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The 'Vortex of Volatility' and the Merger Market  

Intralinks, the provider of inter-enterprise collaboration products that is perhaps best known for its Deal Flow Predictor, recently interviewed Paul Aversano, a managing director at the consultancy Alvarez & Marsal.

Aversano leads A&M’s private equity services practice, and he is the global practice leader of the transaction advisory group. He has been in the merger and acquisitions business for a quarter century, so it is worthy of attention when he says that mergers are now taking place within a unique “vortex of volatility,” with an unprecedented number of variables driving the markets.

Intralinks interviewed him about the components of this vortex, and of how undeterred market participants might best carry on within it.

Globalization and Politics

The volatility is both a result of the globalization of the world and of the fact that the leaders of important nation states don’t want the world to be globalized. As a sign of the extent of financial globalization, Aversano alludes to the Turkish currency crisis of a year ago, and of how that sent the value of US stocks down.

As an example of the consequences of anti-globalization politics, Aversano says that on a recent trip to China, he was “given to understand that Chinese businesses effectively see the U.S. market as shut.” This is in stark contrast to the situation in 2016, “where we saw Chinese bidders in pretty much every situation.”  The change has been brought about not by China’s capital outflow restrictions, though they do have an impact, and not by US protectionist measures narrowly understood either, (the interview in late April, preceded the latest shots in the US/China trade war). The chief driver of the change in climate has been the more intrusive scrutiny Chinese participation in the market gets from the Committee for Foreign Investment in the US (CFIUS).

CFIUS is an inter-agency committee of the US government charged with reviewing the national security implications of foreign investments. Last year, the administration pushed through a new law enhancing its powers over certain types of FDI—a move especially aimed at concern about Chinese investors.

Such geopolitical developments not only reduce the number of bidders in US deals, definitionally reducing the value of assets on the auction block ceteris paribus, they also, Aversano says, create a feeling of uncertainty that has an impact on global debt and equity markets, public and private.

Technology and Dry Powder

Geopolitics does not account for the entire vortex. There is the ongoing digital revolution and the way it continues to transform some of the assets that underlie M&A deals, especially in the retail world. “Every deal now is a technology deal,” Aversano says, “and every company needs a digital transformation strategy.”

Separately, some sectors benefit—and M&A activity in some sectors benefits—from lower oil prices. Other sectors on the other hand are chilled by this. In either case uncertainty can increase volatility, contributing to the vortex.

There are also factors within the M&A market itself that are troublesome. There is a record level of “dry powder” in the system, $2 trillion according to a recent Preqin estimate. There are a lot of new market entrants of various descriptions, all looking at the same assets: these entrants include sovereign wealth funds, family offices, and other participants who would once have “allocated capital to private equity funds but are now investing in their own right.”

A related novelty: more than 50% of PE deals are now being done as secondary buyouts; and in excess of 60% are being done as bolt-on or tuck-in acquisitions.

Don’t Be Afraid

Despite the risks of the vortex, Aversano believes that fortune favors the bold. He encourages buyers to “assume the risk and find creative ways of dealing with it.” This can’t mean buying into acquisitions justified only as financial engineering or exercises in operational efficiency. Rather, deals should add value.

“Exact strategies will depend on the regions,” he says, but present circumstances mean that “you need to be tactical about what your post-deal value creation plan is and have that in place pre-acquisition.”

Overall, Aversano is bullish about the M&A market. During the global financial crisis funding for deals from traditional lenders dried up. That doesn’t seem likely to happen again in the near- or medium-term future. There is too wide a range of new sources for funding.