Trends, Tales and Tidbits from Tulane

By Alexandra Clements and Emma Prenn-Vasilakis

At the 36th Annual Tulane Corporate Law Institute, H/Advisors Abernathy discussed market trends and gleaned M&A insights through a series of panels and events across the Big Easy. Here are our key takeaways from the conference:

2023 dominated by private company deals

While the M&A market in the first half of 2023 was down, dealmaking increased in the second half and was largely driven by private company transactions, which one panelist noted made up more than half of deals in 2023. In an ongoing tight financing environment, private credit providers are stepping in to help, which panelists agreed is a “fundamental change” in a market where banks are traditionally the primary source of transaction financing. One panelist attributed this shift to regulators pressuring banks to hold more capital and not lend to highly levered companies, leaving a gap for private credit to fill. There has also been a significant spike in all-equity deals in the past year, with a panelist referring to these deals as “BOs,” or “LBOs without the L.” The rise of private credit is also perceived as raising the risk that a deal will leak ahead of announcement day, which from our perspective makes it even more important for companies to prepare in advance for potential leaks.

Despite the rise of private credit, panelists were confident that the traditional loan market is not going anywhere and that banks will ramp up lending again as the market stabilizes.

Antitrust remains top of mind

One thing panelists definitely agreed on is that antitrust scrutiny continues to have a chilling effect on high-profile deals. This was particularly true in “big tech.” Technology deals were down by approximately 50% in 2023, while deals in other sectors, such as energy, were elevated. Regulatory challenges are also dampening cross-border M&A, particularly given a heightened political focus on global competition. A panelist noted that while antitrust is viewed as significantly affecting the deal market, the reality is that second requests are down overall. Despite the headlines, the regulatory spotlight is actually on “megadeals” and high-profile deals, which are therefore harder to close, while smaller transactions are less likely to face the same level of scrutiny. Against this backdrop, we recommend thinking critically about the transaction narrative to ensure messaging appropriately caters to the regulatory audience, or at the very least doesn’t ruffle feathers.

This year’s presidential election will also impact deal flow in 2024. A panelist noted that companies are not necessarily waiting for the upcoming election to proceed with a deal, but as we get closer to November it’s likely that both buyers and sellers will consider hitting the brakes to see how things play out. In addition, a win from the current administration could embolden regulators to double-down on current strategies and take an even heavier hand on antitrust protection, according to a panelist.

The challenging regulatory environment also means deals are taking longer to close, so it’s critical that buyers and sellers plan for a prolonged 12-18-month period between sign and close. One panelist noted that this matters most for the seller, who may now face the pressure to maintain business continuity and retain employees for longer. Merger agreements are evolving to take this longer waiting period into consideration, and dealmakers need to plan to make sure interim operating covenants account for an extended closing period. While we always recommend a communications plan between deal announcement and close, it’s even more critical today that companies develop a comprehensive strategy for key stakeholders, particularly customers, partners and employees, to keep them informed of key closing-related milestones achieved and to minimize concerns and confusion in this interim period.

Hostile deals, spinoffs and activism deeply intertwined

Hostile M&A significantly increased in 2023, but only a small portion of hostile bids were successful. Increasingly, acquirers are launching a hostile bid without any prior dialogue with the target, and stealth accumulations are happening with less warning. Activist investors are driving a strong spinoff market, but recently spun-off companies are also prime targets. One panelist explained that “NewCos” often don’t have takeover defenses ready on day one, making them particularly vulnerable to hostile bids and activists. From our perspective, you can never be too prepared, and companies proceeding along a spinoff route should make sure the new company’s board and management are scenario planning for the initial weeks as a standalone company.

Activist funds also are increasingly attacking management. In 2023, as noted by one panelist, CEO departures were significantly elevated in connection with activism – a trend dealmakers expect will continue throughout 2024. Notably, one speaker is also keeping an eye on companies with dual-class shareholder structures facing “sunsets,” which may become activist targets.

Finally, while consensus holds that Universal Proxy Card hasn’t had much impact on activist behavior, it has changed boardroom dynamics and is prompting earlier settlements, tipping the scale in favor of the activists. Behind the scenes, companies are taking more active steps to engage with shareholders year-round and understand their perspectives, and increasingly involving directors in these conversations. Panelists noted that direct board engagement with activists should be approached with caution and ideally organically, such as having directors attend an investor day instead of scheduling 1:1 meetings. Similarly, panelists noted the importance of keeping beat reporters close, particularly in “peacetime,” to ensure reporters engage quickly when an activist comes knocking and a timely conversation is warranted. One key tip from our team – put these conversations to good use to inform your communications strategy and approach. Collect shareholder feedback, learn what reporters are most interested in or don’t understand about your business and most importantly, don’t let this information just gather dust on the shelf.

Looking ahead to 2024

All eyes are on the Federal Reserve. Rate cuts will be the greatest determinant of M&A activity in 2024, and one speaker predicted rate cuts as early as June. Domestic deals are expected to pick up alongside the market, but global M&A may remain challenged particularly given the geopolitical environment and a slowing Chinese economy. Panelists expect to see more life in the IPO market throughout 2024, albeit with continued pressure on valuations. While 2023 was dominated by financial buyers, we may see this balance out with more strategic deals in 2024.

Looking at private equity, firms are holding onto record levels of undeployed capital that may drive elevated dealmaking in 2024. The current regulatory environment is expected to persist at least through the election, meaning we may see a slowdown in deals in the fall as companies take a “wait and see” approach. Overwhelmingly, dealmakers think activists will continue pushing for M&A and the spinoff market will remain active.

So, what’s next? Only time will tell, but the H/Advisors Abernathy team will be watching closely as the market continues to shift. As always, we stand ready to support our clients and make sure they are thinking about emerging trends, how it could impact their business, and preparing for all scenarios as M&A continues to ramp up in 2024.