Though 2022 hasn’t seen the same deal volume as 2021, there has been no shortage of headlines on public company mergers and the challenges that have accompanied them. I have long believed that what happens in the public markets in some way, shape or form over time becomes reflected in the private markets. For private companies and their investors, some notable public deals from this year can offer valuable insights and reminders about the approach to an M&A process during H2 2022 and beyond.
Lesson #1: Renewed antitrust scrutiny is a factor in deals across sectors—even in the middle market.
Around the globe, regulatory authorities are looking more closely at mergers and acquisitions through an anti-competitive lens. This has resulted in delays, forced divestitures of business lines and, in some instances, blockage of the deal.
This new standard of enforcement has added roadblocks to a number of large-cap M&A deals this year. In July, JetBlue announced its merger with Spirit Airlines, a deal that many experts believe is likely to be slowed by rigorous antitrust reviews—or blocked entirely. Across the technology sector, multiple lawsuits brought by the Federal Trade Commission and Department of Justice against Big Tech players have made headlines in recent years.
While large public company mergers have drawn some of the most high-profile scrutiny, make no mistake: antitrust enforcement is an increasingly important consideration for private investors. In fact, competition regulators are examining the influence of private equity on the global economy and indicating potential crackdowns on roll-up strategies.
As deal flow slowed this year compared to the record pace of 2021, regulators have had more time to thoroughly evaluate deals passing across their desks. Our clients are beginning to weigh antitrust more heavily in their M&A strategies, at times even eliminating potential buyers due to concerns about a sale successfully completing antitrust reviews.
Lesson #2: Companies will pursue creative solutions for assets that are no longer key growth drivers.
In many large, mature public companies, there are often material differences in growth and profitability profiles among business units. A key role of executive leadership is to determine if these differences are material enough to warrant a spin-off to maximize shareholder value.
Take Kellogg’s, for example. In June, the company announced plans to split into three separate, independent companies for snacks, cereal and plant-based offerings. The cereal brands that were once Kellogg’s bread and butter have lagged in revenue growth compared to its snacks and plant-based businesses.
Private companies can also benefit from spinoffs and divestitures. At the end of the day, growth drives higher valuations. But for some companies, that value may be buried behind a legacy investment thesis that no longer aligns with the strategic vision.
We regularly advise companies on how to divest a piece of their business before taking it to market for a sale. We can help management teams determine if the pieces of a business worth more than the whole. In some cases, private companies may take a menu approach, collecting bids on both the whole company and its parts in order to evaluate the best path forward—and get the best price.
Lesson #3: More investors and companies will look to capitalize on the rapidly evolving healthcare ecosystem.
Another blockbuster deal of the summer came with Amazon’s July announcement of plans to buy primary care network One Medical for $3.9 billion. The acquisition announcement had the healthcare industry abuzz, as other primary care providers and investors noted that the move signals Amazon—and perhaps other e-commerce retail giants—sees growth opportunities in the consumerization of healthcare.
This strategic acquisition makes a great deal of sense to me, given the evolving landscape of care delivery. The rise of value-based care and consumerism have altered the way we think about healthcare. The advent of the pandemic accelerated the use of technology throughout the sector.
As this period of economic uncertainty continues, we are likely to see more companies pursue investment in healthcare, which has consistently proven to be recession resistant and a high growth sector amid new standards of care delivery.
Lesson #4: Confidentiality and discretion remain crucial in dealmaking.
No acquisition proposal has caused more market stir this year than Elon Musk’s agreement in April to buy Twitter for $44 billion. There have been many twists and turns as Musk has attempted to walk back his bid and wage a legal battle.
Though there are many takeaways from Musk’s dispute with Twitter, it highlights the adverse impact of leaked information and public statements about a deal process or a company itself—and how they can harm both the business and the M&A process.
Public company M&A has its own unique nuances, especially because valuations can shift quickly—as happened with Twitter. Most notably, there are fewer compliance and disclosure considerations for private companies, and it’s less common to see breakup fees or penalties in private deals. Nevertheless, the key to a successful M&A process is employing strategy and discretion in deciding what information to share with whom—and when to share it.
For private M&A, information leaks about a deal process or about the company itself can harm the business before it has the chance to sell. In many cases, maintaining competitive tension throughout a sale process can provide the seller with leverage to keep buyers on a short leash with deadlines and commitments to limit the time and ability for information leaks. No matter the deal size, management teams should always proceed with caution before sharing the most sensitive information about the company.