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.

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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?

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.

Thoughts on Twitch

Why the hell would I want to watch a stranger play a video game??

I distinctly remember thinking this when I first encountered Twitch around the time of its launch in late 2011. Afterwards, I put that thought and the company out of my mind for 2+ years until the other day, when I read that YouTube (Google) is buying Twitch for around $1 billion.

An important piece of successful investing is learning the art of triage. Spending hours researching every idea you have is inefficient and cumbersome. One important aspect of investing is honing a sense for which ideas are worth the time they require to properly explore. On one hand, developing this intuition helps weed out most of the bad ideas. On the other hand, however, some good ideas will get unfairly tossed away.

I should clarify that I never had an opportunity to invest in Twitch; I’m not a VC, and the company was never traded publicly. I’m not writing this to rue missed chance at making millions; rather, I’m recollecting my first thoughts on Twitch, and recognizing that they completely missed the mark.

There exists a widespread sentiment amongst value-oriented investors that you should only invest in what you know, an area also referred to as a circle of competence. This concept exists to prevent overeager investors from buying shares in companies that they don’t really understand. One of the side-effects, however, is that it can prevent investors from exploring an industry they don’t know much about.More specifically, strict adherence to this principle would prohibit exploration beyond the triage stage for any company in an unfamiliar industry.

Looking back at Twitch, I immediately discounted the idea behind it because it offered a service that didn’t appeal to me. To this day, I have little interest in broadcasting my adventures on Skyrim, nor do I really care to watch others doing the same. What we (and in this situation, I) often forget is how important it is to think beyond our own interests and personal preferences. Twitch wasn’t targeted at me; Twitch was created for the group of hardcore gamers that had been using Justin.tv to broadcast/watch gameplay. And it has been this group that drove Twitch to such amazingly high usage and its impending buyout.

So, congratulations to the team behind Twitch. They did an awesome job of finding their niche, developing their product, and controlling their market. I hope it will serve as a reminder that great investments can come from areas that don’t appeal to us at first glance. It’s important to remember that is fine, so long as there is a sufficiently large group of people for whom the product holds appeal.

Lastly, I like the move for the acquirer. Unlike some of their recent acquisitions, Google’s purchase of Twitch makes a good deal of sense for both parties, as Twitch dominates an area that YouTube has been trying to enter lately. Now I’d love to see Apple do the same with Spotify…