M&A optimists get a dose of reality
Dealmakers are usually the worst at calling the end of a cycle. But judging by the mood at the biggest M&A gathering of the year, the future looks a lot less bright than a year ago.
The top deal lawyers, bankers, proxy solicitors, spin-doctors and journalists attending the Tulane Corporate Law Institute conference in New Orleans aren’t quite saying that the dealmaking bull run that started in 2013-14 is over — after all this is a crowd of ultimate optimists (except the reporters).
What is clear, though, is that very few people are expecting 2019 to be as rich in activity as in the past. The best clue that things aren’t as bright as they’ve been in the past few years? Everyone seems to be spending much more time talking about shareholder activism than megadeals.
It’s true that many of those at the conference tend to focus more on either aiding or countering raucous hedge fund investors trying to drive change at listed companies. Still, this is a sophisticated crowd that had a broad pulse of the market.
Mark Shafir, Citigroup’s co-head of global M&A, said that the M&A data so far are “disconcerting”. Below is a slide he shared that explains that we should expect a slower year (clue: the sign were clear from the second half of last year):
The biggest problem is uncertainty: political, economic and social. The big elephant in the room is Donald Trump, for a change. The volatile leadership of the US president, especially when it comes to trade matters with China and Europe, has many concerned that there is diminished visibility to get deals done.
What makes life harder is that activist investors (and now even institutional stock pickers) are making it harder to close agreed deals. On top of that, the share prices of the acquirer has been going down, not up after a transaction is announced. No acquiring chief executive wants to see that happen, alas, more of them prefer to pass on dealmaking.
The best example is Bristol-Myers Squibb’s $90bn (agreed) deal to acquire rival drugmaker Celgene. Bristol-Myers’ share price fell 14 per cent after the deal was announced in early January, and since then, Wellington, the respected institutional investor, and activist hedge fund Starboard have come out saying they’ll vote against the takeover.
But don’t despair yet. The party isn’t completely over.
The broader environment for transacting remains pretty strong. Interest rates are low, which means raising cash is cheap, and economic growth remains subdued, two factors that have driven the M&A boom of the past six years or so.
On top of that technological disruption will continue to force many traditional companies, across all sectors, to make meaningful deals to remain relevant and in business. A perfect example of such a deal would be Altria, the US maker of Marlboro cigarettes, making a huge investment to buy a stake in Juul, the electronic version of smokes.
“There’s a convergence of factors that lead me to be cautiously optimistic: the need for companies to enhance technology, the available liquidity, and the fact that there’s still a lot of good assets,” said Michael DeFranco, the chair of Baker McKenzie’s global M&A practice. “Then there’s the activists pushing for sales.”
To sum up the debate between bulls and bears look no further.
To the masters of the universe, everything is a trade
“Pretty funny. The way the world works these days is unbelievable.” Indeed it is.
If you haven’t been following the college admissions scandal, that’s a quote from William McGlashan,pictured below, a former top executive at the private equity firm TPG.
He was so desperate to get his son into the University of Southern California that he allegedly paid more than $250,000 to a consultant to fake the younger McGlashan’s footballing abilities using Photoshop and doctor his university entrance exam.
Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour.
One parent told Singer he’d been recommended by “people at Goldman Sachs”.
Some spectators were basking in schadenfreude at the humiliation of parents in the highest echelons of society accused of lying and cheating to get their children into university.
Ironically McGlashan was head of social impact investing at TPG and co-founded The Rise Fund, a socially conscious investment vehicle, with U2 frontman Bono. McGlashan said he had resigned from both roles while TPG claimed it had fired him for cause, the FT’s Andrew Edgecliffe-Johnson reported.
In his statement McGlashan said: “There are aspects of the story that have yet to emerge that I wish I could share.”
Elsewhere, Manuel Henriquez, the founder and chief executive of venture capital firm Hercules Capital, has also stepped down after being named in the complaint.
It’s unclear if the indictments will affect profits at any of these firms. But law firms and financial sponsors sell themselves on their good judgment, which some of their biggest rainmakers seemingly haven’t shown.
How not to do DD on Chinese IPOs
Hong Kong’s Securities and Futures Commission has gone after four global investment banks for shoddy due diligence with what amounts to its biggest cumulative fine to date.
The SFC said on Thursday it had penalised UBS, Morgan Stanley, Bank of America Merrill Lynch and Standard Chartered a total of about HK$786.7m ($100m) after an investigation revealed gaping holes in the banks’ roles as sponsors for initial public offerings. UBS will also lose its IPO sponsorship licence for a year.
In Hong Kong, IPO sponsors are legally responsible for claims made in prospectuses, and the SFC has warned investment bankers that they must improve due diligence on companies when preparing for a float or face consequences.
The record-breaking fines are connected to two offending IPOs: China Forestry in 2009 and Tianhe Chemicals in 2014. StanChart worked on the former, BofA and Morgan Stanley on the latter. UBS did both, hence the Swiss bank paying the bulk of the fine. More on the situation here.
For a taste of what went wrong, here are a few excerpts from the SFC’s sanctions:
When doing DD on Tianhe’s customer base to make sure it had the scale of business it claimed, “Morgan Stanley did not have direct contact with Tianhe’s customers for the purpose of setting up due diligence interviews or confirming the mode and place of the interviews”.
Tianhe’s purported biggest customer, a state-owned company referred to as “customer X”, evaded meetings and, at one point during an interview with Merrill and the other banks, one of its representatives “refused to produce his identity and business cards and stormed out of the meeting room”. (Nothing to see here, folks.)
A cornerstone investor did its own DD and reported irregularities to banks. “The potential cornerstone investor’s apparent inability to locate the representative of customer X should have raised a red flag. Even if this alone was not a sufficient red flag this is all the more so when it was compounded with what happened during Merrill Lynch’s interview with the individual.”
UBS and StanChart failed miserably to confirm that China Forestry actually owned the forests it said it did. Both banks “claimed that other professional parties, including lawyers and forestry experts, were involved in some of the site inspections. However, none of them had been instructed to verify the existence of the group’s forests as disclosed in the prospectus.”
Investors in Hong Kong should feel comforted by the fact that, a decade later, the SFC will get around to handling these things.