MT Advisory in 2016

Two of the industries I’m most interested in are media and telecommunications, which of course comprise two of the three components in traditional TMT grouping. While the first ‘T’ garners the most media attention, the ‘M’ and the second ‘T’ are areas I focus on more.  Accordingly, I took a look at the total number of deals that some of the major investment banks have been advisors on (both for the target and the acquirer). Restricting the results to 2016 deals with enterprise values exceeding $500MM led to the following results:

Media

Telecom

Total

Morgan Stanley

7

2

9

JP Morgan

3 3

6

UBS

2 4 6

Citi

4 1

5

Credit Suisse

5 0

5

Deutsche Bank

2

3 5
Unicredit

4

1

5

BNP Paribas

3 1

4

Goldman Sachs

3

1 4
Barclays

2

1

3

Moelis

2

1

3

RBC

2

1

3

BAML

1 1

2

Centerview

2 0

2

Evercore

0

2

2

Lazard

2

0

2

BMO

0

1

1

Greenhill

1

0

1

Houlihan Lokey

1

0

1

 

While some of the names near the top are mostly who one would expect, two names stood out. First, Morgan Stanley’s results were impressive, with a total 50% higher than any of its competitors. Second, Unicredit had an impressive showing, which surprised me given the turbulence in the Italian economy. In any case, it will be interesting to see if these trends hold for the remainder of 2016.

PE deal flow trends

Building on my piece from a few weeks ago, when I examined M&A deal flow trends, I want to look at another component of the M&A market: Private Equity. To reiterate, I wrote the earlier piece to examine if the actual data backs up the media’s widespread assertion that there has been a decrease in corporate takeovers in 2016. The findings were less convincing that one might have expected: the number of deals is down, but the cumulative value of the deals is not (meaning that the deals being completed are larger than before).

The private equity market, excluding the largest and flashiest deals, does not get as much media coverage as the corporate M&A market. As such, I do not know if others are taking PE deal flow trends into account when they discuss M&A trends. In any case, I looked at the last 12 months to see what trends can be found:

6.7.16 pe # of deals

In this first chart, I’ve compared the overall number of deals from the last 12 months compared to the last 3 months as well as the last month (multiplied by 4 and 12, respectively, to annualize those amounts). While this does not account for any seasonal fluctuations, it is pretty clear that deal flow is down in recent months relative to the last 12 months.

6.7.16 pe deal size

Unlike the corporate takeover data, things are a little more consistent with PE. In addition to the number of deals decreasing, the total deal value is likewise down over the past year (looking at annualized data levels). While equity amounts have increased looking at the past month (annualized), on the whole it appears as though both the quantity and size of PE deals has fallen over the last 12 months, reinforcing the media’s hypothesis on the state of the takeover market.

Always more to learn!

Thought of the day: it always fascinates me how much more about banking and finance there is to learn. This is a big reason why each weekday I read Dealbook, the Financial Times, and (to a lesser extent) the Wall Street Journal (which is great except I just can’t stand how they never miss a chance to flip the bird to Obama).

But I digress… one of the links I found today on Dealbook led me to this article on Daniel Tarullo, a man who works at the Fed overseeing the banks’ strategy and regulatory compliance. When I woke up today, I had no idea who Mr. Tarullo was. Now, getting ready for bed, I’ve learned a bit about one of the most important financial regulators, and by extension, one of the more important man/woman in finance. Reading about Mr. Tarullo gave me further understanding of the deference that banks now have (or have been forced to have, depending on who you ask) for their regulators in wake of the financial crisis.

Great stuff! Who knows what I’ll learn tomorrow??

M&A deal flow trends

Is deal flow really down?

The media has been talking quite a bit lately (see here and here) about the decrease in corporate takeovers in 2016. Furthermore, there has been much discussion about the implications on the companies that are most dependent on strong deal flow (see here). All of this led me to wonder… how much of this chatter is true? I took at a look at recent mergers and acquisitions data to find out:

5.26.16 M&A # of deals

Looking at the number of completed deals over the past three years, we can see that yes, deal flow has slowed over the past few months. It is clear that the number of deals has gone down since last December, and that each of the months this year is slower than the same month a year ago. Each month this year has also been below the average level (over the past three years).

5.26.16 M&A value of deals

A slightly different picture emerges, however, when we look at the cumulative size of the deals. On the one hand the market saw high levels last November and December, as well as in June and July. Compared to 2015, however, three of 2016’s first four months have had higher cumulative deal sizes than the same month a year ago. In all, the M&A data paints a murkier picture than what has been presented in the news. While the number of deals is down, the cumulative value of the deals has not decreased, indicating that the deals being completed are larger in dollar value.

Isn’t it early for silly season?

Apple is not perfect. Just because the company has imperfections, however, is not in of itself a reason to panic. Is it reliant on its top product (the iPhone) for profits? Sure. Couldn’t you levy the same criticism on Coca-Cola? Tesla? Google? If the product you make has a sufficiently durable competitive advantage (“moat”), there’s nothing inherently wrong with a company drawing the bulk of their profits from that product.

That’s why articles like this, seeking to knock the king off its throne, make me smile. I haven’t thought of Apple as a “runaway growth” company in some time. That’s not why I bought it a few years ago, and that’s not why I’ve held the stock ever since. I own Apple stock because it’s absurdly profitable, has excellent management, and has created a strong moat on its most important product(s). Not to mention that we’ve seen this criticism before… and if I wasn’t deterred then, why would I be now?

Why finance? Why now?

I’d been thinking: it’s good to be in a thing from the ground floor. I came too late for that, I know. But lately I’m getting the feeling I might be in at the end. That the best is over.

                                                                                 – Tony Soprano

“Why go into finance now?”

Now that I’ve decided to set aside 2 years and plenty of $$$ on an MBA, I get this question more frequently than one might expect. Looking at the business landscape since the Great Recession, the industry seen as having the most “sex appeal” has shifted from finance to tech. My brother works at a startup on Silicon Beach here in Los Angeles, so I have observed the tech scene up close over the past few years. On several occasions – having seen the depth of my brother’s passion for his field – I have even wondered if I should pivot away from finance. Are finance’s glory days over? Am I getting in too late? Did I miss my window? Looking forward, could these financial institutions be the targets of disruptive innovation from companies in my brother’s field?  

It would be naïve to discount those questions just because I don’t want them to be true. As this article describes, years of attacks from politicians and the public have left large banks more timid, more conservative, and more wary of their public image. Putting aside the moral implications of Tony Soprano’s chosen profession, there is some applicability from his quote to my current situation. Is the best over?

Perhaps it is. But there is a flip-side: as more young professionals gravitate towards field such as tech (and away from finance), the ones who remain in finance will be those who are deeply passionate about the field. There will be fewer people working there solely for the paycheck, and more remaining for the work itself. As someone who wants to work with like-minded individuals who share my passion for finance, I see this as an encouraging thought.

Will aspects of the financial system be taken down by disruptive innovation? Of course. But the banking system remains the engine driving the world’s economic engine. When the tech world fell apart in 2000, a short recession followed. When the financial system collapsed 8 years later, the impact was far more devastating, illustrating the integral role that financial firms maintain… and I can’t wait to be a part of that system!

Back to the grind…

I’ve been somewhat out of it the past 2 months. I spent September and October applying to MBA programs. I then got to celebrate the submission of those applications with the joyous process of packing up all my earthly possessions and moving to a new apartment. The end of Daylight Savings Time and the start of November could not have been more of a relief! Beyond checking my portfolio once or twice a week, I haven’t spent much time on the markets. Now that things have slowed down (a bit), it’s time to remedy that!

Solving Einstein’s Riddle

Today’s post doesn’t really have a thing to do with finance, economics, or stocks. I was scrolling through the Business Insider app on my phone during lunch, and came across an article called “Test your skills on this mind-bending riddle that only 2% of the world can solve” with a picture of Albert Einstein next to it. Not a great title, but all I could see was clickbait.

The page presented me with a riddle/puzzle that was allegedly thought of by Einstein during his youth. Consider me skeptical of that legend, but either way, I ended up spending the rest of my lunch break taking a shot at this challenge. After all, who wouldn’t want to be in the top 2% of puzzle solvers in the world?? (That title was such clickbait, it’s not even fair.)

So here is the riddle:

9.8.15 riddle

Let’s get started, but first, a spoiler alert: I was able to solve this, so if you want to try this yourself, scroll back up and click the article’s link.

I first started by trying to draw a few diagrams on some scratch paper. The Brit in the red house was easy enough, as was the Swede who has dogs. But when I saw facts like #4 and #10, I realized that the housing sequence variable would make this a pain to do on scratch paper.

I shifted to Excel, setting up a basic grid. I thought this would be best as whenever I had a match, I could quickly ‘X’ out any other conflicting answers. Then I got into it. The first image basically showed the grid once the initial facts had been applied. Facts such as #4 or #10 were noted and set aside, as I would need more information before I could utilizing them fully. From there, it was just a process of following the clues, double-checking any logic, and working it through all the way to the end:

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Not a bad way to spend a lunch break! If you haven’t seen the answer, or just want to work through a fun puzzle, try it out for yourself!

A Septimana Horribilis… What’s Next?

It’s going down for reeeeaaaalllll… ‘it’ being the stock market… what a week. And no, I never took Latin – that’s why Google was created, because who the hell has time to study Latin?

What I do have time for, on the other hand, is the stock market. I pay attention to it, and more often than not, it treats me pretty well. That is until concerns over China exploded and the investors flipped out, leading to this terrible, horrible, no good, very bad week.

Value investors have been thinking about, nay lusting after, a crash like this for some time now. Years of hoarding cash (as can be seen here and here) have left many investors ready to pounce whenever a substantive correction would finally arrive. I’ll speak for myself; having kept about 25% of my funds in cash, I’m excited to sit back, let some panic take hold, and then pounce on some tasty bargains.

In the coming days/weeks, my goal is to start posting more about individual companies, specifically describing my process for evaluating them. I see process as very important, as it helps partition off decision-making from emotion. If this slide continues, it will create buying opportunities. Apple is not intrinsically worth 20% less than it was a month ago; people are scared. Mr. Market may be on a wild ride… when the music stops and the panic subsides, it will be time to strike!

8.22.15 stocks last week

Alphabet ≠ BRK: Cease the Comparisons

We like comparisons, especially when they help relate the known to the unknown. They can provide a broad understanding of the unknown, but it is important not to be wholly reliant on comparisons in attempting to understand an unknown entity. A young soccer phenom may dribble in a manner reminiscent of Lionel Messi, but to proclaim him “the next Messi” would overlook the myriad of ways that they are dissimilar. Once upon a time, Bobby Jindal was declared the “Republicans’ Obama.” The comparisons swiftly ceased once the only real similarities were found to be some charisma and a foreign-born parent.

The creation of Alphabet, the new holding company for Google, led to a hasty – and inaccurate – comparison to Berkshire Hathaway (this comparison is either argued for or alluded to here, here, and here). On the surface, it’s an easy comparison: tons of cash, low debt, different classes of stock, capital allocation decisions made by a holding company. Hell, they both have Indian-born whiz kids running the core businesses (Sundar Pichai at Google, Ajit Jain at Berkshire)!!

Once you get past the surface comparisons, however, the comparison falls apart. As many have noted, Berkshire Hathaway is comprised of self-sufficient cash-generators, whereas nearly all of Alphabet’s profitability comes from Google. Many of the other entities that will comprise Alphabet could be categorized as glorified R&D departments.  You could spin off most of Berkshire’s companies tomorrow without much of a problem. Alphabet will not be comprised in such a manner.

Building a version of Berkshire Hathaway has been the goal of many different businesses in many different fields (here’s one example). Berkshire transcends industries, of course, owning dozens of companies in areas such as insurance, energy, consumer products, etc. What binds them together is profitability; what will bind Alphabet’s companies together is technology. Alphabet has the potential to be more cohesive than Berkshire, but will have to enjoy widespread profitability among its various companies for it to be properly compared to Berkshire. As of now, the framework is more similar to a venture capital fund, with one huge winner showering money over everyone else.

Discussion of Alphabet potential for success is a very different conversation. The history of conglomerates does not inspire confidence for such prospects, although Google’s leadership seems determined to avoid the fate of aging tech giants such as Microsoft, HP, and Dell. Once you lose the innovation edge, it is hard to reacquire, and Google is certainly looking to forge a different path.