaccines don't completely quash the virus, the bottom line is that deal makers have gotten used to the current environment, and no one is planning to wait around until COVID-19 has been entirely eradicated.

"There is familiarity now with how the pandemic has impacted businesses," said David D'Urso, a corporate partner at Akin Gump Strauss Hauer & Feld LLP. "People are comfortable making investment decisions based on this information, and there is no longer a sense of fear of the complete unknown."

Dan Malone, a partner in the corporate and private equity practice groups of Haynes and Boone LLP, pointed to food and beverage and consumer packaged goods industries as two industries where there will likely be lots of M&A activity in 2021.

"If you look at the status of most of our lives, people are spending more time at home," he said. "They're not eating out as much, they're not traveling and they've got some discretionary income that they're spending on food and consumer packaged goods."

The Market for Distressed Assets Will Get Red-Hot

In the immediate aftermath of the pandemic, some companies were forced to file for bankruptcy protection, and people were predicting a rash of distressed M&A. To date, there hasn't been the flood of distressed M&A deals that was expected — but that doesn't mean there won't be. There's been a lag because companies were either kept afloat by government lending programs or have been waiting to see if they could turn things around organically, experts say.

"There are a lot of companies that haven't yet recognized the pain from 2020," Hernand said. "Companies have suffered pain, but in many cases they haven't felt the consequences of the downturn yet."

He explained that lenders have largely given companies "a complete pass on covenant compliance" because they understand the extreme difficulties that arose in the wake of the pandemic.

"[Those companies] are going to have to pay the piper at some point," he said. "In 2021, we will see a lot of carnage and distressed M&A opportunities." 

In particular, assets in industries that were hit hard by the pandemic could become attractive targets in the new year, including retail, dining and health clubs.

"Professional investors are always looking for investment opportunities, and those companies could be attractive to distressed investors where there will be less competition chasing deals," D'Urso said. "People are smart. If they can find value, they are going to pursue it."

SPACs Are Here to Stay, For Now

The use of special purpose acquisition companies, or SPACs, as a means for companies to go public exploded in the wake of the pandemic, and they have remained one of the more popular types of deals in the months since. SPACs, also called blank-check companies, are corporate entities that raise money through initial public offerings to take private companies public, usually within 24 months after the offering. 

The interest in SPACs has led to lots of work for lawyers, explained Bob Bartell, global head of the corporate finance unit of Duff & Phelps LLC.

"In the SPAC marketplace, you have roles for multiple law firms," he said. "You have underwriters counsel in addition to company issuer counsel, and then in the SPAC merger agreement you have lawyers representing the buyer and lawyers representing the seller. There's a significant amount of legal work involved for SPAC deals."

There are some obvious reasons for the increasing popularity of SPAC deals as a way for companies to go public. For starters, they offer greater price certainty since the terms are negotiated privately rather than being determined the day of an IPO, and the disclosure requirements are different.

"There's always a new flavor in terms of exit strategies," Amy Bowler, a securities and capital markets partner at Holland & Hart. "People are always looking for a strategy that removes risk, uncertainty and expense. SPACs can do that."

Further, they are a transaction type that offers flexibility for clients.

"I think it's a product that's here to stay," said Josh DuClos, a partner at Sidley Austin LLP focused on M&A and private equity. "It has joined the club with other, more traditional later stage transaction types like IPOs, traditional M&A exits and growth financing rounds. It really depends on what the client is considering. And one of the good aspects of SPACs is that they are a hybrid of multiple deal types, so you can do a lot of things with them."

Still, as with any trend, there will eventually be a tipping point. Some lawyers are already noticing diminishing returns with such deals as the market becomes oversaturated with SPACs.

"Early on, SPACs were like a pandemic band-aid," said Jonathan Melmed, a partner at King & Spalding LLP and co-chair of the firm's global private equity and global power & infrastructure groups. "People may look back a little bit wishing they had been more patient, or pursued other avenues."

While it's true the cost expense of an IPO is greater than that of a SPAC deal, the notion that SPACs are a way of going public without having to deal with burdensome regulatory filings isn't exactly true, according to Keith Townsend, another partner at King & Spalding and leader of the firm's capital markets practice.

"The reality is that, by the time you get through the S-4 proxy statement and related Super 8-K on the back end, about 80% of the disclosure that would be in the S-1 for the IPO gets written anyway," he said, referring to various types of regulatory filings.

Meanwhile, SPACs are very much dependent on private investment in public equity, or PIPE, components that are typically announced in conjunction with the SPAC merger. In PIPE deals, private investors agree to buy a set number of shares of the resulting entity for a negotiated price. In the early months after the start of the pandemic, finding PIPE investors was relatively easy, but the market now isn't as robust as it once was.

"There isn't evidence of many successful SPAC transactions that have been done without the validation of some form of PIPE, either concurrent with the announcement or shortly thereafter," Townsend said. "The reality is that the PIPE market for SPAC deals has cooled significantly."

The Importance of Technology Has Never Been Greater

Technology had already made its way into every aspect of our daily lives, and the pandemic only served to underscore that trend. Companies with significant technological capabilities were in a stronger position than those without, and many businesses providing services like video-chat services or online food delivery barely felt the economic downturn, if at all.

Hernand was practicing in the mid-1990s when the internet began to take hold, and he witnessed how technology went from being a "narrow little sector" to the most important aspect of most companies. A similar transition is happening today, according to Hernand, except rather than technology in general becoming more prominent, companies are now figuring out how to transform their business for the digital age. For example, a food provider must also now have a top-notch delivery system, and a news outlet that hasn't figured out how to offer an online version of its publication is likely to face problems.

"Now, every industry is tech," he said. "If you're not leaning into the digital transformation, you're a dinosaur and you're not going to survive."

Meanwhile, those companies that have made a successful digital transformation will be more highly valued than ever coming out of the pandemic, according to D'Urso of Akin Gump.

"There's been the COVID premium," he said, referring to companies that currently have sky-high valuations because they continued to do well despite the pandemic. That includes "health care and tech-based companies," D'Urso said, although there are also companies in other sectors that have received a valuation bump based simply on the fact that their business stood strong through the pandemic.

Cannabis M&A Will Tick Up

Interest in cannabis-related investments has been on the rise for some time now, although the fact that the drug is still federally illegal in the U.S. means there are complexities when trying to do deals. Potential issues include increased regulatory compliance and difficulty in procuring financing, since traditional banking giants are still hesitant to get involved in the space. 

That said, the U.S. seems to be trending toward decriminalizing or even legalizing pot. Five states voted to legalize cannabis in some form in the November general election, 36 states plus the District of Columbia have comprehensive legal medical cannabis programs, and 15 states and the nation's capital have legalized marijuana for adult recreational use.

"The biggest winner in the election was cannabis," Zagzebski said. "The cannabis industry could not have asked for a better outcome."

According to Zagzebski, there's no question M&A activity in the sector will pick up in the new year, but it's not a given that the increased activity will include multiple megadeals between industry titans. Companies may also remain wary of inking big-ticket cannabis transactions after the U.S. Department of Justice issued second Hart-Scott-Rodino requests, which are part of the Antitrust Division's most extensive investigations, for numerous deals involving cannabis companies in 2020.

However, Zagzebski said, there is hope that the federal government under President-elect Biden will soften its stance on scrutinizing such deals.

"People ain't gonna stop smoking weed," he said. "So some of these companies will sell, some will get new investment and buy, and some may restructure and come out stronger. The cannabis industry held its breath as long as it could in 2020, and 2021 is going to see a significant increase in the volume of deals."

--Editing by Alanna Weissman.

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