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Why 2021 could be a record year for M&A

Despite a pandemic-fueled M&A decline in the first half of 2020, activity for the year ranked 6th for largest U.S. transactions value in the post global financial crisis 2007-2008 period. Brian Salsberg, EY Global Buy and Integrate Leader, joins Yahoo Finance Live to discuss why conditions are ripe for already resilient M&A activity in the U.S. to accelerate in 2021 and beyond.

Video Transcript

MYLES UDLAND: All right, let's turn our attention now to the M&A markets for 2021. Now, when we came in to 2020, quite a different backdrop. We were looking at stocks that were, again, at a record high.

We were looking at an economy that was continuing to expand. And then the script got completely flipped in 2020. But what does the backdrop now look like as we enter a new economic cycle?

Joining us now to discuss is Brian Salsberg. He is the Global Buy and Integrate Leader at EY. Brian, thanks for joining this morning. So let's just start there with your overall outlook on the M&A environment, as people like to characterize it. What does that mean to you? And where does it stand as we start 2021?

BRIAN SALSBERG: Well, good morning. Yeah, look, we-- we think that 2021 could be a record year for M&A. What we've seen is that from a market where M&A basically stopped in the March, April, May time frame, it's sort of come back with a roar in the last few months in terms of hitting new highs.

And we think that, you know, things are ripe for 2021 being one of the largest markets or biggest M&A markets we've-- we've ever seen. And a lot of that is a combination, I would think, of the disruption that you're seeing in almost every industry that was either caused by or accelerated by the pandemic. And then on top of that, you know, record low cost of capital and high stock prices, and as well as what most people would say is a relatively favorable political environment.

BRIAN SOZZI: Brian, why do companies making these acquisitions-- we've had several this morning, Centene out there paying up to buy another insurance company. Why does it appear that companies are completely ignoring valuations?

BRIAN SALSBERG: Yeah, I think it's-- I think it's a couple of things. I think it's-- it's a bit of a timing and kind of a race to build scale phenomenon, number one. I think there's-- there's a lot of just optimism. There's-- there's not a lot on the near-term horizon that causes them huge concern. And then, like I said, the-- I think the cost to borrow money now is sort of-- it's so low.

And the valuations cut both ways. You know, not all those are stock deals, obviously. But having, you know, a high stock price also means your ability to raise cash at high prices is there. So I think it's-- in most clients I've spoken with, they see a window to acquire and also view that if they don't make a move their competitors will.

JULIE HYMAN: You know, what's strange, Brian, is where the deals have not been. In other words, as far as I can see, we have not had a lot of deal making in the distressed areas of the market, in, say, travel and leisure, for example. In the oil sector, there haven't necessarily been as many deals as you might think. Why not, do you think, because you tend to see some consolidation among-- in times of distress, at times, for these types of companies? And is that going to change in 2021?

BRIAN SALSBERG: Yeah, so basically, a lot of this is a disconnect between what sellers think the value is and buyers think it is. And so I think if you're a seller in a lot of the industries you mentioned, the notion is that their-- they don't want to look their shareholders in the eye and say we kind of sold at a low. And many of them think that we will bounce back to where we were. Now, whether that's going to happen in 2021, it's unlikely, depending upon the sector. So that's a main thing.

Oil and gas is-- is similar, but also a little bit more complicated. Because whereas a few years ago, I think, you almost certainly would have seen big consolidation, even of the oil majors just given the-- the shareholder pressures right now around sustainability, et cetera, there's real questions about with the money you have, do you try to make a clean energy strategy or do you-- do you roll up the business? And also, even the private equity firms who just a couple of years ago were very keen on that sector have sort of dialed back a bit. So I think it's a bunch of different things, but a lot of it is just a disconnect between valuations.

BRIAN SOZZI: Brian, what are CEOs and other executives at acquiring companies telling you about how they're going to go about integrating these companies? Because on a day one of acquisition, usually the acquiring company's CEO holds a big town hall meeting, meets and greets employees. But that can't happen now during a pandemic.

BRIAN SALSBERG: No, that's right. You know, we-- we at EY have integrated a bunch of companies since March virtually. And you know, on the positive side, there is a lot of tools, whether it's not just things like Zoom, but sort of integration and project management software that lets you do everything on the cloud and remotely. So a lot of that stuff, you know, fortunately, we're able to do.

But-- but the people element is certainly the one that is the most challenging. And while we have ways, and there are ways to get people together virtually, I think you're right that-- that culture is going to be something that people are going to have to work on going forward. That being said, I would say, you know, this virtual environment really hasn't stopped too many deals from happening.

Even from a due diligence perspective, use of remote and even things like drone technology to inspect sites has sort of come to its own during this pandemic. So the real test, I think, will be 6, 12 months from now when these companies that have merged get together physically in person. They've got a little bit of catch up to do to really integrate the thing-- the companies culturally.

MYLES UDLAND: And then, Brian, just finally kind of picking up on that point, certainly the way that you go about doing your diligence, even finding your targets, has changed in this remote world. Do you think it has maybe reset the opportunity set, as it were, for some of these acquirers, given that they now think like oh, I actually can do all my diligence on this business even though it is located here or it's kind of in this area, because we found that, you know, through these remote tools, it wasn't quite the challenge it might have seemed, you know, given the dynamics that we assumed back in, you know, the before times?

BRIAN SALSBERG: Yeah, there's no doubt. I mean, I would say I don't think that we are ever going to replace a lot of that in-person kicking the tires, et cetera. But it certainly has increased the comfort level that CEOs, and CFOs, and even boards of directors have in terms of getting these deals done in this environment. And so, you know, a lot of these digital and online tools are certainly here to stay and the comfort level with them. And I think, like in many things coming out of this pandemic, we're going to see a hybrid of virtual digital approach that won't go away.

MYLES UDLAND: All right, Brian Salsberg with EY. Brian, thanks so much for joining the program this morning. Really appreciate the time.

BRIAN SALSBERG: Great. Thanks for having me.