Global mergers and acquisitions (M&A) activity broke records for a second consecutive quarter this year as companies continued to borrow cheaply and spend their cash reserves on transformative deals to reposition themselves for the post-COVID world.
Deals worth $1.5 trillion were announced in the three months to June 30, more than any second quarter on record and up 13% from the record first quarter of the year despite activity among blank-check firms slowed down, Refinitiv data shows.
"This is an environment we haven't seen before because we have very supportive financing markets combined with the pressure to come out of COVID-19 and reorganize entire businesses," said Alison Harding-Jones, head of M&A for Europe, the Middle East and Africa at Citigroup.
"These high levels of activity will likely continue through the summer," she added.
Second quarter volumes rose 440% in the United States with $699 billion worth of M&A deals compared to the same quarter last year when the world's biggest economy came to a halt because of the pandemic.
President Joe Biden's proposed tax hikes drove some companies to rush to complete deals before proceeds get taxed at a higher rate.
"Many transactions are happening because people want to announce and close before the end of the year. It makes sense on all sides from a tax perspective," said Anu Aiyengar, co-head of global M&A at JPMorgan Chase & Co.
Dealmaking in Asia Pacific jumped 104% to $327 billion while Europe was up 50% to $293 billion.
The biggest deals of the quarter were all done domestically, as companies hedged their bets and refrained from hunting outside their home turf, wary of rising protectionism and geopolitical tensions between China and the United States.
"U.S. cross-border activity has decreased by just about every measure you can think about," said Vito Sperduto, co-head of global M&A at RBC Capital Markets.
The $40 billion merger of Southeast Asia's biggest ride-hailing and food-delivery firm, Grab Holdings, with U.S. blank-check firm Altimeter was one of the few sizeable cross-border deals to top the quarterly charts.
Size matters
While the global deal count suffered a 10% contraction compared to the first quarter, the M&A frenzy has translated into a spike in transactions value, with deals greater than $5 billion up 127% in the second quarter.
In the United States, telecoms firm AT&T merged its content unit WarnerMedia with rival Discovery to create a media giant with an enterprise value of about $150 billion, while in Europe two German real estate giants - Vonovia and Deutsche Wohnen - tied the knot in a $34.5 billion merger.
"Corporates have been reset by this crisis and their mantra is now simplification and digitalisation as they strive to become more focused and complement their business model with new technologies," said George Holst, head of the corporate clients group at BNP Paribas.
The telecoms, media and technology (TMT) industry topped the M&A charts with a combination of deals, spin-offs and corporate reorganisations involving the likes of Dell Technologies Inc and Dutch-listed technology investor Prosus NV.
Fearful of falling prey to activist investors, companies across all sectors have taken steps to review their operations and tackle non-performing units.
"We expect a lot of sell-side activity in the second half of the year as many corporates are thinking about carve-outs right now. They feel it is the right time to refocus their businesses and divest non-core assets," said Tariq Hussain, head of European M&A at Jefferies.
But for all its frenzy the second quarter saw a steep decline in SPAC listings as investors grew wary of the asset class and regulators tightened up scrutiny on blank-check companies.
"SPACs are a massive accelerator of deals, but the types of SPACs that will succeed going forward are more institutional in nature. Investors are no longer buying into these vehicles indiscriminately unless they have a solid story and management team," said Dominic Lester, European head of investment banking at Jefferies.
Fast and furious
The decline in SPAC activity was largely offset by a flurry of private equity-backed buyouts which rose 152% in the first six months of the year to $512 billion, representing 18% of global M&A volumes.
"What we're seeing now is cheapness of capital. The cost of capital is obviously playing a role in the activity that we are watching for both strategic and sponsor acquirers," said Lyle Wilpon, head of global M&A at BMO Capital Markets.
In Britain – Europe's biggest M&A market – the bout of private equity assaults was fast and furious with several publicly traded companies such as asset management services provider Sanne receiving multiple proposals before agreeing to a takeover deal.
Dealmakers said a possible hike in interest rates in the second half of the year could make financing conditions less favourable for investment funds but the pressure to deploy capital would remain intact for the next few quarters.
"Dry powder held by sophisticated private equity firms is at record highs which provides for meaningful buyer interest in target companies," said Steven Geller, co-head of global M&A at Credit Suisse.
Yet, the current level of activity might not be sustainable for long.
"Can you really grow off of such a high number of deals? It's more than likely that we are going to stabilise down a little bit because companies have to digest what they've done so far," said Marc-Anthony Hourihan, global co-head of M&A at UBS.