The Pipeline: M&A and IPO Insights | S.3 Ep. 3 - M&A Outlook Brightens as Financial Sponsors Prepare to Ramp Up Activity

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Joe Mantone [00:00:04]:

Welcome to another episode of the Pipeline, an S&P Global market intelligence podcast that dives deep into the world of M&A and IPOs. I'm your host, Joe Mantone, and today I will speak with Carol Stryker, the head of deal advisory and strategy at KPMG in the U.S. Carol, thank you for taking the time.

 

Carol Stryker [00:00:26]:

Thanks for having me, Joe. Appreciate it.

 

Joe Mantone [00:00:28]:

I'm excited to have Carol join us today because KPMG recently conducted a survey of dealmakers and asked about the impact tariffs are having on M&A decision making. Initially, it was clear that the tariff plan brought a pause to M&A as it introduced a significant amount of economic uncertainty and it raised questions about strategic initiatives for many dealmakers. But now some time has passed since the administration first unveiled this proposal. So I think it's a good point to have a discussion about tariffs and their impact on M&A. So I will ask Carol about The findings from KPMG's recent survey and also about the M and A outlook in general. But before we do, Carol, could you give us a little bit of background about yourself and your work at kpmg?

 

Carol Stryker [00:01:21]:

Yeah, happy to. So I lead our deal advisory and strategy practice here at kpmg for the US been doing deals for about 30 years and obviously we work with a lot of executives, deal makers both in private equity and strategic clients that are looking to do deals both buy side and sell side. And so really have that 30,000 foot view level insights into the market.

 

Joe Mantone [00:01:45]:

Yeah, it's great to have that full continuum there for sure. Okay, so sort of kick things off here. Can you provide an overview of KPMG's recent survey which was a mid year M&A survey. How was it conducted and when was it conducted?

 

Carol Stryker [00:02:02]:

Yeah, absolutely. So we do this about twice a year. In May we did the most recent one and we Talked to about 300 big deal makers and we broke that down about half and half, half private equity and those were all private equities with funds over 500 million and corporate accounts that were dealmakers with their revenues of their business over a billion dollars. And so we really look at this to see the sentiment of dealmakers over a period of time. We did the last one in November and like you said, Joe, this one in May, about a month after the tariff announcement to just allow that to sink in and assess how they were looking at the impact from tariffs and what that would do to the M&A landscape as we look forward into this year.

 

Joe Mantone [00:02:47]:

Great. And so what were some of the key takeaways from the survey?

 

Carol Stryker [00:02:51]:

Well, very excited to say that it was very optimistic. A lot of the deal makers were still very positive about M&A and continuing to be optimistic into 25 and 26. You know, a couple of the things that they pointed to is just the new administration and continued optimism around the new administrations that specifically around tax policy and antitrust initiatives. We also saw that, you know, tariffs, like you mentioned, it did cause some slowdowns. And what we saw in our business and what we saw in the survey is really, you know, some slowdowns in that April timeframe. But really also it allowed them to have some opportunities for them to look into new geographies and think about M and A as a catalyst to help them doing just that. And then as you think about just the fundamentals of M&A. Right.

 

Carol Stryker [00:03:39]:

They're still very important in the survey around why they're doing deals. You know, moving into new territories, moving into strategic reasons of doing the deal. Different sectors that are more likely to be hot this next year than others. So a lot of good information from the survey, but generally very optimistic.

 

Joe Mantone [00:04:00]:

So moving into new areas, new geographies. So is that because of tariffs, do you think?

 

Carol Stryker [00:04:06]:

Yeah, absolutely. I think partially because of that. As they, as they look at these tariffs and understand the impacts to their business, they need to understand their supply chain, where are their businesses located and how they might need to pivot and change because of tariffs. And so in some of the survey results, we even saw some individuals, some companies looking to accelerate their M&A activity from a tariffs perspective.

 

Joe Mantone [00:04:32]:

Okay, yeah, that makes sense to kind of take a little bit of a pause and try to figure out what's the best way to operate going forward. Something I did notice in the survey was I think about 20% of the respondents had said that tariffs add extra costs to deals and can add some time to the deal making process as well. How does that work? How would tariffs add cost and time to deals?

 

Carol Stryker [00:04:55]:

Yeah, it's a great question. So really, as you think about it, tariffs are going to be an additional costs potentially to the business based on the type of business that they're looking at. But if the business is impacted by tariffs, it's going to be an additional cost. And so as you think about that, you know, M&A, you need to figure out your valuation, what's the price you want to pay for that asset. It's creating extra work to be done, extra work and due diligence, extra time to do the diligence. And so those elements of Extra due diligence and extra time to do it are what scale making it more complicated and a little bit more burden on the buyers and looking at the businesses that they want to transact with.

 

Joe Mantone [00:05:38]:

Sure, that makes sense. How about valuations overall? I mean, do tariffs just sort of complicate that process?

 

Carol Stryker [00:05:45]:

Yeah, absolutely. And it's added a level of uncertainty, right? Like I said, with tariffs, there is this level of uncertainty as to what it means. This pause obviously has added another element in what are going to ultimately happen with the tariffs. But this uncertainty is something that our clients are having to navigate through. You know, here's the thing. We've been living in this of age of compound volatility for a while. You know, tariffs are really just the next round of uncertainty or volatility. If it's not Covid, then it's interest rates.

 

Carol Stryker [00:06:20]:

If it's not interest rates, it's tariff. Right. So this is what our clients are just having to kind of navigate through is their, their next round of volatility that they're figuring out.

 

Joe Mantone [00:06:31]:

Yeah, that does make sense. It does seem like we've been dealing with one hurdle after another. So. But just keeping the topic on tariffs for a little bit while longer here, did the survey results say that if some sectors are more impacted by tariffs than others?

 

Carol Stryker [00:06:47]:

Yeah, absolutely. So as you would expect, right. Industrial manufacturing was the one that the survey respondents and what we're seeing in our business, as well as being the sector that would be most impacted from M&A from tariffs. And that's not surprising as you think about, you know, automotive industry having an impact from the tariff perspective, the steel industry, you know, those are areas within the industrial manufacturing space where we see obviously a lot of impact. So that would be the number one. The next area that was impacted was our technology, media and telecoms of TMT ranked second. Almost 40% of the respondents had indicated that as an area that's most impacted from tariffs. And as you think about, you know, our tech hardware comes from East Asia and this administration, you know, proposing more tariffs from things coming in from overseas.

 

Carol Stryker [00:07:41]:

Not surprised to see that as being kind of the area that's second most. And then the third one was, as you guys would guess, right, consumer and retail, again, a lot of things that are in the consumer and retail space are reliant on a global supply chain. And with tariffs, that is creating more uncertainty within that space.

 

Joe Mantone [00:08:02]:

Makes sense. So what's the advice that KPMG is giving your clients right now?

 

Carol Stryker [00:08:08]:

Yeah, I mean, it's, it's quite simple, you know, do very thorough due diligence, do a lot of different models, look at different scenarios, do sensitivities to those. What's your best case, what's your worst case, what's your most likely case? Scenarios? Use financial models. We at KPMG have a, a great tariff modeling tool that will help you analyze things, the key variables around tariffs, exchange rates, interest rates, all those things. But just recommending to our clients that they need to make sure that they're looking at different scenarios and sensitivities around those.

 

Joe Mantone [00:08:40]:

You mentioned earlier on that there's some optimism and you said that some of that's stemming from the current administration. So, you know, so our dealmakers feeling pretty positive about the administration, you know, aside from the tariffs, are they feeling pretty hopeful about the environment for dealmaking?

 

Carol Stryker [00:08:59]:

Yeah, absolutely. And when we look at both the November survey as well as the May survey, there was definitely optimism around this administration's policies. You know, specifically they talk to the tax policy, antitrust perspectives, maybe a little bit less scrutiny. You know, I will say, and I've said this before, is that even in the last Trump administration, it wasn't a complete green light when it came to doing deals. There was things that were being scrutinized. But I think in comparison to the last administration, there's some real optimism around their ability to increase M and A under his four year term.

 

Joe Mantone [00:09:33]:

Yeah, it definitely seems like this administration is a little bit more pro M&A or, you know, all about fueling economic growth.

 

Carol Stryker [00:09:41]:

Yeah.

 

Joe Mantone [00:09:42]:

Okay. What are some other drivers to M and A that you see out there?

 

Carol Stryker [00:09:46]:

You know, another interesting driver is AI. Everybody's talking about AI and it's impacting all parts of our businesses. And it wouldn't be any different if we didn't say it was impacting M&A. Right. So from an M&A perspective, we saw in the response that there is an element of our clients needing to react to AI, transform their businesses, and that can be through using M&A as a catalyst to acquire new technology, to acquire new talent. In a separate survey that we did around AI specifically, 72% of the respondents said that they plan to use M&A as a way to acquire AI into their businesses. AI talent, AI technology. So that's a catalyst also that we're seeing from an M&A perspective.

 

Joe Mantone [00:10:37]:

Yeah, I know a lot of companies have that decision whether to sort of build it in house or buy it.

 

Carol Stryker [00:10:43]:

Exactly.

 

Joe Mantone [00:10:44]:

I know energy has been a sector where it's been pretty active in M&A. In recent years. Is that something that KPMG is expecting to. To continue, to continue growing?

 

Carol Stryker [00:10:54]:

Yeah, so, yeah, absolutely. What we saw both. What we see in our business right now is energy is a. Is a very busy part of our practice right now. And we also saw it in the, the survey as well. And, you know, actually a little bit ties back to AI from the standpoint of, as you think about the amount of energy that is needing to be utilized to power this AI revolution. That is something that I think is spurring M&A activity. You can see in January, the announcement of Constellation Energy.

 

Carol Stryker [00:11:32]:

They did about a $30 billion acquisition of Calpine Energy. And part of the rationale was the really, the growing demand for energy in the United States. So we definitely are seeing energy being very busy. We expect it to continue to be so for multiple reasons, I just being.

 

Joe Mantone [00:11:49]:

One of them in general. What. What are dealmakers saying about valuations right now?

 

Carol Stryker [00:11:55]:

Yeah, so valuations continue to be high. I think about almost half of the respondents said that the valuations are high right now. You know, as. As we look at what we've seen in the market and how we've seen it kind of unfold, we saw the valuation gap that was probably much more significant about a year ago, narrow, getting into closer alignment. We saw that coming together. But we still see a valuation gap between buyers and sellers. And how I break that down is, is a couple things. You know, assets that are really good, what we call kind of a assets, those that are growing and have good margins, those are selling, they're selling quickly and they're going for really good valuations.

 

Carol Stryker [00:12:37]:

But assets that are not transacting and. Or there's a valuation gap maybe have a little bit of hair on them. And there's just a. There's a gap in regards to buyers and sellers within the space. And I think sellers are still hopeful that they'll get the valuations that they saw in 2021, and buyers are not willing to pay those. Those types of prices unless they're A plus assets. So still seeing a misalignment from a valuations perspective in the market, right?

 

Joe Mantone [00:13:07]:

Yeah. And I know that private equity is a key part to M&A. Are those valuations, those gaps still keeping some private equity activity on the sidelines?

 

Carol Stryker [00:13:17]:

Yes, absolutely. So it's really interesting because what we see when you break down the private equity space, obviously the fundamentals of them needing to do deals and wanting to do deals, there's a ton of dry powder to put to work. There is a parking lot Full of assets that are ready to transact. So a lot of those fundamentals are there. But if you break down the specific space a little bit, when we look at sponsor to sponsor deals, so that's private equity to private equity buyers and sellers. In the year to date 25 period, that was only about 23 billion of transactions. And so if you compare that to the full year of last year of about $60 billion, you know, they're far below what they were in prior years. And the peak if you look at 2021 was about 168 billion.

 

Carol Stryker [00:14:06]:

So about half of sponsor to sponsor deals this year compared to what we were at the peak of 2021. And it goes back in my mind to the valuation gap. Right? Sponsor to sponsor deals, they're not able to transact on those deals, most likely because there's not a corporate coming in to pay synergies and have that strategic rationale of doing the deal. And so the numbers are just not making sense in the sponsor to sponsor deals. So an interesting data point as we look at this year.

 

Joe Mantone [00:14:37]:

Right. So kind of sort of kicking the can down the road for the full exit. The IPO market. I mean, that helps with private equity too. I don't know how closely you follow the IPO market, but that's something that we highlighted in our last episode that it was starting to pick up a bit. What is KPMG seeing in terms of IPOs?

 

Carol Stryker [00:14:57]:

So probably similar to what was on your last podcast, you know, it is picking up. It is positive momentum coming into this year. And what we're seeing with our clients is some of them are even looking at doing dual processes or not looking at. Are doing dual processes to look at an exit from an IPO perspective or a sale to a corporate or another private equity just to keep the optionality open. And so we do see that positive momentum. You know, I say the US listed IPOs from 2015 to 2019 were much more significant than they are right now. About half of what we're seeing right now. So again, positive momentum, but not nearly as fruitful it was prior to Covid as an exit strategy.

 

Joe Mantone [00:15:41]:

Yeah, that's nice to hear. The dual track process is back. I haven't heard anyone mention that in a while, so that's great.

 

Carol Stryker [00:15:48]:

Yeah, we're seeing a little bit of that in the market right now.

 

Joe Mantone [00:15:51]:

Okay, Any other final thoughts on the deal making outlook or thoughts in general?

 

Carol Stryker [00:15:57]:

I would just say kind of what I started with is just some positive momentum. I'm very excited to see the results of May. I didn't know what the tariffs if it would change the sentiment of dealmakers, but it has seemed to the fundamentals of people needing to transact and showcasing that dealmakers are really positive about the rest of 25 and going into 26 as well. So that is what I would leave us with.

 

Joe Mantone [00:16:20]:

Okay, great. Well, thanks a lot for taking the time, Carol, and thanks for listening.

 

Carol Stryker [00:16:24]:

Thank you for having me. Really appreciate it.