The Year in Deals Can Be Summed Up in 4 Letters

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Cashing blank checks

It was a difficult year for deal makers to describe. Early on, the pandemic made the notion of corporate takeovers seem, for a few months, like something from a lost era. But then came a burst of activity like few had ever seen before, even as the health crisis raged.

Amid the twists and turns, the single biggest thing on merger advisers’ minds can be summed up in four letters: SPAC.

Short for special purpose acquisition companies, these publicly traded shells are created solely to merge with a privately held business, giving the takeover target a ready-made listing without having to stage an initial public offering. Once dismissed as a shady Wall Street relic, SPACs have since become the hottest tickets in mergers and acquisitions. (In an industry with strong herd instincts, it isn’t much of a stretch to say that nearly anyone who’s anyone has one.)

And as deal makers look ahead to 2021, a common thread to their predictions — from continued growth in blank-check funds to a rise in takeover activity in general — is that things are only looking up from here. There’s perhaps no better sign of that renewed confidence than the surge in SPACs.

As of this week, nearly 45,000 deals worth $3.4 trillion had been announced this year, down 8 percent by number and 7 percent by value from the same point a year ago, according to Refinitiv. What’s remarkable is that the drop wasn’t worse: Overall deals were down 40 percent by value at midyear.

The economic troubles that the pandemic imposed on the deal-making business are well known. But top mergers advisers say the speed and strength of the comeback since late summer surprised them:

The past few months have seen “one of the most active markets in history,” said Stephan Feldgoise, co-head of global M.&A. at Goldman Sachs.

“We’re accelerating into the end of 2020,” said Patrick Ramsey, global head of M.&A. at Bank of America. “What started in the more resilient sectors, like health care and tech, has spread across nearly all sectors.”

“2020 was a miracle,” said Dirk Albersmeier, global co-head of M.&A. of JPMorgan Chase.

Others said the desire for deal-making never went away, even during the depths of the pandemic, but the lull was merely a matter of being able to pull it off. “People saw value during the dark days, but often didn’t have the constituency or support to carry out a transaction,” said Peter Weinberg, the chief executive of Perella Weinberg Partners.

A flood of cheap debt, made possible by the Federal Reserve’s emergency aid measures, and a roaring stock market, another result of the Fed’s money spigot, gave would-be buyers the confidence to go back into the market. Then, they struck the deals they had been eyeing — over Zoom meetings instead of power lunches.

The undeniable star of the deal industry in 2020 was the SPAC. Investors flocked to these blank-check vehicles as they hunted for takeover targets. And an increasingly eclectic range of sponsors — from the former baseball manager Billy Beane to Paul Ryan, the former House speaker — rushed to create yet more funds (see the note about herding, above).

The numbers tell the tale: 242 SPACs were introduced this year, four times the number raised last year, according to SPAC Insider. The average size of a SPAC in 2020 was $335 million, nearly 10 times the amount in 2009.

The appeal to buyers and sellers is apparent. Sponsors generally get a 20 percent stake at very little cost — known as the “promote” — which turns into a big stake in the target company after a merger. Sellers can go public without the hassle or restrictions of a traditional I.P.O., a benefit that attracts venture capitalists in particular.

”We’ve seen higher-quality companies merging with high quality SPACs,” said Mr. Ramsey of Bank of America. “That’s driven strong performance, and sparked more private companies to express interest in SPACs.”

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Indeed, advisers expect tweaks that could make SPACs more of a permanent part of the deal-making landscape. The hedge fund mogul Bill Ackman raised a record $4 billion for a SPAC in July, enough to let him reportedly approach Airbnb about a merger. (It didn’t go anywhere, but the notion of a SPAC swallowing a target of that size is significant.)

Advisers note that even corporations like Liberty Media are now raising SPACs, aiming to buy businesses that they couldn’t otherwise afford. And bankers are studying ways to create permanent funds to pump additional money — so-called private investments in public equity — into SPACs to help them acquire ever-larger targets.

“I think the SPAC business has become a large and sustained ecosystem,” said Michael Klein, the veteran banker who has since raised a series of SPACs that have struck multibillion-dollar takeovers, including those of the health care services provider MultiPlan and the analytics software company Clarivate.

Some financiers have now made a business of raising SPAC after SPAC. Mr. Klein recently raised $450 million for his fifth Churchill Capital fund. The venture capitalist Chamath Palihapitiya, who took Virgin Galactic public, has raised a series of funds in search of takeover targets.

And deal makers expect the SPAC craze, to date largely an American phenomenon, to go global. Earlier this month, the French billionaire Xavier Niel raised €300 million ($368 million), for a blank-check fund, in what was the biggest market debut in France this year.

What could go wrong?

Popular targets of SPAC deals this year have been electric vehicle companies, some of which have stumbled badly since going public. Goldman Sachs’s strategists noted earlier this week that many SPACs have posted poor returns post-merger relative to the S&P 500 this year. “If weak returns persist, investor appetite for new SPACs may wane,” they wrote, which suggests that attracting investors for new funds could become trickier. The short-seller Carson Block has declared SPACs “the great 2020 money grab.”

The popularity of SPACs may also prove their undoing, advisers cautioned. Goldman’s strategists estimate that 193 blank-check funds are currently sitting on $63 billion in search of takeover targets. This implies potential buying power of some $300 billion, because the typical SPAC merges with a company five times its size, thanks to outside investors who buy into the transaction, according to LUMA Partners.

SPACs generally have two years to find a takeover target, or they are contractually required to return their money to investors. This puts them on the clock, potentially crowding each other out of deals or leading to mergers born of urgency instead of prudence. “A business model that incentivizes promoters to do something — anything — with other people’s money is bound to lead to significant value destruction on occasion,” wrote Mr. Block.

And one of the big drivers for their soaring popularity earlier this year, disappointing I.P.O. performance, may be waning. The enormous run-up in the valuations of Airbnb and DoorDash in their recent I.P.O.s may persuade some companies to return to more traditional ways of going public, leaving SPACs with billions of dollars but fewer targets worth buying.

Activists are back, and they brought friends

The pandemic wasn’t kind to activist investors, as hedge funds held off shaking up corporate boards during a global health emergency. Just 124 campaigns were started in the first nine months of the year, according to data from Lazard, a five-year low and down 20 percent from a year ago.

“The most hostile activists recognized what the world was going through,” Mr. Feldgoise of Goldman Sachs said. It didn’t help that such investors were also suffering during the pandemic: Hedge Fund Research’s activist index tumbled 20 percent in March.

But activists have since returned to their core business of pushing boards to alter their strategies. The robust stock market recovery has made it easier to argue that companies should sell themselves — or pieces of themselves — to lock in gains for shareholders. Giants like Elliott Management are back to arguing for big changes at the likes of Public Storage. And activism continues to expand in new ways: No less than Exxon Mobil is under pressure from longtime shareholders like D.E. Shaw as well as new players like Engine No. 1, a firm that is calling on the oil giant to, among other things, invest more in clean energy.

Others are getting in on the act, too. Private equity firms have increasingly adopted activist tactics to push corporations to cash out, abandoning a traditional aversion to bare-knuckled tactics that pit them as aggressors. “In the right situations, private equity is willing to support more aggressive approaches,” Mr. Albersmeier of JPMorgan Chase noted, adding that these firms are also working more quietly in the background to help out activists.

Deal makers expect to spend much of their time in the coming year helping companies out with activists. “I can’t think of one conversation with a public company, client or prospect, with whom we have not discussed activism,” Mr. Weinberg of Perella Weinberg said.


Wall Street is at it again. Despite missing badly in 2020, analysts are back to making bullish predictions for the stock market next year.

Don’t get cocky. The expected rise in M.&A. next year is because of, at least in part, “deal-maker hubris because the bottom didn’t fall out of the markets in 2020.”

Seeing green. A recent study suggests that activist investors think environmental issues are winners when it comes to agitating for change in companies’ strategies.

What do you think? Can the SPAC boom keep it up next year? What else will make its mark on deal-making in 2021? Let us know: [email protected].

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