By Benjamin Horney

Law360 (May 14, 2021, 4:57 PM EDT) -- Mergers and acquisitions activity has rebounded after last year's coronavirus-induced slowdown, but the market has evolved, with massive special-purpose acquisition company deals taking center stage and private equity players increasingly showing interest in minority investments.

In April of last year, at the height of the COVID-19 outbreak in the U.S., there were 560 total U.S.-targeted M&A transactions worth a collective $21 billion, including debt, according to data provided by Dealogic. This year, April saw 630 such deals, with a total value of almost $318.4 billion. 


The difference a year makes becomes even starker when you look at big-ticket deals valued at $5 billion or more. In April, May, June and July of last year, there were 10 total U.S.-targeted transactions announced worth at least $5 billion, per Dealogic. This April alone, there were 12.


Simpson Thacher & Bartlett LLP is among the law firms that have capitalized on the M&A comeback. The firm has advised on a bevy of big-time transactions in 2021, including its representation of Microsoft Corp. on the company's $19.7 billion acquisition of Nuance Communications Inc., a health care industry-focused provider of artificial intelligence-based software, as well as its counsel of contract research organization PPD Inc. in the company's $17.4 billion sale to lab equipment giant Thermo Fisher Scientific. That's not to mention its work advising Blackstone Group in a $6 billion deal for hotel operator Extended Stay America Inc., or its role as counsel to KKR & Co. LP on the private equity firm's $5.75 billion sale of several vitamin and supplement brands of the Bountiful Co. to Nestlé SA.

Law360 recently spoke with Alan Klein and Atif Azher, M&A partners at Simpson who have experienced the resurgence in deal-making firsthand. Klein, who works in New York, is co-head of the firm's M&A practice. Azher, who works in California, is a corporate partner.

This interview has been edited for length and clarity.

At this time last year, the M&A market was extremely uncertain. After a very volatile 2020, there have been a number of significant transactions this year, including deals Simpson worked on. Is M&A back?

Alan Klein: I'd say it's a little more nuanced. I think you're seeing that big, strategic transactions are back in a way that wasn't really the case in 2020, with the exception of a few headline-making deals. There have been a number of transactions already this year with price tags north of $10 billion, which is way ahead of the pace from this time last year.

That's potentially a reflection of a few factors. First, in the back half of last year, M&A was actually pretty healthy, although that was driven to a far greater degree than historical norms by private equity folks. But, going back 13 months ago, the Federal Reserve pumped $2 trillion into the financial system; they may have over-calibrated a little bit, but they were learning, they hoped, a lesson from the last crisis. 

During the financial crisis [in 2008], the government put in less money over a longer period of time. In mid-March of last year, the credit markets were totally seizing up, equity markets were in free-fall, and the government just wanted to take a majority of that off the table as a problem. A lot of people were getting sick [with COVID-19], and that was a big enough issue. Having the financial markets collapse would have only added to the problem.  

The result of the money being pumped into the system last year was that there was no shortage of credit and equity financing available. Private equity players were able to capitalize on that. Corporate America, meanwhile, borrowed tons of money last year, and had cash available, but they were holding off, in large part, from implementing some of the deals they may have wanted to do until there was visibility on when we'd climb out of this economic trough that was caused by the pandemic.

What you've seen, certainly since December, is private equity folks still cranking away, and, in some cases, increasing the size of some of the deals they're willing to do. You see [special-purpose acquisition company] mergers added to that mix. The explosion of SPACs is a direct result of people trying to put capital to work. There's a lot of capital sloshing around the system.

Strategics have been mulling what to do for some time now, and recently there's a backlog of activity that has sort of burst through, which can now be added to the M&A mix. 

Atif Azher: I wholeheartedly echo what Alan said. One area to emphasize is that private equity, in the second half of last year and continuing through the first quarter of this year, has been red-hot. In some ways, they were freed from having to be as concerned about strategic competition for some assets they've been pursuing, especially last year.

Certainly this year, however, strategics have come back in full force. My sense is that, not only is deal activity high when it comes to executed deals, but the actual number of deals being pursued is at an all-time high. For every winner, there's usually one or more losers for these hot assets. 

What's the state of the SPAC market? Is it still ablaze? Are there any reasons to think the market might cool off at some point in the near future?

Azher: My personal view is that it remains very active, although there was a bit of a lull recently. There's a lot of interest from targets to pursue transactions with SPACs, and we still see SPACs in the market seeking to go public. There was some recent SEC guidance challenging the accounting treatment of warrants, so accounting firms are trying to restate financial statements for several hundred SPACs out there, either those that are already public or are looking to go public.

That created a bit of a pause, but it's not clear whether that's a substantive issue when it comes to the continued attractiveness of SPACs. Would I tell you that SPACs will remain as popular as they currently are in perpetuity? Absolutely not. Everything comes in cycles. It's not clear that we are on a downward trajectory just yet, though. 

Klein: SPACs are an unstable isotope in the M&A system. In the first quarter alone, there were something like 250 SPAC IPOs, some extremely high number on top of the ones from last year. And only a fraction of these have actually done de-SPAC deals. 

Their only purpose is to go do a deal. So even though the SPAC IPOs have abated to some degree, that does nothing to change the fact that you've got hundreds of these pools of cash that have been raised, and sponsors have every incentive to go find a deal. All they need is for shareholders of the SPAC to vote to approve the deal. And shareholders have no incentive not to vote for a deal. 

Even after a shareholder votes in favor of a deal, they can, if they don't want to stay in, just redeem their money. There's zero downside. Investors can actually exit ahead of a deal if they wish. This puts huge pressure on valuations. SPACs are willing to bid up for assets past what, certainly, a strategic buyer would value the asset at, and past, for the most part, what private equity buyers would be willing to pay. SPAC sponsors will make a multiple of their investment at almost any price level.

I don't think SPACs are going away. We're already seeing higher-quality sponsors. There will be some fallout, as some of the sponsors seem a little more inexperienced, so there is still an unspooling of this movie to come. PIPE [private investment in public equity] investors have backed off from some of the more extreme situations, which means deal sizes will be smaller in certain cases. In other instances, deals will be even bigger. 

At this point, is it back to business as usual for many PE clients? Have any private equity clients altered their strategies at all, in the wake of the pandemic?

Azher: Based on what we have been seeing, there are two areas that come to mind where private equity sponsors have taken new approaches in evaluating attractive opportunities since the start of the pandemic. 

First, large-cap PE firms are much more open to minority investments. That stemmed from both the beginning of the COVID-19 crisis to pursuing PIPE investments in rescue financings for companies that were looking to raise capital to shore up their balance sheets. That has all trickled into sponsors that, though traditionally buyout specialists, are increasingly considering minority investments when historically they may not have done that. The other area is serial SPAC sponsors. There are a number of sponsors out there that are creating a family or series of SPACs that are different sizes and chase different opportunities.

There's also a renewed focus by private equity sponsors in understanding the implications on target businesses, including impairment from COVID, especially if they've taken out any government loans or had other financial assistance. Additionally, private equity clients are increasingly focused on diligencing target companies from an ESG [environmental, social and governance] and DEI [diversity, equity and inclusion] perspective. They want to understand how the investments they are making stand and compare to their own stated mission of environmental sensitivity, diversity, equity and social justice, and appropriate governance.

Hopefully, the worst of the COVID-19 pandemic is behind us, and at the moment the M&A market appears pretty strong. What are some factors that could disrupt the M&A market in the months ahead? Are there any particular possible issues you see on the horizon?

Klein: You have to break out the different silos of the market. For strategics, it's antitrust policy and foreign direct investment organizations, whether it's CFIUS [the Committee on Foreign Investment in the United States] or analogous organizations being set up around the world. Those could potentially have dampening effects on different kinds of transactions that a strategic would like to do.

The conventional wisdom for a very long time has been that vertical mergers are typically fine; the only things you have to worry about are overlaps with respect to horizontal mergers, and whether a horizontal merger will have effects on competitors and consumers.

In the U.S., CFIUS already has a lot of teeth. More teeth than it had five years ago, before FIRRMA [the Foreign Investment Risk Review Modernization Act of 2018]. Other countries are also stepping up their review of transactions on a national security basis in different industries. It's long been the case that CFIUS could look at almost any industry, but some of that is being made more specific and broadened out to cover what people are most concerned about.

--Editing by Marygrace Murphy.

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