Keywords Studios, a British-listed company that provides services to some of the largest video game developers, has had a challenging year.
The company’s share price began to weaken in May last year amid concerns about the impact of artificial intelligence on its business. To add to the pressure, short sellers – investors who profit when a stock falls – have made it one of the most targeted listings in Britain.
The Swedish private equity group EQT kept a close eye on developments. Last week, Keywords announced it was in advanced talks over a £2.2 billion takeover by EQT, after previously rejecting four proposals from the buyout investor.
However, there is more than just opportunism at play here. At £25.50 per share, the latest proposal represents a premium of more than 70 percent to Keywords’ pre-announcement share price. It is also a big increase since its initial public offering in 2013, which valued it at less than £50m.
The proposed acquisition is just the latest sign of an uptick in takeover activity, as previously timid companies and investors begin to find the confidence to pursue major mergers and acquisitions after a period of economic turbulence.
“The market is definitely coming back, companies are taking risks and there is an appetite for big deals,” said Mark Sorrell, Global Co-Head of M&A at Goldman Sachs.
Global acquisitions totaled $1.3 trillion this year, up 23 percent from the same period last year, according to data compiled by the London Stock Exchange Group.
That total was made possible by megadeals, with acquisitions worth more than $10 billion increasing 75 percent year-over-year to $338 billion.
Historic bids included oil and gas producer ConocoPhillips’ $22.5 billion takeover of Marathon Oil and Spanish bank BBVA’s €12 billion hostile bid for domestic rival Sabadell, which it also owns from TSB in Great Britain. There has also been an attempted takeover by Australian miner BHP of British-listed rival Anglo American, which failed this week.
However, advisers acknowledge that the recent surge in deals follows the worst-performing year in a decade, and warn that significant political and economic uncertainty still hangs over the mergers market.
The biggest variable is the outcome of the US election, with a second Trump administration expected to be more flexible on major takeovers than a new term of Joe Biden, whose economic team has stepped up antitrust enforcement.
In Britain, where the opposition Labor party is the odds-on favorite to win the July election, business leaders have many unanswered questions about what policies a new government would pursue.
And in the background, the series of rate cuts from major central banks, expected to begin this year, continues to be postponed amid persistent inflation data.
While M&A volumes have reached a two-year high, they are well below pandemic record levels and lagging behind more normal years such as 2019.
“I don’t think there is a flood of new deals being announced yet. We are rebuilding the pipeline and it will take a few months to get through that,” said Melissa Sawyer, Global Head of M&A at New York law firm Sullivan & Cromwell.
Much of the recovery from the deal has taken place in the US. U.S. transactions account for 57 percent of the global total, up from 46 percent a year ago and the largest share of total mergers and acquisitions in a quarter century.
Further supporting this sense of recovery, 18 of the top 20 deals so far this year involved a US target.
Activity in Europe has also increased, with a 31 percent increase this year compared to the same period. Britain has been a particular hub for dealmaking, with mergers and acquisitions up 74 percent annually – even after excluding the failed mega-mining deal.
British takeovers have been fueled by lower valuations in the London market, which has been out of favor with global investors since the 2016 Brexit referendum.
Last week, British postal service owner Royal Mail agreed to a £5.3 billion takeover by Czech billionaire Daniel Křetínský, while US International Paper agreed in April to a £7.8 billion takeover of the British paper and packaging group DS Smith.
“It’s different here than we initially expected at the start of the year, because UK M&A – especially in the public arena – is very active,” said David Avery-Gee, head of the London M&A practice at law firm Weil, Gotshal & Manges. .
“There is a lot more confidence in London and that is partly because the stock markets are performing quite well, but we still see that there is a valuation discount for listed companies compared to the US,” he adds.
Outside the US and Europe it was rockier. Mergers and acquisitions in Asia Pacific are down 26 percent this year, falling below $200 billion at this point in the year for the first time in 11 years.
The acquisition agreements reached this year are also not evenly distributed across sectors or transaction types. Energy and power transactions lead across all sectors, while deals in the telecom and consumer sectors lag behind.
A specific area where dealmaking takes place has recovered more slowly than expected by buyout investors. During the first five months of the year, the value of deals closed by private equity worldwide amounted to $286 billion, an increase of more than 30 percent compared to the same period the year before.
“We’re pretty optimistic based on what we’re seeing,” said John Maldonado, managing partner at Advent International. “It is a healthy mix of sponsor sellers, strategic sellers and some listed companies.”
While this number is still far from the record high of $486 billion in 2022, it still marks the fourth highest value of transactions by buyout groups in at least two decades, the data show.
Dealmakers say the recovery might have been even stronger if there had been no delay in funding cost cuts and disagreements over valuations.
“You don’t have the same frenzy as 2021 or 2022. It’s on a selective basis,” said Eric Liu, head of EQT’s North American private equity business. “Private equity firms have a lot of capital to invest.”
Much of the slowdown in PE dealmaking can be attributed to a continued slowdown in private equity firms selling assets to each other, a type of transaction that has grown rapidly in an era of ultra-low interest rates.
A discrepancy between price expectations between buyer and seller has led to a number of so-called ‘pass the packet deals’ falling through, including potential transactions between pet food company Partner in Pet Food, commercial laundry company JLA and holiday resort group Center Parcs, the Financial Times previously reported.
“Buyers are generally more cautious,” said Dean Mihas, co-CEO of US private equity group GTCR. “A much higher number of processes [deals] fail because sellers hope to get a certain valuation.”
Although activity has increased in terms of the total value of transactions, the number of deals closed by buyout groups fell by almost 50 percent year-on-year over the same period.
Still, dealmakers say it’s inevitable that private equity groups will continue to ramp up their transactions because they own nearly $3 trillion in assets worldwide that need to be sold so they can return money to their institutional backers.
“There is enormous pressure to return money to investors. In any case, there is increasing pressure to close deals as time goes on,” says Romain Dambre, partner at A&O Shearman.
Some dealmakers remained on the sidelines due to political uncertainty in the US, where the Biden administration has introduced a strict regulatory environment. Regulators, for example, have accused Google of using anti-competitive agreements to dominate search traffic and have said they will take a tougher stance on dealmaking by major private equity firms.
Blair Effron, co-founder of independent advisor Centerview Partners, says several companies have posted strong profits in recent months “leading to an increase in transactions.” But he adds that “the largest transactions are still happening at a slow pace until there is more clarity on the macroeconomic and political environment.”
In particular, stricter antitrust enforcement has made completing large deals much more complex.
“Regulation is still a big problem, and people are still very concerned about it, especially in an election year in the US. I think a number of companies are hesitant to put a target on their back to become a talking point in a political debate,” says Sawyer of Sullivan & Cromwell.
“Technology has been hit more than most sectors, if only because the Federal Trade Commission has focused heavily on large technology deals, and small technology deals as well,” she adds. “Health care has also been affected.”
But some dealmakers say boardrooms and advisers are learning to live with stricter regulations.
“The regulatory environment in the US remains very challenging. But for dealmakers, companies, CEOs and boards, there is more certainty about the uncertainty,” said Ed Lee, a partner at law firm Kirkland & Ellis, who focuses on mergers and acquisitions. Companies now have a better understanding of ‘what to expect from the process’.
Geopolitical instability and technological disruption have created some opportunities for dealmaking, especially in the energy and financial services sectors, he says. Technology companies’ growing energy needs, especially the processing power needed for artificial intelligence, could spur dealmaking in sectors from data centers to traditional utilities.
“Energy companies see the need and opportunity to scale up and prepare for a changing world,” says Lee. “You are able to withstand change and adapt to it from a better position with more scale.”
While deals picked up at the start of the year, there remains a chance of a slowdown later, especially as the US elections approach in November. Typically, dealmakers have postponed major transactions around these types of political events to let the dust settle.
“Maybe the elections are a bit of a pipe dream? Of course that could be the case,” says Goldman’s Sorrell. “[But] the headline is: we are working on recovery.”