US M&A progressed steadily through the first half of 2021. The COVID-19 vaccination roll-out has allowed the economy to begin reopening, stock markets have remained strong, and dealmakers have moved to accelerate deployment and put deal schedules back on track after lockdown disruption.

The outlook for M&A remains very positive for the second half of the year. Below we consider some key themes that are likely to be at the top of dealmakers' agendas.

1. Regulation could complicate dealmaking

The Biden administration has made antitrust a key focus of its policy agenda, with the technology sector a priority area. The White House remains focused on the impact of M&A on national security and CFIUS has been allocated additional resources and the SEC, under its new chair Gary Gensler, is expected to take a more aggressive approach to securities law enforcement.

This does not mean deals will not progress. Effective bidders will have to adapt and demonstrate understanding of how to prepare transactions in advance to secure regulatory clearance.

2. Energy transition will fuel M&A

The Biden administration's ambitious targets to achieve net zero carbon emissions will drive a surge of M&A activity in the energy and infrastructure sectors as corporates pivot their portfolios away from hydrocarbons and move to retrofit and build infrastructure for renewables. There will also be follow-on effects in other sectors, with consumers already showing preference for 'green' brands and suppliers, while financial institutions see opportunity to create ESG-focused financial products and finance energy transition projects.

3. SPACs continue to be an important factor

There are signs that the red-hot capital market for SPACs is cooling off. Shares in some SPACs have fallen after completing a deal this year, in contrast to the rising share prices that greeted SPAC purchases in 2020. Retail investors and institutions have opted to sell their shares when deals don't meet expectations.

So much capital has been raised by SPACs, however, that even at the current frenetic pace of dealmaking, SPAC acquisitions are still lagging the pace of new SPAC IPOs. With SPACs given two years to deploy their funds, these dealmakers will remain active and influential for the next 24 months, even if the pace of new listings does not reach the same heights as its peak in Q1 2021.

4. The sector lens is widening

The pandemic saw dealmakers narrow their investment focus to a select group of high-quality companies in a small group of industries that did well throughout the pandemic. Resilient technology and healthcare assets were the most prized, with consumer, leisure and aviation deemed too risky.

Dealmakers will continue to invest heavily in tech and healthcare, but industries hardest hit by lockdowns are starting to draw dealmaker attention to a broader range of targets. The gradual reopening of hospitality, travel and entertainment and clearer visibility of future earnings, will help to direct more capital into these industries.

5. Liquidity remains high, but watch out for inflation

Extensive government stimulus and dovish monetary policy are expected to continue supporting the provision of abundant liquidity. There are early signs of inflation increasing, however, and the Federal Reserve has indicated that it plans to raise interest rates in 2023—sooner than it previously suggested. Over the medium to long term, this could ease M&A valuations and balance out what has been a market slanted in favor of vendors.

6. Stock markets could pull back

Stock markets plunged early in the pandemic, sharply rebounded, and then surged to new highs in the second half of 2020 and the first half of 2021. Rising market caps fueled dealmaking throughout the last 12 months. Similarly, a significant pullback in the next year could put a significant damper on M&A activity.

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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