M&A Outlook – the news should be more positive

No one could blame you for having a less than optimistic outlook for M & A activity for the coming year.

The global media machine is bombarding you with banking crisis headlines. We are faced with the highest interest rates for 10 years, that so-called experts are failing to predict or give sufficient warning of problematic financial institutions leading to the surprise collapse of both SVB and Signature Bank in the US and the Credit Suisse rescue package sending unintended shockwaves throughout the EU banking market following the wipe out of $17 billion of value for holders of a specific category of credit Suisse bonds (AT1s), to name but a few.

But we all should know by now that news is inherently negative. Take the reporting of the pandemic for example, you would be forgiven for thinking that the world had ceased to operate as we know it, nothing would ever be the same again. But yet here we are, the world is still spinning, and we managed to get through it despite the doomsday headlines.

We shouldn’t blame the media though – it’s a simple case of supply and demand. Many studies have examined what is referred to as “negative bias” – the majority of humans will, when presented with a choice of negative, positive or neutral news stories to read, will choose the negative stories over all else. It’s in our DNA to give more attention to negative aspects of our world in order to counteract any harm or danger those aspects pose, in our personal lives.

So, what is it that I see right now?

I know a banking crisis leading to a squeeze on credit will of course impact M&A activity in a traditional sense. After all, banks lend to investment funds and companies, and investment funds and companies buy and sell businesses.

However, things aren’t really that simple. You need only look into the complex circumstances which caused SVB to collapse. This wasn’t a poorly run bank. A slow down in venture capital activity resulted in lower deposits meaning the bank needed more cash to make its customers’ withdrawal requests. Normally it could have sold bonds it had invested in on a long-term basis when interest rates were close to 0%. As a result of interest rate measures, those bonds had become worthless, meaning they would be sold at a loss (a $2 billion loss in fact). SVB made, what it viewed as a prudent move, an announcement of a $2.25 billion share sale to shore up its balance sheet. Instead, what was intended to be a positive message, panicked the market leading to a good old-fashioned run on the bank. A somewhat horrific example of how the negative bias operates – ignore the positive intent, focus on the negative, look to protect against potential harm (harm only caused by collective focus on the negative) and the rest is history.

We should therefore not take a simplistic view on the M&A outlook as a result of a potential slow down in traditional funding methods being available, as a result of the banking crisis.

Of course, it is much less effort to hear the headlines and take them at face value – challenging the status quo takes energy and time. Bad things happen and the results are instant. Good things take time to achieve.

Negative bias is the butterfly which flaps its wings creating ripples that turn into typhoons. President Joe Biden will understand this better than anyone after his administration had to step in to guarantee all of SVB’s depositors, who would have access to the funds to avoid a complete loss of confidence in the US banking system. It took just 4 days for a $2 billion loss to get uncomfortably close enough to a nuclear meltdown and failure of the US economy, that the Biden administration had to make the unusual announcement.

So why do I think you should ignore the noise and be positive?

There are many reasons to be positive. Firstly, this isn’t 2008. The global banking market is more robust and heavily regulated than ever before – it is built to withstand the current shockwaves.

Flip the SVB news on its head and it took just 2 days from the run on SVB to prevent a full meltdown of the US economy – that’s pretty impressive.

Larger banks have rallied and provided rescue funds for other at-risk US banks and interest rate rises are slowing, with predictions that these will soon begin to fall.

Companies that have built stockpiles of cash whilst interest rates have been high, will soon be looking to invest the cash, if they aren’t already doing so, to get a better ROI than the falling rates can provide.

This is borne out in the trends which Herrington Carmichael’s corporate team are seeing in the market which include:

Entrepreneurs are turning to alternative structures such as employee ownership trusts (EOTs) which, in the UK, provide lucrative incentives in the form of tax reliefs for both the exiting parties and the participating employees.

Overseas investment has accelerated, largely driven by the strong performance of the USD against the GBP in the latter half of 2022 and the cooling off (for the time being) of the US / China trade war.

Increased focus and global awareness of climate change and collective willingness to do something about it has resulted in shareholder activism among larger companies and innovation and investment in businesses providing solutions, not to mention the larger corporates seeking to offset their carbon footprint to ensure they can meet their environmental reporting targets and requirements.

Well run, acquisitive companies continuing to deploy their capital in accordance with their buy and build business plans.

Growth in specific sectors such as the healthcare and energy sectors, with the former being a natural consequence of the pandemic and the latter resulting from ESG requirements and sky-high energy prices.

Private equity houses becoming increasingly specialised and making industry specific investments in a move away from the traditional sector agnostic approach many previously took – something that has been particularly prevalent in the UK tech sector.

Next time the news tries to tap into your negative bias, make a conscious choice not to be the butterfly, as collectively we have the power to succeed. It’s in our DNA after all.

To discuss the matters in this article, please contact our corporate team on 01276 686222 or email matthew.lea@herrington-carmichael.com.

Matt Lea
Partner, Corporate
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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