IPOs, mergers surge as dealmakers ride post-lockdown rebound

By Jim Tyson for CFODive.com

• The global market for Initial Public Offerings (IPOs) surged during the third quarter, with 547 IPOs raising $106.3 billion, the highest levels in two decades, according to EY. IPOs in the Americas continued at a record pace during Q3, with 409 transactions since January, valued at $133.6 billion.

• Meanwhile, global mergers and acquisitions hit a new record during the first nine months of the year, with 43,865 deals at a total value of $4.33 trillion, according to Refinitiv. 

• North American buyers financed more than half of global M&A during the third quarter, Willis Towers Watson said, adding that dealmaking is on pace this year to exceed 2015's record.

Record-low interest rates, high stock valuations, abundant capital and the global rebound from the pandemic-induced recession will likely continue fueling IPOs and dealmaking in coming months, finance and M&A experts say.

“An accommodative market backdrop and valuations toward the upper ends of historical ranges have encouraged numerous issuers to go public,” Rachel Gerring, IPO leader for EY Americas, said. “Barring substantial upsets in market backdrop and continued strong after-market performance, a slowdown in new issue activity is unlikely."

Private equity firms hold a record $2.9 trillion in dry powder, and the IMF forecasts the global economy, after shrinking 3.2% last year, will expand 6% by the end of 2021 and 4.9% in 2022. The U.S. economy will probably grow 7% this year and 4.9% in 2022.

“As economic uncertainty melts away from the impact of 2020 lockdowns, companies have embarked on an unprecedented deal spree this year, looking to bulk up and address the vulnerabilities it exposed,” Jana Mercereau, WTW's head of corporate M&A consulting, Great Britain, said. “With the deal pipeline at such record levels, it’s difficult to see M&A activity slowing in the near term.”

The prospect that the period of easy money may soon end has added urgency to dealmaking. The Federal Reserve said last week that it may announce the start of tapering of $120 billion in monthly bond purchases at its next scheduled meeting in early November.

Also, half of the 18 participants in the Fed’s two-day, interest-rate-setting meeting last week indicated they expect to raise the benchmark rate from a record low next year.

“Companies should be looking to make the most of the favorable market conditions and go public,” EY said, while flagging “a host of uncertainties: geopolitical tensions, regulatory changes in flux, inflation risks and tapering” by the Fed.

“At the same time, new variants of COVID-19 are disrupting a full global economic recovery,” EY said. “Serious IPO candidates should look to prepare themselves as early as possible and be ready to launch quickly.”

Transactions involving special purpose acquisition companies (SPACs) have fallen since the first quarter.

“The SPAC market is facing some headwinds: an oversupply of SPACs has created bidding wars, tepid trading performance, lower trading liquidity and the private investments in public equity (PIPE) market has softened while facing increased regulatory and congressional scrutiny,” EY said. “The SPAC market will continue to be an attractive option for the public market, though closing deals may become harder for SPAC sponsors.”

During the second quarter, the number of IPOs involving SPACs plunged 87% compared with the first quarter of 2021, as regulators and investors stepped up scrutiny of the blank-check companies.

Thirty-nine SPACs raised just $6.8 billion during the second quarter compared with 292 that raised $92.3 billion during the first three months of 2021, according to FactSet. The implosion ends more than a year of record growth — SPAC IPOs accounted for more than half of $67 billion in IPO capital raised in the U.S. in 2020, according to Goldman Sachs.

Securities and Exchange Commission Chair Gary Gensler prompted concerns about SPACs in May when he flagged risks to investors and said the agency will investigate how the shell companies raise cash from the public and merge with target companies.