While COVID-19 is resulting in unprecedented volatility, headwinds during election cycles are not uncommon. M&A activity has always been cyclical in nature. In the US, volatility continues to remain a thread that links M&A cycles to past election years. The 2008 election unfolded against the backdrop of a widespread financial crisis, while the fallout from the bursting of the dot-com bubble disrupted the 2000 cycle. 2020 looks to be no different, given the evolving ramifications of COVID-19.
With the past serving as a guide, our full-length white paper draws on PitchBook datasets to examine the impact of US election cycles on dealmaking. Anchored by the below interview with Craig Clay, president of global capital markets at DFIN, this piece also offers insights into navigating the M&A landscape during turbulent times.
COVID-19 has already radically affected markets and policy discussions going forward. As we grapple with the fallout, what security measures should clients be thinking about knowing that “shelter in place” means “working from home”?
CLAY: Protect your devices and data, just like you would in the workplace. Some reminders include keeping in close contact with your IT department and using what is in their toolbox. Stay current on software updates and keep VPN on at all times. Lastly, beware of COVID-19 themed phishing emails. Bad actors are taking advantage of the crisis. The best solution for sharing business-critical documents is to use a virtual data room. Utilizing a collaborative online platform is more crucial than ever when access to inperson meetings is prohibited. VDRs are not just for deals. Today, they are critical for internal collaboration that delivers bank-grade security while providing timesaving benefits using AI.
Data privacy has overtaken antitrust and drug pricing, among other policy areas. What explains the rise of data as a presiding concern in the C-Suite, and which shifts in the market around data privacy do you anticipate this cycle will shape?
CLAY: Two things have been playing out heading into this cycle. The first is data privacy, and then there’s the separate but related set of concerns around cybersecurity. Particularly for the general public, data privacy has become top of mind as we all come to understand more about the sheer amount of data on us that platforms such as Facebook and Google collect with each passing day. These concerns have already informed policy moves as witnessed with the implementation of GDPR across the EU in 2018 and the California Consumer Privacy Act coming online at the start of this year. These policies have brought data privacy compliance squarely into the purview of the C-Suite on a level comparable to extant concerns around ensuring the security of the digital assets and IT infrastructure of the enterprise.
In addition, the FTC released its new position on data security at the beginning of the year, giving companies a clearer understanding of the FTC’s expectations for security practices. The new orders emphasized the role of executives in taking responsibility for overseeing policy in the hopes that C-Suite and board level buy-in will improve compliance. Under the new orders, companies must present their board with an annual report on their security program, and senior officers must directly provide the FTC with certifications of compliance in hopes this will force senior managers to gather detailed information about the company’s information security program, so they can personally corroborate compliance with an order’s key provisions each year.
But the emerging picture of data privacy as a complementary concern to cybersecurity could become a lot more complex with the spread of COVID-19. In coordination with leaders in health and tech, federal officials have discussed aggregating and anonymizing user data to track user location in order to monitor the spread of COVID-19. These moves not only represent a complicated balancing act around data privacy and the public good, but also take place against the patchwork of state policies and a much older privacy regime in HIPAA that outlines the lawful use of health information. How this situation is resolved could very well inform data privacy standards for the foreseeable future, representing a natural extension of the ongoing policy conversation around the federal government stepping up to unite state-by-state data privacy regulations. As a result, I would expect to see consolidation in the data privacy market as sizable enterprises try to acquire smaller, more nimble players with more advanced technologies that could solve one-off problems. Big companies often focus on the security of their large networks. So, I anticipate an uptick in the strategic acquisition of compliance solutions providers as incumbents look to expand existing platforms.
With that in mind, what additional benefits to the safety, security and accessibility of data do you expect from the expanded deployment of AI and machine learning in financial services?
CLAY: In just a few short years, AI and machine learning have become tools necessary to improve productivity and build a company’s value chain. AI deployed to service a host of clients, ranging from law firms and advisers to corporates and private equity, in a secure data room has improved the quality and efficiency of engagements across each phase of the transaction. With the recent mandates surrounding COVID-19 regarding minimizing movement and physical contact, most professionals are working from home. VDRs and AI are even more pressing and vital to the productivity, security and efficiency for transactions to move forward during this pandemic. In addition to security and accessibility of VDRs, there are skills AI & ML can be trained to do from the moment users begin to use the platform, including facilitating tasks like contract review. The eBrevia contract reviewer, for example, learns from behaviors around specific clauses, say, and in relatively short order starts to become very specific in how it operates per the accounting or law firm using it. From our vantage point, these tools add tremendous value for our clients because they make it easier for people to do their jobs, leverage their ability to focus on higher level analytics and input to provide their own clients with better insight. It is also crucial during times like these, where the human workforce may not be at full working capacity and these tools can fill the gaps.
With so much talk of antitrust examinations, do you anticipate any divestitures by any companies or spinouts, or is that too premature?
CLAY: That still seems premature, particularly as the markets continue to grapple with the impacts of COVID-19. Rather, I suspect that the lure of innovation will continue to drive people to leave positions at tech giants and other companies to start things where they can move more quickly or get funding for more targeted innovations. I return to the security side as an example. A single tool, perhaps one that’s very much needed to address a certain compliance or regulatory framework, can come to market, prompting someone to say, “We’re going to buy that, because why build it in-house when this is quicker and faster?” The need for speed and agility is no less at a premium today, and I anticipate that need should continue to inform exit and acquihire activity going forward. Organic growth may take a back burner to inorganic.
What’s shaping up this election cycle that stands out from your experience?
CLAY: A number of the most recent presidential elections have coincided with some truly trying times—and by no means just for markets. This election cycle is no exception. The election in 2000 coincided with the dot-com bubble bursting, sending stock markets plummeting. Flash forward to 2008, that election took place in the some of the darkest days in living memory. When a market’s down by historic margins, that’s certainly not an election cycle issue. That’s a macroeconomic issue. It’s tough to say what the future holds, but this election cycle may register in the data in a similar manner. All the same, you can see some correlation in the numbers between a policy or regulation coming online and its impact on dealmaking. In the years since the JOBS Act encouraged small businesses to become public companies, the SEC has made the filing process easier to manage with the support of smaller regulations like the FAST Act, adopted a year ago, to simplify certain disclosure requirements in Regulation S-K, including incorporation by reference.
In the future, I anticipate technology to continue evolving alongside the regulatory ecosystem around direct listings. That’s not a near-term bet, though, as there’s no underwritten issuance of shares in a direct listing, which can cause a lot of unwanted volatility without the stabilization effort and price management regime that investment banks provide. SPACs are also viable paths for companies exploring growth funding and liquidity outside of a traditional public offering and with close to 90 SPACs looking for acquisitions, this will certainly remain a viable option.
But these are unpredictable times. While this year is unlike any other, our global economy will recover. It always has. Through it all, we’re reminded that technology connects us like never before. This connectivity will continue to change the way we work, while yielding enormous productivity benefits for those firms that are well-positioned. Further, it’s likely safe to say that organizations that are at the forefront of ESG practices will lead the way by demonstrating how to maximize the intersection of technology and regulation, with the patience, understanding and compassion necessary to adapt in an everchanging landscape.
I wish all companies well through this crisis. Together, we will get through it.