Mergers and acquisitions (M&A) show no signs of slowing down anytime soon, though there are challenges companies face trying to win support from shareholders, according to several panelists at the IR Magazine & Corporate Secretary Corporate Transaction Forum.
Since the second half of 2020, global M&A has experienced a massive rise in deal volume and valuations, and this trend is set to continue. ‘There was approximately $1.5 tn worth of deals in Q2, more than any other Q2 in history – and that came on top of the record Q1 for deal values,’ explained Arthur Crozier, chairman of Innisfree, at the forum.
This trend doesn’t appear to be slowing down, either, said Russ Hartz, vice president of corporate development at Ansys. ‘By all accounts, if you look at the commentators, M&A professionals, economists – everyone expects it to continue well beyond the end of this year,’ he said, noting that this has led to intense competition for high-quality assets.
One of the drivers for the increase in activity during H2 2020 and early 2021 was outbound M&A activity by US companies, but Crozier said this is beginning to tail off. The future of cross-border activity ‘is really hard to predict,’ he said, due to uncertainty caused by the pandemic, geopolitical tensions and other economic uncertainty.
Spacs drive volume, but new listings could slow down
The panelists highlighted special purpose acquisition companies (Spacs) as one of the biggest drivers of recent M&A activity. Crozier said there is likely to be a slowdown in new Spac listings, but that deal-making volume will be sustained because many of the Spacs currently listed need to close deals.
Forum panelist Doug Hass, associate general counsel and assistant secretary at Kimball Electronics, noted that the SEC has adopted a more aggressive approach to enforcement, which includes paying special attention to issues like Spacs and primary direct listings. This echoes recent comments by SEC chair Gary Gensler, who said during testimony to the House Financial Services Committee that the SEC will be paying attention to Spacs under his leadership.
A recent report conducted by Edelman also outlines that an overwhelming majority of investors agree Spacs should face additional regulation from the SEC.
The role of proxy advisers
The panelists also shone a light on the role proxy advisers, such as ISS and Glass Lewis, can play in successful M&A. Mike Verrechia, managing director and co-head of the M&A and activism advisory group at Morrow Sodali, told the forum: ‘If you have 80 percent of your outstanding shares held by institutional holders, chances are many of them are going to be subscribers to ISS or Glass Lewis, or both. Their interpretation of the deal and the market reaction to the deal and their recommendation get passed on to the underlying holders.’
In September 2019 the SEC outlined an interpretation and guidance for proxy rules on proxy voting advice. In July 2020 amendment rules 14a-1(l), 14a-2(b) and 14a-9 concerning proxy voting advice were adopted by the commission.
A publication by Fenwick in June outlines that ISS and Glass Lewis as well as a number of institutional investors strongly resisted the initial 2019 guidance and the 2020 amendments. ‘ISS has gone so far as to sue the SEC over its attempt to regulate the proxy advisory business in the manner of the 2019 guidance and 2020 amendments,’ the authors write.
The law firm states that a majority of SEC members do not support the 2019 guidance and the 2020 amendments. ‘In the interim, for however long that interim period may be, the division of corporation finance’s refusal to seek to enforce the 2019 guidance – and 2020 amendments once they become applicable – would seem to be tantamount to their suspension or repeal,’ the authors note.
In a statement in June, Gensler says he is now directing staff to reconsider the 2020 amendment and the 2019 interpretation and guidance definition.
Hass told forum attendees that this will be extremely troublesome and really challenging for corporate secretaries and issuers without really materially improving governance for shareholders.