Smith: 'Cautious, but Needful' M&A to Define 2026

Bloomberg

Watch Smith: 'Cautious, but Needful' M&A to Define 2026 - Bloomberg on Dailymotion

Transcript

00:00We know that 2025 gangbusters, when it comes to M&A, it seems like a lot of that activity

00:04came in the latter half of the year. And interestingly, you point out in your notes that

00:08a lot of that came from larger ticket deals. It was the deals

00:12worth less than $1 billion that really declined last year.

00:18That's true. And first of all, Romain, Katie, thank you for having me on again. Happy New Year.

00:22We definitely saw sort of a separation from the large deals versus the medium and smaller deals

00:27last year. Overall, as you've already pointed out, it was a gangbuster year for M&A,

00:32really up almost 70% in tech from about $450 billion to over $750 billion. But a lot of that

00:39did come from those larger deals. As we saw, the bigger companies and PE firms weighed in to

00:46participate in a number of those large transactions. And as you mentioned, Katie, a lot of those that

00:52were in the smaller end of the scale, $1 billion or less, really we saw a decline in that market

00:57by about 20%. We think overall volatility in the markets that we saw, we think the effect of

01:02tariffs, at least in the first half of the year, a lack of alignment on valuation, all those

01:07contributed to a decline in that part of the overall M&A segment. We think it's going to be

01:11better in 2026, but it was definitely kind of the haves and the have-nots for 2025.

01:16And Ted, I'd love to talk about how those deals are getting done, so to speak. We were just talking

01:21about Warner Brothers' discovery, seemingly uncomfortable with the debt financing as it relates

01:26to the Paramount Skydance bid. That might be a very unique situation here. But when it comes to how

01:31these deals are being paid for, what trends are you seeing when it comes to cash versus equity versus

01:36debt? Yeah, we're certainly still seeing cash being king, as cliche as that is. We see that in most of

01:42the transactions around tech. Obviously, larger deals, whether it be Warner Brothers, Netflix, Skydance,

01:50obviously there has the potential for a significant amount of debt as there is in at least one of those

01:54situations. Tech buyers tend to finance principally with cash off their balance sheet, except for the

02:00very largest of transactions. The same is generally true for private equity firms. As interest rates

02:06have gone up until 2025 when they started to come back down, the use of debt for most PE buyers has

02:13tapered off a bit. They'll still use debt, just not as much as they have in the past. So I still think

02:20this is all about strategics and sponsors spending cash that they have in their funds or on their

02:26balance sheets, potentially backfilling with debt after a transaction closes. We're still not seeing

02:32a terribly large amount of pure equity driven, stock driven transactions, although that could change

02:38given the overall strength in the underlying equity markets that we continue to see. Given the regulatory

02:43environment, Ted, do you think that the more prudent exit option would be through the equity markets, the

02:50public equity markets or with a private M&A transaction?

02:55We still continue to believe, and obviously as M&A advisors, this is what we're trained to believe, that the M&A exit

03:01is going to be the better alternative. We think the IPO markets are open for a select few companies that remain

03:07of scale and that can truly get multi-billion dollar valuations in the public markets. That was a fairly

03:13challenging path last year. It felt like those markets were opening up after we got through the first half

03:19of the year and the effects of tariffs. And then we ran into the government shutdown that put a number of

03:25companies on the sidelines in the fourth quarter that were hoping to get public. Obviously, it's really

03:30early in the new year now. We haven't seen many of those companies announce their intention to come back

03:35public just yet. But the reality of it is the IPOs that we saw a number of companies come out and do

03:41have very large day one pops only to lose significant amount of market value after the fact.

03:47And overall, tech IPOs that came out last year underperformed the S&P. So even though there were some

03:53notable bright spots and we still see companies that evaluate the IPOs as a liquidity option, the vast

03:59majority of companies that we think are going to get liquidity for themselves and their investors are still

04:03going to do it through a sale to a strategic or financial buyer. Yeah, I was actually looking at

04:08some of the returns on some of those big names from last year. Definitely a mixed picture. But it

04:12gets to the idea too, Ted, about this idea of how companies want to grow right now and whether that

04:18can be done organically or whether they really still need to be involved in the M&A process in order

04:23to get that scale or continue to build that scale. I think the larger companies are always going to be

04:29evaluating the need for M&A to enhance their slowing organic growth. We certainly see that in the

04:36technology sector and a number of the transactions that have been announced over the course of the

04:41last year. And I believe we're going to continue to see that. Cautious buyers, to be sure, but needful

04:48buyers. And we think the large strategics will continue to participate in that. And we also think

04:53that the investors in the companies to be acquired, particularly those private companies at least,

04:58to be acquired, really have a need for liquidity on their own end, given the age of their funds,

05:03given the demand that their investors, the LPs in those funds, have for liquidity today.

05:08So we think that this year really is going to see a further opening up in the M&A markets because

05:13you've got, as you point out, Romain, the need for growth on the part of the strategic buyers,

05:18at least, and the need to sell on the part of the investors in the private companies that are

05:22involved in those transactions. Well, Ted, you touched on something that I've been wondering about,

05:26which is, you know, when we think about the dealmaking that we might see in 2026,

05:30how much of that is basically going to be a function of maybe some of these private equity

05:35investors have held on to their investments for too long and they need some sort of liquidity,

05:41some sort of exit opportunity at this point?

05:44We think that's going to be a huge driver. It's that groundswell began in 2025 and we think it's going

05:49to continue an increase this year, depending on how you look at the statistics that are out there,

05:55anywhere from 25 to 50 percent of current investments by private equity venture and

06:02growth equity players are out of funds that are 10 years old or older. And most of those vehicles

06:08are intended to be 10 to 15 year vehicles in and of themselves. So now you've got aging funds,

06:13aging investments in a desperate need for the for the funds that have those investments to seek

06:19liquidity through traditional sell side processes or an emerging class of solution around continuation

06:25vehicles, which we're also seeing a significant upswing in.

Category

Transcript

Be the first to comment

Recommended