TheChek News Flow

A year ago, the board of Salesforce, one of the most acquisitive companies in tech, disbanded its mergers and acquisitions committee as it faced pressure from activist shareholders to reduce spending. The economic backdrop had sent deal-hunters into hiding. Forecasters braced for a global recession. Investment bankers complained they had nothing to do.

But in recent days there’s been signs that the deal market is beginning to turn. News last week that Salesforce was in talks to buy data management software firm Informatica, valued at $10 billion, was perhaps the best example that corporate buyers are hungry again. Not only have stocks rebounded, satiating activists and other shareholders, but large companies (“strategic buyers,” in M&A parlance) are feeling more confident. Forecasters say the odds of a recession are at their lowest point in a couple years. Meanwhile, first quarter results from banks in recent days showed investment banking revenues are starting to recover from the downturn—for more, see below.

Anton Levy, managing director at the growth equity giant General Atlantic, said at The Information’s Private Capital Conference last week that the change in economic sentiment meant that more tech executives would seek to make large deals. “To have the confidence to do a meaningful acquisition for you, whatever that means for as a CEO, you need to be able to predict the near future,” said Levy, a board member at Squarespace, Vox Media and Chess.com.

Now, he said, CEOs “have a sense of resilience. That creates an environment where you’re going to see M&A pick up.”

Another environmental factor is that sales growth is the prize again. As RBC Capital Markets said in a note sent to clients, revenue growth has been more important than free cash flow margins or gross margins in driving tech valuations up recently.

Companies may not be able to rely on price increases or new products to drive revenue growth, a reality that could send them to an M&A market to satisfy shareholder desires. “This is a moment when most want to purify their business model or grow,” Morgan Stanley chief executive Ted Pick said on the investment bank’s earnings call Tuesday. He added: “It is not surprising that the C-suite wants to act. So I think we are in the early innings of a multiyear M&A supercycle.”

That might be part of the motivation for executives at Salesforce. While its acquisition pause since mid-2021 has helped lift its profit margin to 14.4% in the 12 months to January from around 2% in fiscal 2021 and fiscal 2022, its revenue growth has slowed from around 25% in fiscal 2022 to a projected 9% this fiscal year.

Meanwhile, potential sellers may have finally settled on the fact that they’re no longer worth what they were when interest rates were zero. We reported in January that privately held Israeli cybersecurity startup Noname Security, valued at $1 billion valuation in 2021, was looking to raise money at a lower valuation. It appears to have settled on M&A instead. TechCrunch reported last week that it was in talks to sell to Akamai Technologies for $500 million.

For startups, “there’s a moment in the market right now to be acquired,” Ronan Kennedy, an M&A specialist at the VC firm B Capital, told me. VC firms are looking to combine companies in the same sector, and public companies talk more on earnings calls about making acquisitions, he said. The deals, however, won’t necessarily be at “the valuations we saw in the past,” he said, “but the true business valuations.”

Plenty of factors, of course, work against increased deal-making. One obvious question is the more aggressive antitrust enforcement in the U.S. and Europe, which has put a chill on many internet and semiconductor deals. The other less satisfying one: Are all the companies up for sale worth buying?

Maybe not, said Tony Kim, BlackRock’s managing director of fundamental equities, at our conference last week. For private equity firms that have bought “old, legacy” software companies, “do the strategics want that? Do they actually want to buy that?” he asked, rhetorically. “Especially now in AI, like I'm buying a legacy stack of application software, but like, ‘Hey, the world's going over here.’ It's a very different world.”

Banking’s AI Opportunity

Artificial Intelligence is a growth driver for the banking industry, according to Goldman Sachs CEO David Solomon, who told investors on Monday that AI comes up in “virtually every client conversation I have” and that the expected “demand for AI-related infrastructure” and power will be a “tailwind” for Goldman’s financing and trading businesses.

What Q1 Earnings Reports Are Telling Us

Business is recovering, although we’re a long way short of the halcyon days of 2021.

Goldman Sachs’ investment banking division reported 32% higher fees of $2.08 billion, driven by growth in debt underwriting, advisory work (due to an increase in completed M&A) and from equity underwriting thanks to IPOs and secondary offerings.

“It's clear that we're in the early stages of a reopening of the capital markets,” Solomon said on the call. To put Goldman’s results into context, here’s a chart showing its IB revenues in Q1 going back to 2021:

Meanwhile, JPMorgan investment banking revenue rose 27% to $2 billion on stronger debt and equity underwriting, but M&A advisory fees fell. “We’re seeing better IPO performance,” said JPMorgan CFO Jeremy Barnum on a call with analysts. He noted though that the first quarter reflected “pull-forward,” particularly on debt refinancing, implying the growth rate could slow.

Meanwhile, “regulatory headwinds” are having “a chilling effect” on M&A, Barnum added.

Morgan Stanley was a laggard. Its investment banking revenues rose 16%, the bank reported on Tuesday, lifted by a significant increase in equity underwriting but dampened by a drop in advisory revenue “on lower completed M&A transactions.”

Bank of America’s investment banking fees rose 35% to $1.6 billion, which CEO Brian Moynihan attributed in part to BofA increasing its market share and to efforts it has made to expand in the middle tier of the market.

• “It seems that now no one's able to buy anyone,” Coatue’s chief investment officer Philippe Laffont. “There's regulatory waves… I actually think it's bad because a lack of M&A can favor large companies…. It's the opposite of what you think. When there's no M&A, then the path for small companies to be successful is really hard. And that means that the large companies are less challenged by the small ones.”
• General Atlantic’s co-president Anton Levy: “I think it's getting a little bit better. The M&A environment today is better than last year. [But] There's a handful of companies that are under a lot of scrutiny. They're gonna continue to have their hands tied.”
• Josh Wolfe, co founder and managing partner of Lux Capital: “M&A is still open. We sold the company Mosaic to Databricks last year. And I think like in certain pockets, particularly where you have sort of [an] oligopolistic industry structure with 2, 3, 4 players that might covet a particular team or technology that you can still exit.”
• On IPOs, Michael Harris, vice president of Global Capital Markets at the NYSE Group: “If you look at the total ECM [equity capital markets] pool—converts, follow-ons and also IPOs—you're seeing activity that's up about roughly 300% relative to last year. So things are steadily improving. We're not back to 20 20, 20, 21 days, but, things are definitely on the right path.”