M&A is back, and the rise of the big deal is set to fuel banks’ top lines.
Since the second quarter kicked off last week, bankers and hedge fund execs alike have been rubbing their hands with glee as a spree of M&A, fuelled by the expectation of prolonged cheap money and expectations that oil may, finally, be bottoming is expected to push transactions that could top record value amounts, several Wall Street insiders are now saying.
With a spate of transactions to kick off the second quarter, deal value has already surged to $US1 trillion for 2015 and a projected $US3.7 trillion worth of deals this year would be second only to 2007, where all M&A surpassed the $US4 trillion mark.
Part of that comes on growing sentiment that, whenever the Federal Reserve finally decides to increase rates, this won’t be coming until after summer.
“Expectations for a delayed rate hike have already been baked in,” says one bulge bracket banker. “There seems to be no end to big M&A coming.”
And that’s on top of a ton of big, recent deals. Data housed by S&P Capital IQ says seven of the 10 biggest M&A transactions in the wake of the financial crisis have all been announced within the last 16 months. What’s more, S&P Capital data shows, the year-to-date announced deal value is, right now, as high as it has ever been (including the bellwether year 2007).
“We expect continued momentum in 2015, primarily due to rising competition among financial buyers along with the fact that strategics are actively looking for new opportunities,” said Mounir Gad, vice president in Silicon Valley Bank’s financial sponsors group. “Companies are cash-rich and access to outside capital is abundant.”
In 2015, premiums paid for some M&A targets are on the rise
As deals have surged, so have premiums: FedEx’s land-grab in Europe, in the form of a mega-buy of TNT Express for $US4.8 billion, came at a 33% premium to its stock price. When Shell agreed to a $US70 billion buyout of British energy company BG Group, that came at a stunning 50% premium.
Another big buy this quarter, at $US5.3 billion, the software-focused LBO of Informatica Tuesday represents the largest private equity deal of 2015. While that pales in comparison to the volume and value of PE deals at the last peak for M&A, in 2007, it is nevertheless expected private equity firms will keep putting capital to work to take advantage of what little discounted debt regulators will afford them.
Coming at a time when activist investors are emboldened, perhaps more than ever before, to push for companies to either strike deals or break up, and when strategic bidders are both armed with capital and can dominate the debt markets, more on Wall Street are expecting the biggest deals to come from corporates.
It might mean more mega-deals in the media sector, or, alternately, breaking up one-time behemoths in the tech sector. While they can’t say for sure where the next target for Carl Icahn or Nelson Peltz might originate, bankers are expecting activists to start invading boards and demanding change across the US this year.
In Q1-2015, ‘big deals’ made up more M&A than at any other point this decade
This, in turn, could push bigger profits at Wall Street’s biggest banks. Many have not even been able to process revenue from some of 2014’s biggest announced deals, which have been held in regulatory limbo, but packing the 2015 pipeline with even more billion-dollar-deals will prop up future earnings — as long as the bulge bracket players don’t continue to cede market share to the threatening swarm of boutiques.
This year, some enormous mandates have been swiped by boutiques: Centerview Partners advised Kraft in the $US45 billion deal with Heinz announced in late March; and, this week, boutique Robey Warshaw LLP in London was reported to be the sole advisor to BG Group, netting the tiny office a massive payday.
And, in recent years, boutique investment banks’ share of M&A in the US has risen substantially, although many of the firms don’t have the same success competing against bigger competitors internationally.
If what insiders are saying is true, though, there’s going to be enough going around for everyone.