NEW YORK • Dealmaking came roaring back in the first quarter, climbing to a record US$1.1 trillion (S$1.48 trillion) as big acquirers moved past the pandemic slowdown and blank-cheque companies snapped up targets.
It is the best start of the year since at least 1998, according to data compiled by Bloomberg.
Mergers and acquisitions soared in every region, with North American acquirers leading the way with US$644 billion of transactions. Deals by European buyers rose 41 per cent to US$286 billion, while companies in the Asia-Pacific spent US$261 billion.
"I haven't seen these levels of activity for a long time and I don't see a meaningful slowdown any time soon," said Ms Alison Harding-Jones, head of merger and acquisition (M&A) for Europe, the Middle East and Africa at Citigroup.
"Stocks are highly valued, financing markets are supportive and there's money coming in from a number of places."
After the Covid-19 lockdowns grounded deal advisers and threatened revenue across industries last year, optimism about vaccine programmes and economic growth are driving the 2021 boom, dealmakers said. The busy first quarter built on a rebound in M&A that started towards the end of last year.
"Confidence is what drives M&A deals even when the markets may be overvalued," said Mr Scott Barshay, chair of the corporate department at law firm Paul, Weiss, Rifkind, Wharton & Garrison.
Mr Barshay singled out industrials companies, which have announced the year's biggest deals, as being particularly active compared with last year as furloughs and supply-chain challenges ease up. There is also optimism in that sector that "everyone will be back to work in a normalised way by the end of the year, and they will be helped by the fiscal stimulus," he added.
AerCap Holdings' US$30 billion acquisition of General Electric's jet-leasing business was the biggest deal of the quarter, followed by Canadian Pacific Railway's purchase of Kansas City Southern for US$25 billion.
What is missing? Mega, mega deals - the US$50 billion-plus behemoths that shake up industries and attract extra scrutiny from regulators. There have been no transactions above that mark since mid-2019, the data shows, when AbbVie agreed to acquire botox maker Allergan for about US$63 billion. That is not necessarily a bad thing, bankers said.
"The number of deals and the flow are a sign of a healthier M&A market, rather than just a few big deals here or there that are skewing the numbers," said Mr Steven Baronoff, chairman of global M&A at Bank of America Corp.
Meanwhile, Spacs - or special purpose acquisition companies - are playing an outsize role in dealmaking. The blank-cheque vehicles, which raised US$85 billion through initial public offerings (IPOs) last year and another US$99 billion this year, have now started putting that money to use.
Deals in which public companies bought private businesses made up US$435 billion of the first quarter's activity, the data shows, though that number is likely much higher as financial terms of such transactions are not always disclosed. That is 86 per cent higher than a year ago, and could be partly due to the boom in blank-cheque M&A.
The biggest Spac deal of the quarter was Churchill Capital Corp's acquisition of electric vehicle start-up Lucid Motors, which will list at a pro-forma equity value of US$24 billion.
Given that Spacs usually find a deal worth about five times their equity capital, according to Goldman Sachs Group strategists, vehicles that have raised money this year alone could be looking for as much as US$500 billion in transactions.
"The scarcity of opportunities matched against the wall of money means that folks are maybe being less discerning in terms of their views on quality," said Mr Colin Ryan, Goldman Sachs' co-head of mergers and acquisitions in the Americas and global co-head of technology M&A.
In response, banks are being picker. "We take the view that we're going to do only de-Spac transactions for companies that are companies that we would otherwise take public," Mr Ryan added.
The number of blank-cheque companies on the hunt for a target, as well as investors' reception of IPOs from consumer-facing technology brands like Airbnb and DoorDash, could be tempting some potential M&A targets to tap the public markets instead.
"I would say there is a degree where companies that would have normally pursued an outright sale are now looking at IPOs or Spacs," said Mr Madhu Namburi, global head of technology investment banking at JPMorgan Chase & Co.
But technology strategics remain very active in deals, Mr Namburi added. "Despite where the valuations are, we find the interest level is actually pretty high, and because strategics' own stock prices are attractive, it's giving them lots of confidence overall," he said.
One sign of a potentially overheated market is the return of unsolicited deals and bidding wars, which stacked up in the first quarter as acquirers fought over tech and industrial targets.
The battle for laser maker Coherent went to eight rounds while US defence electronics maker Cubic Corp accepted a sweetened offer on Wednesday from investment firms after Singapore Technologies Engineering showed up with a counter-bid.
Insurer Chubb, meanwhile, made a public US$23 billion offer for Hartford Financial Services Group, which has so far rejected its advances.
Mr Mayooran Elalingam, head of investment banking coverage and advisory for the Asia-Pacific at Deutsche Bank, said that deals are being driven by competitive pressures and technology changes, and not just companies wanting to optimise their balance sheet.
"CEOs are focused on owning the right portfolio assets for the long run," Mr Elalingam said.
Protectionist sentiment killed at least one US$20 billion cross-border deal in the quarter. Canada's Alimentation Couche-Tard's friendly takeover bid for French grocery chain Carrefour was blocked by the French government.
As the first quarter drew to a close, dealmakers in the United States and in other regions are closely watching US President Joe Biden's appointments at the Justice Department and the Federal Trade Commission (FTC). The fear is any big changes to antitrust policy that could stymie mega deals.
"Especially for companies looking at large deals, there is concern about what kind of reception they will meet in Washington, once it becomes clear what the antitrust policy is going to be," Mr Barshay said.
Mr Biden has said he would nominate to the FTC law professor Lina Khan, an antitrust expert who has warned about the power of dominant technology companies.
Besides technology, healthcare deals could come under scrutiny. This week, the FTC sued to block Illumina's US$7.1 billion proposed acquisition of testing firm Grail.
At least for now, there is no sign the activity will let up. "The next six months or so will be very busy," Ms Harding-Jones said.