Perella Weinberg's Bednar Sees Encouraging Signs in M&A

How is the M and A environment today? Yeah, so just the level set on on M&A markets, there are some very observable and enduring characteristics of M&A markets, 1 they’re large, 2 they’re growing and and three, they’re cyclical. And so we do have movements from year to year, quarter to quarter. We see peaks and troughs really throughout the history of when we’ve been recording M and A volume, but we are seeing higher troughs and higher peaks. And so therefore, you get the dynamic of long term secular growth which has been persistent in the M&A markets. Now we’re today on a pace for about 2 1/2 trillion, which is what I mentioned in the panel yesterday with romaine. I don’t see 5 trillion in the near term. Usually when you have these peaks and troughs from a peak, you usually fall down the elevator shaft, you go down very fast and then you walk your way back up and we’re walking our way back up. So we’ve got a lot of encouraging signs. You’ve got larger deals, you’ve got some significant stock for stock deals. The boardrooms are very active and I do think that’s harbinger for future activity. But it’s a slow walk back up, but it’s an encouraging 1. Andrew, why are companies doing deals? Because they have to or because they want to? So strategics are leading us out of this through and M&A. So it’s clearly a strategic LED market. I think sponsors will follow strategics are faced with the same pressures they’ve typically had, which is growth. So they’re looking at how much can they continue to grow the top line in a late stage economic expansion. Most economists will say GDP is probably a single digit for the USA and emerging markets maybe a multiple of that, but most of the developed markets are single digits. A lot of action has happened in the middle of the P&L, cost cutting and other supply chain improvements that have been made post COVID. You have capital going back to shareholders for dividends and buybacks, but that’s not enough to satisfy equity investors who want twelve 1314% equity return. So how you going to get that? You have to look externally and that’s where M&A becomes this permanent. Part of the discussion in a boardroom about how do we grow, how do we adjust the transition, how do we adjust to transformation. All the things happening in the economy around AI, energy transition, what was globalization now seems to be a bit of a shrinking globe where certain markets are uninvestable. So that presents new challenges as well because some of the historic markets for growth like China for example, many companies find that to be uninvestable. Now I’m curious about the strategic buyers. I mean what type of premium do they have to pay in this environment in order to gain that type of growth? Is it is it much higher than what it was in the past? So valuations are are elevated. We have a very large and liquid market in the United States. Globally, there’s about $110 trillion of equity value and I mentioned this yesterday on the panel, there’s 47 trillion in the US Part of that is because we’re a very large and liquid market and that’s driving more capital to this market, which is increasing valuations. So we do have a higher multiple environment. Premium is largely an output in what we do as M&A advisors in thinking through complex transactions with our clients. We’re not thinking about what premium do we have to pay, but we look at underlying cash flows, we look at synergies, we look at strategic value and and enhancements that a new buyer can bring to an asset and determine what we can pay that either is a premium or not. And then that premium either clears the market, satisfies investors or it doesn’t. It hasn’t been the premium that’s been an inhibitor to these transactions. I want us to look at the other side of the equation. We had a guest on earlier on the show who talked about the idea that you’re going to see a lot of forced selling in this market and that’s actually going to be a driver of a certain pocket of M and A talk about those folks out there, those companies that are struggling that are really going to have no choice about to find somebody. I mean, what are they going to be able to get in the market? Yeah, there’s always, even in even in a very strong market environment, you’re always going to have some companies that just run into trouble. They’re going to be over levered. They’re going to have some kind of disruption to their business. Maybe they have a life threatening lawsuit, something that just fundamentally changes their operations and those companies can seek to raise new capital to hopefully recover out of a difficult situation or in many cases they they look for a merger solution. And so whether it’s a forced marriage or whether it’s forced financing, you do see, you know many of those transactions playing out, not full on bankruptcies, so not calling 911, I’ve got to go bankrupt, but we’re in trouble. We need a new partner and that partner could be a merger partner. I don’t see a watershed event coming where you have a lot of forced sales. Rather I see and this was mentioned again in the panel yesterday, thousands of companies held in private hands that are not really with their natural perpetual owner. Those owners are there as custodians for a time period, private equity and otherwise, to help enhance value, deliver returns for their shareholder, for their LP’s in that case and then reintroduce them to public markets or sell them to another party who’s a better owner. We’re going to see more of that. And those assets held in private hands, I think will transact going forward. But there’s still a valuation problem there. A lot of those assets were bought during a high multiple period and a lot of owners are waiting for those multiples to come back. Do you think most of those properties that are held in private equity hands, it’s a case that they’ll be acquired or is it a case of going IPO ING or something and coming to the public market on their own. So for the last two years or so, we’ve had almost no IPO market and so that’s been an alternative that you typically look at for monetization that just hasn’t been available. Now we’ve got some early signs of opening of that plumbing which is encouraging. The recent Viking IPO is very well received and I think is is a good sign of maybe an additional IPOs that’ll come to market. So I think the IPO is definitely back on as an opportunity for modernization, but also for outright sales. But again, you do have this one immutable trait that you have in, in the private equity business, which is and it’s true for strategics as well. What is that hubris? I joke, I joke, no, it’s it’s that they can’t change the multiple they paid on entry. So the purchase price is the purchase price. A lot of things they can do once they own the asset, yeah, but they cannot change the purchase prices. Some of these assets were bought at A at a higher multiple where there’s more leverage and also much cheaper leverage. So one of the issues with today’s higher cost of capital is that the valuation equation, the mathematics just don’t work. So I think it’s going to take some more time for private equity to come to the table, but they’re going to come back. It’s geology time and pressure. It’s just a matter. It’s just going to bring those two together and they’re going to come to market with assets and they’re going to redeploy $4 trillion at some point because that’s what’s sitting in private market ends at some point, right. I don’t know if he asked you this on the panel. You know, I know he does a good job. But I am curious that if you had to pick one sector, you’ve done a lot in retail, you’ve done transportation. Is there one sector within the M&A environment where you’re like, wow, there’s going to be a lot people are asking, I want to do stuff right now, where is there? Well, first of all, Romaine did an A+ job on the panel yesterday. You have to, you have to rip a colleague every once in a while. Is there one sector? It’s an interesting market unlike 9899, it was all about telecom and tech and media. You had 2016 largely because the stress was a big energy market for consolidation. I’m I’m seeing this activity really in every sector because as I said yesterday also M&A is not a market trend, it’s it’s A and it’s not a short term trend, it’s a long term corporate strategy. So these are the best allocators in the world within private equity and within private credit and infrastructure and real estate, those are going to be very, very active. Again, there’s 4 trillion sitting there without leverage. So the purchasing power is much higher. You have $4.8 trillion on non bank corporate balance sheets. There’s only so much dividend and buyback you’re going to do. There’s only so much build versus buy and I would say in many industries build versus buy is really dead because it’s not practical. So in certain industries you’ll always have it like tech, but in other industries by the time you build, it’s another market and so buying becomes necessity. And so again, I just think this is a matter of time we have to be patient and continuing the walk up, I I I am curious Andrew about the regulatory environment. There’s been a lot of pushback at least on the big mega deals particularly in tech here in the US and in Europe. How much of that regulatory trend effects what you do and the type of companies that you’re involved with. So it’s a very meaningful change to our business and very meaningful change to how we map out a timeline for our clients. So what used to be, you know, a fairly routine, you know if you’re not in a particularly sensitive area from a competitive perspective, you would estimate a few months to close, you’d probably request early termination, but maybe go through a short process if you didn’t get that today. There is no concept of early termination of the HSR waiting period. So that’s off the table. Many, many industries including that are not particularly consumer sensitive on pricing are being reviewed by competitive authorities, not just in the United States. It’s happening in Brussels with the deep with with the with the competitive authorities in Brussels as well as the CMA in the UK. So it’s not AUS alone phenomenon, but it’s very real. It extends the timelines, it makes it more costly, which then I think ironically feeds into the need to do larger deals because the entry price, if you’re going to do it, I might as well do it where it has consequence. So it’s the entry price to M&A is higher because of longer duration. By the time I sign something it takes me longer to close. I don’t know when I’m getting it close. So I got to make it meaningful. So it’s really interesting dynamic. It’s one of those things, if you’re going to do it, go big.