A NEW wave of multibillion-dollar merger and acquisition (M&A) deals suggests that corporations are once again comfortable with taking on debt and, more significantly for investors, taking on risk as well.
Research and accounting firm EY recently estimated that US corporate M&A volumes will rise 20 per cent this year, from 2023 levels.
This also means that Wall Street is back with a vengeance after enduring a decade of retrenchments.
Gone are the pinstriped suits and stirred martinis – they’ve been replaced by fleece tops and recyclable water bottles. But the M&A desks in the downtown towers of Goldman Sachs, Morgan Stanley and JPMorgan are making it rain again.
For much of the post-pandemic bull market, the shares of these investment banks were overshadowed by consumer banks such as Bank of America.
Goldman even made an ill-fated attempt to become a plain-vanilla consumer bank with its online bank called Marcus, which offers high-yield savings accounts and certificates of deposit.
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And famously, the 2021 stock-market boom was run by the Reddit-based ragtag meme trading army, not by the corporate bigwigs in downtown Manhattan. Now, Goldman’s shares have finally conquered their all-time highs as the bank returns to its marauding investment-banking roots.
In the recent bank earnings season, all the major Wall Street firms, and even consumer banks such as Bank of America and Wells Fargo, said growth in their investment-banking activities compensated for the blows to lending businesses from volatile interest rates and a slowdown in the US labour market.
“These deals tend to be a sign of confidence,” said JJ Kinahan, the chief executive of IG North America and president of its brokerage tastytrade.
For initial public offerings to happen, the corporations going public must have confidence in their near-term earnings.
“In the case of M&A, they have to be confident that they’ll achieve economies of scale by doing it.”
Some of the biggest deals on the new Wall Street are also hardly recognisable to veteran bankers.
Blackstone, one of the biggest dealmakers on the “buy side” of Wall Street, is making some of its largest new investments in artificial intelligence startups’ data centres.
Stripe, the payment technology firm, is experimenting with privately funded ways of raising capital, resisting venture capitalists’ traditional route to a payday: the public offering.
Some other big deals are the result of cash-rich companies deciding to spend their hoard.
Flush with cash across sectors
One reason there hasn’t been much deal-making happening in recent years is that the most lucrative economic activity has been focused on a small cohort of giant companies, most notably the “Magnificent Seven” mega-cap tech companies and obesity drugmakers.
For more than two years, these companies sat on the war chests they were amassing, apparently viewing the rest of corporate America as vulnerable.
Even Warren Buffett refused to produce his chequebook during the bear market of 2022-2023. Now, with large increases of existing stakes in companies such as insurer Chubb and Occidental Petroleum, Buffett seems to be in a more acquisitive mood again.
Among the Magnificent Seven, Google owner Alphabet is reportedly close to making its biggest takeover to date, a US$23 billion buyout of Israeli cybersecurity company Wiz.
Another Alphabet affiliate, GitLab, which makes coding tools, has hired investment bankers to explore an US$8 billion sale, according to a Reuters report.
Earlier this month, obesity drugmaker Eli Lilly, another company flush with cash, struck a US$3.2 billion agreement to buy bowel-condition drugmaker Morphic Holding.
There are deals popping up in almost every imaginable sector. Also in July, Devon Energy agreed to buy rival oil explorer Grayson Mill Energy, which is active in the Williston Basin in South Dakota and the Midwest.
JD Joyce, president of Houston-based financial advisory Joyce Wealth Management, has been tracking deals in the energy sector for months and sees no signs of their slowing down.
In retail, Saks Fifth Avenue recently agreed to buy luxury rival Neiman Marcus, resorting to consolidation to cope with young consumers’ shifts in taste, from jewellery to fitness gear.
Macy’s turned down suitors Arkhouse Management and Brigade Capital Management, who were after the department store’s prime real estate, apparently hoping that more strategic buyers would emerge.
Deal activity is so frenzied that one firm is involved in a kind of leapfrog series of transactions: EssilorLuxottica, the Italian maker of Ray-Ban sunglasses, recently agreed to buy street-fashion brand Supreme for roughly US$1 billion while simultaneously negotiating the sale of a stake of at least 5 per cent of itself to Facebook owner Meta Platforms.
Iron-ore miner and steelmaker Cleveland-Cliffs reached a deal to buy Canadian steel producer Stelco Holdings for about US$2.5 billion, diversifying the types of steel it produces.
Among industrial companies, Spirit AeroSystems agreed to sell itself back to former parent Boeing. And Canadian aerospace player Heroux-Devtek agreed to sell itself to investment firm Platinum Equity for about US$991 million.
The fleece-vested armies of lower Manhattan are likely to work weekends throughout the summer and fall, unveiling deals as in similarly active periods during the Wall Street heyday of the 1980s to the 2000s.
From what we’ve seen so far, expect more of these mergers to happen in the coming months.
