Amit Thakur, a managing director at Amax Capital and CFO of Augie, is a financial advisor in M&A, debt and equity raising, and strategic finance deals totaling $35 billion. A cross-border pro, Thakur launched Standard Chartered's U.S. M&A business, and led Morgan Stanley's Indian FIG group. He mentors startups as well as multinational companies, globally. As worldwide M&A activity reached $2.8 trillion in the first half of 2021, Thakur says there are plenty of factors that can affect deal pace, including heightened regulatory scrutiny, debt issuance and a tempering SPAC boom.
Global Finance: Across the globe, many regulators are taking a harder stance on transactions. Anti-trust is arguably the highest-stake issue. Is big now bad?
Amit Thakur: For some situations, big indeed is bad. Trying to get bigger, therefore, is worse. Unlike in the past, this issue is now evaluated more broadly than just from a competition standpoint. I see this being a part of broader political and geostrategic considerations in various markets. Many corporations now have size and influence that can rival full countries. While the discomfort of political and sovereign entities with large and often global corporations is not a new thing, the ease with how the newer players in the digital and services domain can spread their influence far, wide and deep has accentuated the focus on size. Global digital giants may have been the triggering cause of this, but I believe this will affect all industries.
GF: In what ways can cross-border deal professionals like you prepare?
Thakur: M&A professionals working with cross-border situations have become especially careful about closing risks on account of such issues, especially because often the issues may come up in jurisdictions far from home. So, politics—local and international—has become an important factor to consider right at the start of a deal idea.
While this is hardly a new concern—the CFIUS worry for China-US and Russia-US deals in the last seven years being cases-in-point—this now shows up on a much broader spectrum of deal types. This will slow down the pace of giant deals, give fillip to deals among relatively smaller players, and bring the focus back to adequacy of break fees in case deals do not close.
GF: This year, tech companies remain in the so-called “hot seat” as US legislators introduced five antitrust reform bills to preclude large digital platform companies from acquiring smaller targets. But two of the world’s largest insurance brokers, Aon and Willis Towers Watson, canceled their merger. How has this ongoing trend affected the advice you give to parties that are starting to consider a transaction?
Thakur: The cancellation of the Aon-Willis Tower Watson deal underscored two points to the industry: the apprehended worry about the government being inimical to mergers and consolidations was real and here; and that this was not just for “those bad tech giants.”
This has made deal advisors and participants become more vocal about both the risks as well as the mitigants. It has now become important to ask right at the beginning of the deal if there is any possibility of competition issues.
Also, given the multi-jurisdictional nature of these risks, advisors are pushing for deeper and earlier evaluation of regulatory and political dependencies than what had been the norm. The recent legislative and executive actions in the US have heightened the probability of such risks actually crystallizing. As a result, parties are negotiating harder on break fees and walk-away conditions.
GF: Will the upward trajectory of corporate borrowing continue to spike? And what might chill that growth?
Thakur: I do believe that corporate debt issuances will continue to increase at least in the near term. The amount of liquidity that has been pumped into the markets by central banks across the world will keep the rates lower than historic levels at least for many months. This low cost of debt is even more accentuated when contrasted with the implied cost of equity, especially for the sectors that have been traditionally held to be riskier. So, it just cries out for corporates to rework their capital structures.
Indeed the market’s belief that the current (low) rate environment may not last is fueling an acceleration of activity—let’s “tank-up” on liquidity and lock-in the rates before the window closes. Is it all prudent? Hardly. There are glaring examples of corporates—whole sectors—that have borrowed more because debt is available and cheap than because there is a solid business case. Any reduction in large M&A will certainly have a moderating impact on debt issuance. Given the political risks to large mergers, that is almost a given.
The issuance curve will likely turn whenever the rate curve turns. There are two distinct factors that I think will precipitate that. First, the Fed’s recent explicit indication of tightening is already telegraphing the imminent bottoming-out of rates. Other central banks, especially the European Central Bank (ECB), are expected to follow as their respective systems get comfortable that they have reached a post-pandemic quiescent state. Second, many of the corporates and industries whose poor credit situation could stay obscured by the pandemic-fueled liquidity will start showing up. This most certainly will lead to reassessment of risk spreads. Together, these two effects will end up raising rates for corporates.
GF: What are the near-term risks to M&A activity?
Thakur: I believe the near-term risks to M&A activity come from a number of different directions. First, the concerns and stance that various governments have become vocal about on the issue of data localization and privacy will make many M&A deals that are premised chiefly on value of data to become completely moot. Then there is the tempering of the SPAC boom over the next year or so. As less money is raised by SPACS—and also as the wheat-chaff distinction becomes evident with SPACS of the 2020-2021 vintage who have invested poorly, or not at all—I believe there will be a lot of targets that will be left unacquired. Finally, as mentioned earlier, the general, almost global, political climate against large corporations doing deals will certainly reduce the value of M&A transacted.