The Review — 06/03/2018 at 11:00

Why Companies Are Looking To Do More M&A, IPOs

by

Gregg Lemkau2

Gregg Lemkau

From corporate boardrooms to Silicon Valley startups, the outlook and appetite for mergers, acquisitions and initial public offerings (IPOs) appear to be shifting into high gear. Goldman Sachs’ Gregg Lemkau, co-head of Investment Banking, and David Ludwig, head of Americas Equity Capital Markets, shared their perspectives on the markets, private market activity and client sentiment.

You both spoke at Goldman Sachs’ 2018 Tech & Internet Conference, which was recently held in San Francisco. What was client sentiment like?

Gregg Lemkau: The best barometer for the M&A environment right now is the mindset of our corporate clients: the CEOs and boards. When we’re out talking to our clients in this environment, they’re really optimistic across all sectors and all geographies driven by the clarity on US tax reform and repatriation. In fact, to understand the M&A landscape today, it’s helpful to think back to conditions at the start of 2017 when, having come off the US presidential election, we were entering an environment that felt largely pro-business. The world was gearing up for what felt like would be a strong year for M&A. However, fast forward through the ensuing uncertainty over healthcare and tax reform, and you saw a lot of companies put their contemplated transactions on hold. Until finally, by the fourth quarter of last year, companies just wanted to get back to business. That’s when we saw some of the largest transactions of the year, including CVS Health’s acquisition of Aetna and Twenty-First Century Fox’s sale to Disney. And against that backdrop, we actually saw corporate tax reform get done. And that reform is helping to accelerate M&A activity even further this year. We believe the M&A market is strong, and companies are well-positioned to think about large transactions.

Is that still the case, given the market volatility we saw at the start of February?

GL: Persistent volatility isn’t great for M&A since volatility makes it harder to match buyers and sellers. But markets appear to have stabilized a bit. If, instead of the onset of volatility, the first few weeks of last month reflected a market correction, a revaluation of assets and helped to rectify investors’ beliefs that stocks can also go down (and not just up) — that would actually be a constructive factor for M&A activity.

David, what’s your outlook for IPOs and how does volatility affect the appetite for companies to want to go public?

David Ludwig: Broadly speaking, we’re really excited about the IPO market right now. Market conditions remain highly favorable for issuers. While we have witnessed some increased volatility recently, the fundamental picture continues to be positive for equities which bodes well for new issuers, especially in growth sectors such as technology.

In recent years, we have seen private technology companies stay private for longer. David, how do you see that theme evolving?

DL: While we do see more companies maturing in the private markets longer before going public, many of these companies that have scaled quite a bit in the private markets and are now beginning to think about the right time to go public, which is likely over the next few years. From our perspective, we are actually very excited about the diversity of the pipeline — both in terms of sectors and regions. No one theme will dominate the IPO market like internet in 2011 and 2012, or software in the years that followed. Investors are going to have the opportunity to look across a number of securities that will allow them create a more balanced portfolio.

US tax reform is spurring some companies to repatriate offshore cash to the US. What do you think companies are going to do with this cash?

GL: It’s been fascinating to see how companies are reacting to cash repatriation. A year ago, if we had talked to companies about deploying their “trapped” overseas cash, they would have said it was a non-issue — that is, they could always borrow against that cash if they needed to. Having overseas cash wasn’t constraining them from doing M&A. But today, with the prospect of that cash coming back to the US, companies appear to be changing their behavior. The expectation is that companies will have to soon articulate their capital return plan to shareholders. So they’re actually ramping up the pace at which they’re looking to deploy that cash because the view is that if you don’t use it in the next year for M&A, for example, shareholders are going to demand it back.


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