Keywords Studios, a UK-listed company that provides services to some of the biggest video game developers, has had a tough year.
The company’s share price began to weaken in May last year amid concerns about how artificial intelligence could affect its business. To add to the pressure, short sellers – investors who profit when shares fall – have made it one of the most targeted listings in the UK.
Swedish private equity group EQT has been watching closely. Last week, Keywords announced it was in advanced discussions to acquire EQT for £2.2bn, having previously rejected four overtures from a buyout investor.
However, there is more than just opportunism at play. At £25.50 a share, the latest proposal represents a premium of more than 70 per cent to Keywords’ share price before the announcement. It’s also a big rise from its initial public offering in 2013, which valued it at less than £50m.
The proposed acquisition is just the latest sign of an acquisition resurgence as previously timid companies and investors begin to find the confidence to pursue large mergers and acquisitions after a period of economic turmoil.
“The market is definitely coming back, corporates are taking risks, there’s an appetite for big deals,” says Mark Sorrell, Goldman Sachs’ global co-head of mergers and acquisitions.
Global acquisitions this year totaled $1.3 trillion, up 23 percent from the same period last year, according to data compiled by the London Stock Exchange Group.
That total was boosted by mega deals, with acquisitions worth more than $10 billion up 75 percent year-over-year to $338 billion.
Notable bids included ConocoPhillips’ $22.5 billion acquisition of oil and gas producer Marathon Oil and Spanish bank BBVA’s €12 billion hostile bid for domestic rival Sabadell, which also owns TSB in the UK. There was also Australian miner BHP’s £39bn bid to acquire British rival Anglo American, which collapsed this week.
But advisers acknowledge that the recent uptick in deals comes after the worst year of performance in a decade, and warn that a lot of political and economic uncertainty still hangs over the merger market.
The biggest variable is the outcome of the US election, where a second Trump administration would be expected to be more receptive to big takeovers than the next term of Joe Biden, whose economic team has beefed up antitrust enforcement.
In the UK, where the opposition Labor Party is a heavy favorite to win the July election, business leaders have many unanswered questions about the policies the new government would pursue.
And amid the backdrop of a series of interest rate cuts by major central banks set to begin this year, it continues to be pushed back due to sticky inflation data.
While M&A volumes are at a two-year high, they are well below record levels seen during the pandemic and trail activity at the same point in more normal years like 2019.
“I don’t think we’re seeing a flood of new business heralded. We’re rebuilding the pipeline and it’s going to take a few months to get through that,” says Melissa Sawyer, global director of M&A at New York law firm Sullivan & Cromwell.
Much of the recovery in trade has taken place in the US. U.S. deals account for 57 percent of the global total, up from 46 percent a year ago and the largest percentage of total mergers and acquisitions in a quarter century.
To further maintain that sense of recovery, 18 of the top 20 deals this year involved a US target.
Activity also increased in Europe, which saw a 31 percent increase over the same period this year. The UK was a particular hub for M&A deals, up 74 per cent year-on-year – even after excluding the failed mega-mining deal.
The UK takeover was supported by lower valuations in the London market, which has been out of favor with global investors since the 2016 Brexit referendum.
Last week, the owner of British postal service Royal Mail agreed to a £5.3bn takeover by Czech billionaire Daniel Křetínský, while US company International Paper agreed in April to buy British paper and packaging group DS Smith for £7.8bn.
“It’s different here than we originally anticipated at the start of the year because UK M&A – particularly in the public arena – is very active,” says David Avery-Gee, head of London law firm Weil, Gotshal & Manges. .
“There is a lot more confidence in London, partly because the equity markets are doing quite well, but we still see a valuation discount to the US for traded companies,” he adds.
Outside the US and Europe it was more rock. Asia-Pacific mergers and acquisitions fell 26 percent this year, falling below $200 billion this year for the first time in 11 years.
The takeover deals reached this year were also not evenly spread across sectors or transaction types. Power and energy deals lead all industries, while deals in telecom and consumer goods are stretched.
One particular area where business is done is recovering more slowly than expected, according to buyout investors. During the first five months of the year, the value of private equity deals worldwide reached $286 billion, an increase of more than 30 percent compared to the same period of the previous year.
“Based on what we’re seeing, we’re reasonably optimistic,” says John Maldonado, managing partner at Advent International. “It’s a healthy mix of sponsorship vendors, strategic vendors and some public companies.”
While that number fell somewhat short of the record $486 billion set in 2022, it still represented the fourth-highest transaction value for buyout groups in at least 20 years, the data show.
Traders say the recovery could have been even stronger had it not been for delays in cutting borrowing costs and disagreements over valuations.
“You don’t have the same frenzy that you have in 2021 or 2022. It’s on a selective basis,” says Eric Liu, head of EQT’s North American private equity business. “Private equity companies have a lot of capital to invest.”
Much of the delay in closing securities deals can be attributed to the continued slowdown in private equity firms selling assets to each other, the type of transactions that have grown rapidly in the era of ultra-low interest rates.
A mismatch in price expectations between buyer and seller has led to a number of so-called “pass the package” deals falling through, including potential transactions involving pet food company Partner in Pet Food, commercial laundry JLA and leisure center group Center Parcs, financial office. Times previously reported.
“Buyers are generally more cautious,” says Dean Mihas, co-chief executive of US private equity group GTCR. “Much higher speed of processes [deals] they fail because the sellers hope to get a certain valuation.”
While activity in terms of total transaction value increased, the number of deals closed by buyout groups fell by nearly 50 percent year-over-year in the same period.
Still, dealers say it’s inevitable that private equity groups will continue to step up deals because they’re sitting on nearly $3 trillion in assets globally that need to be sold to return cash to their institutional backers.
“There is huge pressure to return money to investors. In any case, there is increased pressure to close deals as time goes on,” says Romain Dambre, partner at A&O Shearman.
Some dealers stayed away due to political uncertainty in the US, where the Biden administration has implemented a tough regulatory environment. For example, regulators have accused Google of using anti-competitive agreements to dominate search traffic and said they will take a tougher stance on deal-making by large private equity firms.
Blair Effron, co-founder of independent adviser Centerview Partners, says several companies have reported strong earnings in recent months, “which is leading to an increase in transactions.” But he adds that “the biggest deals are still moving at a slow pace until the macroeconomic and political environment clears up.”
In particular, tougher antitrust enforcement has made closing big deals much more difficult.
“Regulation is still a big issue and people are still very worried about it, especially in an election year in the US. I think a lot of companies are hesitant to put a target on their backs to become a talking point in the political debate,” says Sullivan & Cromwell’s Sawyer.
“Tech has been hit harder than most sectors, just because the Federal Trade Commission has been very focused on big tech deals and small tech deals,” he adds. “It also affected the health sector.”
But some dealers say boardrooms and advisers are learning to live with tighter regulations.
“The regulatory environment in the US remains very challenging. But for marketers, companies, CEOs and boards, there’s more certainty about uncertainty,” says Ed Lee, M&A partner at law firm Kirkland & Ellis. Companies now have a better understanding of “what to expect from the process”.
Geopolitical instability and technological disruption have created some opportunities for deals, particularly in the energy and financial services sectors, he says. The growing energy demands of technology companies, particularly the computing power needed for artificial intelligence, could spur deal-making in sectors ranging from data centers to traditional utilities.
“Energy companies see a need and opportunity to expand and prepare for a changing world,” says Lee. “You are able to resist and adapt to change from a better position with greater scope.”
While business has picked up at the start of the year, there is still potential for a slowdown later, especially as the US election approaches in November. Typically, dealers have held off on large transactions around this kind of political event to allow the dust to settle.
“Can elections be a bit of an air pocket? Of course it can be,” says Goldman’s Sorrell. “[But] the caption reads: We are in recovery.’