- Wikimedia Commons
This year has not been the best for Wall Street dealmakers.
Global deal volume – of about $1.5 trillion – is below where it stood in the past two years to date, according to Dealogic. That is down from $1.9 trillion in the same period in 2015.
Until Microsoft announced that it would be acquiring LinkedIn for $26 billion on Monday, there just hasn’t been much to write home about. And the year has also been marked by the unraveling of some mega deals struck in 2015.
Business Insider spoke with a handful of top deal makers on Wall Street about what’s on their minds, and what they expect to see throughout the rest of the year.
They all agreed that a volatile market in the first six weeks of the year was a major impediment. Cautious shareholders can have disproportionate effects on the M&A business – they also argued that comparisons to 2015’s record volumes are a little unreasonable. Compared to 2014, which was also a robust year for deals, the environment right now looks much better.
Another common complaint was the regulatory environment. Major transactions like Staples-Office Depot, Halliburton-Baker Hughes, and the $160 billion Pfizer-Allergan merger have all been called off because of government concerns in 2016.
While several bankers pointed to power, chemicals, and healthcare as important sectors to watch going forward, they also agreed that the big looming question was what would happen to the energy sector.
And, of course, one of the biggest themes in M&A this year has been China. Chinese companies struck $92.2 billion of deals outside the country in the first quarter, including ChemChina’s $48 billion purchase of Syngenta, Tianjin Tianhai’s $6.3 billion bid for Ingram Micro, and Qingdao’s $5.4 billion deal for General Electric’s appliance business.
We spoke to all five bankers before the Microsoft-LinkedIn merger was announced this week, but that deal appears to fit within their broad message: that things will continue to pick up throughout the year.
The M&A business is all about confidence
- Goldman Sachs
Stephan Feldgoise – Cohead of M&A for the Americas, Goldman Sachs
Feldgoise explained the current M&A environment from the point of view of the buyers and sellers.
“The M&A business is all about confidence,” he said. “Nothing is ever 100% certain, and so the confidence to take some degree of risk – whether that be cross-border, whether that be size, whether that be integration, whether that be putting out your stock to the market or being involved in an antitrust process – that is all affected by, ‘Am I confident overall?'”
The fact that we’re in an election year will also add some degree of uncertainty to the market, he added.
In light of that, Feldgoise said, many buyers are shifting their focus from the mega mergers to the midsize deals in the $2 billion to $10 billion range, which are more likely to be successfully executed. The uncertainty, or lack of confidence, also means that bankers need to focus on the technical terms of deals – things like breakup fees, in case deals don’t close.
Feldgoise highlighted another important trend in the M&A market taking place within the private-equity space. Essentially, he said, there is a “new class of private equity” made up of institutional pension investors and family offices that become direct partners as financiers or otherwise.
For example, when Apollo Global Management brought the security business ADT private, the private-equity arm of the Koch brothers’ family office participated directly in the financing of the deal. It’s not unlike what Warren Buffett has been doing for years, but it’s becoming more mainstream.
“This is right up there in terms of the most important things in the market,” Feldgoise said.
Chinese buyers know what they want and go get it
Kurt Simon – Global chairman of M&A, JPMorgan Chase
While deal volume is down relative to last year, Simon is “very optimistic about the balance of the year.”
For one thing, he noted, the cost of capital is still “incredibly attractive.” Markets are open and liquid, and despite some choppiness, he remains upbeat about the US economy.
“That, combined with attractive financing markets, should lead to an uptick in activity,” he said.
Additionally, he said, corporates looking to accelerate growth may look to M&A to boost growth rates, considering the low-growth economic environment.
“The third factor I might look at is: The IPO market remains challenged,” Simon said. “So those companies and those investors are going to need liquidity, and I think that also will be an accelerant in our M&A pipeline for the balance of the year.”
On Chinese outbound M&A, Simon said that the deal activity has been “very systematic” and concentrated in areas like agriculture, technology, and – more specifically – semiconductors.
“I think this is going to be here to stay for a long, long time for these key industries, where they feel it’s important for their domestic market to have leadership positions,” Simon said. “They are aggressive, they know what they want, and go get it.”
What worries me is that valuations are pretty high
Mark Shafir – Cohead of global M&A and head of global technology, media, and telecom banking, Citigroup
The regulatory environment has been a big part of the M&A story in 2016, but Shafir takes it all in his stride.
Regulatory enforcement tends to go in cycles, and we appear to be heading for a more aggressive enforcement cycle, but it’s not as though we haven’t seen this before. Whether it’s just the regulators getting more aggressive, or whether it’s the deals that are pushing the edge of the envelope, it’s hard to tell. I just view that as something that we all come to learn to live with over the years.
He has other things on his mind.
“What worries me is that valuations are pretty high. Year-to-date, we’re sort of at or above the previous peak in 2007 in terms of EBITDA multiples,” Shafir said.
He noted that if we’re in a rising interest-rate environment, then it will boost the cost of debt, and therefore the cost of transactions, which could put a damper on things.
“There are arguably some potential clouds on the horizon, but it still feels pretty good to me right now,” he said, adding that some of the concerns that were circling earlier in the year around market turbulence have subsided.
He expects to see activity in industrials, power and utilities, and tech. Within tech, he said, software, semis, and computer services are the spots to watch.
Companies were aggressive and have seen mixed results
Gary Posternack – Global head of M&A, Barclays
Posternack says that the slower M&A activity relative to previous years all comes down to aggression.
“The M&A market is and always will be a cyclical market, and we will see new peaks in the future,” he said. “Companies were increasingly aggressive through 2015 in accepting execution risk within their transactions and have seen mixed results.”
It’s the lack of success in some of those transactions that’s now weighing on CEOs and boards contemplating their own deals, he said, noting that the most acute drop-off in M&A activity has been within the mega-deal space and that this year’s deal volume is a reflection of that.
Of course, one factor has increased regulatory scrutiny, but Posternack chalks that up to riskier deals rather than stricter regulators.
“I think it’s less of a shift in the regulatory environment than a reflection on some of the transactions, which have been announced in the last year to 18 months,” he said. “Buyers have taken more risk, and as a result of that, we’re seeing a certain number of those transactions not ultimately come to fruition.”
Going forward, Posternack expects to see continued activity in the technology, media, and telecom space, as well as healthcare.
Sectors with higher velocity of change have seen more deal activity
- Deutsche Bank
Jim Ratigan – Head of Americas M&A, Deutsche Bank Ratigan said that while some areas of M&A – mainly the mega deals – have slowed this year, his team, and many on Wall Street, are keeping busy in deal space under $10 billion.
“That size range is the kind of size range that may not drive league tables but does drive profitability at many firms across the Street,” Ratigan said. “So we’re very focused on $500 million to $10 billion deals, no question.”
As for which sectors to watch, he said that it’s all about which industries are getting disrupted quickest.
The last handful of years we’ve seen the sectors with higher velocity of change have seen more deal activity – so obviously tech and healthcare have been high on the list in the last few years.
Industrials, chems, and basic materials have been big sectors for consolidation so far this year and they’re conducive to cross-border consolidation as well, so I think we’ll continue to see activity there.
He said he expects consolidation in the energy and financial-institutions sectors – not in 2016, but next year and in the years that follow.
He also pointed to a number of sectors that have, in his opinion, generally finished consolidating. Those include large-cap defense, large-cap cable and telecoms, the beer industry, and a number of other subsectors within consumer and retail.