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Here’s what a surge in M&A activity means for the economy

Moelis & Company Chief Operating Officer Elizabeth Crain joins Yahoo Finance Live to discuss what investors can expect from M&A trends in 2021.

Video Transcript

JARED BLIKRE: It's been an eventful year in financial markets, and we have seen IPO activity picking up. We've also seen the IPO market hot, we've seen M&A hot as well. Joining us now to talk all things capital markets as we wrap up 2020 is Elizabeth Crain. She is the chief operating officer over at Moelis and Company. Elizabeth, great to talk with you this morning. I'd love to begin by talking about how you are seeing the year 2020, what the meetings have been like through each quarter with your clients, and sort of how surprised you are that we are sitting where we are today, given how things looked at the end of Q1?

ELIZABETH CRAIN: Well, good morning. I'm so pleased to join you this morning. You're right, it's been an unbelievable year. And as you think about where we are, certainly from an M&A and capital market standpoint today, relative to the last couple of quarters, it's been quite eventful. As we all know, first quarter was very active. And then from an M&A standpoint, business pretty much shut down in that second quarter, and then began to resume over the summer with a focus on companies that benefited from the stay at home economy, more COVID resilient, and now we are seeing activity much more widespread across virtually every sector, and led by both strategic and financial sponsors.

And particularly, at this moment in time, we're seeing tremendous activity in what we call that power middle. Companies with a market cap between $500 million and $4 billion.

JULIE HYMAN: Elizabeth, it's Julie here. It's great to talk to you and get your perspective on all of this. Motivation-wise, where are a lot of these deals coming from? In other words, is it from an area of strength or an area of weakness in more cases, would you say?

ELIZABETH CRAIN: I think it's a little bit of both. And there is certainly this desire on the part of so many companies to accelerate business transition, and that transition may have been planned, it may have been under way, it could be something they contemplated over the next couple of years. But this environment seems to be almost a catalyst for transformation. We've seen how quickly things can change, and companies are looking to M&A to position them faster to respond in this environment, and faster to be competitive in the future. So I actually think it's a little bit of both. Both defensive and offensive is what we're seeing.

BRIAN SOZZI: Elizabeth, do you think we'll see next year more radical transformations? And I'm already starting to see this to close out this year, S&P Global spent $44 billion to buy IHS, you have [INAUDIBLE] and [INAUDIBLE] joining forces this morning. These are, at least to me, pretty big deals that fundamentally changes two companies, and it's address them at this point.

ELIZABETH CRAIN: Absolutely. And I think that plays into that theme of transformation. I think we're seeing it, I think we're seeing that acceleration of it across so many industries. And that was under way pre-COVID, that intersection of technology and any traditional industry, is where we were spending a considerable amount of time advising our clients. This environment is accelerating that. There's no doubt about it.

JULIE HYMAN: And do you think the fact that we are seeing rates where they are-- presumably, that's also a contributing factor. But do you think that there are deals happening that shouldn't happen? I don't know from your perspective if there are ever deals that shouldn't happen, because it's good for you guys, the more deals that happen. But do you think they're-- just as we are having in discussions here pretty regularly about are things overvalued in stocks right now, are there too many crazy IPOs, what about in deals?

ELIZABETH CRAIN: I think what we're seeing is actually greater confidence. So when you think about the components of what drives M&A, availability capital, interest rates, but importantly, executive board confidence to undertake a transaction. And as we have come into the last quarter of the year, this fall, that confidence level has definitely increased. Companies, including financial sponsors, as they're looking at acquisitions, there's greater confidence in the outlook for '21, '22-- that ability to predict or see line of sight, underwrite a business model, and transact based on that, that confidence in line of sight and to how an asset might perform.

So we think that work is underway. And it's not-- I would attribute it much more to confidence in the outlook for these businesses at this point in time.

JARED BLIKRE: Speaking of that outlook, Elizabeth, I want to circle back to something you mentioned at the beginning, which is that power middle, that $1 to $5 billion type acquisition. This sounds to me like a conversation we would have had 2017, 2018, private equity, capital on the sidelines, look at all these deals I want to do. In some ways, are we continuing simply that theme after a pause for-- I guess the rate hikes in '18, and then pause for the pandemic?

ELIZABETH CRAIN: I do think that is a continued theme, and when you look at the amount of capital that private equity has to deploy, globally, it's about $2 and 1/2 trillion-- it's significant capital. And so that theme is underway, but the added aspect to that is coming back to this confidence. Private equity potentially was certainly less confident in Q2 and over the summer, as they look towards the future at broader industry opportunities, they are confident in what they're seeing in terms of business models as we head into '21, '22.

I think the other thing that we're seeing is this idea that there is-- that we will see, I should say-- this idea that there's this pent up demand. As an individual society, there are so many activities, experiences, products that we're not undertaking right now. And that could be-- that will be, I believe, another accelerant of M&A activity, and I'd look to private equity to have their eyes on those opportunities, and be in front of those opportunities with a confidence level that they can-- that we're seeing the other side of this environment, if you will.

BRIAN SOZZI: Elizabeth, do you think-- SPACs, what we've been seeing-- is that activity good for the market? Certainly the argument could be made-- these companies that are coming public via SPAC, they're receiving less scrutiny as opposed to if they would undergo the traditional IPO process.

ELIZABETH CRAIN: I think-- we believe SPACs are an alternative vehicle for a company to go public. So if a company is ready, if they're prepared, a SPAC-- listing through a SPAC can really shorten that time frame to launch, to be public. And it is, we believe, a permanent alternative. That doesn't mean-- IPOs are very much-- and we're seeing it in this market-- an important means for a company to list, but SPACs are very attractive alternative.

And I think what's also interesting about SPACs is for a management team that's considering a listing IPO through a SPAC, the initial partnership, if you will, access to the experience level of the SPAC executive team, or even of the sponsors, can really be an interesting and added and valuable complement in those early days of being public through a SPAC. And I don't think you get that through a traditional IPO.

JULIE HYMAN: Yeah, and that's perhaps an angle that we don't talk often enough about. Elizabeth, finally, I want to ask you about a change that you all have made at your firm. Ken Moelis, the CEO, recently told Bloomberg, people who work for Moelis can live wherever they want. And so I'm curious, I don't know how recent that allowance is, but I'm curious what the take up has been on that. You guys, what, have over 800 employees, I believe. Are people moving all over the place?

ELIZABETH CRAIN: In this environment, our most important asset is our talent, our people. And we have wanted to provide as much flexibility for our bankers to work anywhere in any way that they want to in this environment. And at the same time, what we're seeing is-- we are seeing our clients-- clients are moving to certain locations. We already have six offices in the US. I would expect in the next couple of years, we may have a few more. And there's going to be a business imperative to have those offices near where our clients are located. That will provide greater flexibility to our employees.

I don't doubt, though, that-- we believe employees will continue to come to the office. There is a learning-- a process of development culture-- that virtuous cycle that happens when people are physically in the room, and even though so much is being done in a virtual environment, it's still different when you're face to face. And there's real value in that.

So we're going to take the best of what we learned in this environment. I am confident we will have a flexibility in how and where we work in the future. But we also believe that individuals are going to keep coming into offices and conduct business in offices in the future. It just may look a little different.

JARED BLIKRE: Certainly with the weather we have moving in today here in New York, it's nice to not have to leave the house. But I think we all wish, certainly the three of us here at Yahoo wish we could be all in one place. All right, Elizabeth Crain is the chief operating officer at Moelis and Company. Elizabeth, great to speak with you this morning. Have a great holiday, a great new year, and hopefully we can talk face to face sometime in 2021.

ELIZABETH CRAIN: I look forward to that. Thank you for having me this morning.