Gregg Lemkau, co-head of global mergers and acquisitions at Goldman Sachs, spoke with Bloomberg Television’s Stephanie Ruhle and Erik Schatzker about the outlook for corporate dealmaking.
Lemkau said he believes M&A activity is on track to pass records set in 2007: “It feels like we have a pretty got a good shot to pass 2007. The activity we’ve seen through the first half of the year is on pace to match what we did in 2007…. The pace seems to be accelerating and the kinds of transactions we’re seeing, and what we see in the pipeline indicates that will continue through the balance of the year.”
On risks to the M&A environment, Lemkau said: “One of the bigger risks of this M&A environment right now is antitrust…I think if we saw a handful of big transactions get blocked that would chill some of the activity in these consolidating sectors.”
Lemkau described a “frenzy” for consolidation in industries such as health care and telecommunications. He said: “People know there’s one or two deals left, and they don’t want to be the ones sitting on the sidelines left out as the smaller player in the sector.”
Gregg Lemkau: 2015 M&A Has Chance To Pass 2007 Levels
ERIK SCHATZKER: Once again Goldman Sachs is the number one adviser globally. The firm’s Co-Head of M&A, Gregg Lemkau, is here to talk about his business. Gregg, I suppose we start with the easy question. You know your pipeline, right? And you have a sense of what other firms are working on. Does it seem to you at this point like 2015 will top that mark set in 2007?
STEPHANIE RUHLE: Did you want to start with congratulations?
RUHLE: All right. So I would have.
GREGG LEMKAU: Thanks, Stephanie. I’d say it feels like we have a pretty got a good shot to pass 2007. The activity we’ve seen through the first half of the year is on pace to match what we did in 2007. And it’s been accelerating through the year. So we saw $800 billion of activity in the first quarter, and then a billion — $1.4 trillion in the second quarter. So the pace seems to be accelerating and the kinds of transactions we’re seeing, and what we see in the pipeline indicates that will continue through the balance of the year.
RUHLE: Should that give us any concerns that a bubble is approaching, or what are you doing to avoid the 2007 pitfalls?
LEMKAU: Well the nature of the transactions we’re seeing now continue to be smart, strategic transactions that are well-received by the market. And so we’ve seen —
RUHLE: Didn’t we think that then too?
LEMKAU: I think that in 2007 a lot of activity was driven by big LBO transactions that were fueled by what I think in retrospect was a credit bubble, and lots of leverage being given to companies that allowed deals to happen that couldn’t have happened previously. I think the trend we’re seeing now are the biggest corporations taking advantage of a low interest rate environment, and a receptive equity market to do smart consolidating industry-defining transactions that help drive growth in a low organic rate environment, or drive cost savings in an environment where it’s hard to really drive the bottom line.
SCHATZKER: Gregg, the easiest thing to do is look at the total of deals announced, or deals completed and try to pass judgment on the basis of those data points alone on whether the market is hot or not. What data points matter to you? What metrics say more to a banker like yourself about what’s happening in the M&A business than just that (INAUDIBLE)?
LEMKAU: We look at three things. I’d say the thing that everybody looks at are the global lead tables that drive the M&A volumes. And that’s what everyone pays attention to is probably the least important of the three metrics we look at.
And the second metric we look at are the number of deals above $500 million, so how often are companies doing things that are big and significant to them. And we look at it in terms of volumes of activity. And we look at it in terms of market share.
And then the last piece we look at our advisory fees. I mean it’s really what are people paying for advice, and who’s getting the lion’s share of those advisory fees?
SCHATZKER: And are they paying for advice?
LEMKAU: They are paying for advice.
SCHATZKER: More so than they used to?
LEMKAU: Advisory fees are up towards a record this year, compared to where they were in the past.
SCHATZKER: And, sorry, how do you — I’m curious to know, when you say advisory, is that just the total fees taken, or are you talking about the percentage?
LEMKAU: Total fees, total aggregate dollar fees history.
RUHLE: Is that increase due to the threat of activism?
LEMKAU: I think — I’m not sure the increase in fees is necessarily due to the threat of activism, but I think the increase in activity is partially driven by the threat of activism. I think shareholder — shareholders generally are more active, whether it’s the actual activists, or it’s all shareholders, and they’re forcing companies to do things either proactively to help not get under attack by activists or reactively when they did come under attack.
SCHATZKER: Gregg, we are going to take a quick break, when we come back, I think perhaps a little more on activism, something about hostile deals perhaps.
RUHLE: We are talking deal making with Gregg Lemkau, Co-Head of Global M&A at Goldman Sachs.
SCHATZKER: Gregg, you were saying earlier that the kinds of deals getting done now feel better than they did back in 2007, possibly even better than they did back in 2000, another crazy era for M&A. What doesn’t feel right?
LEMKAU: Well I’d say I think the transactions that are getting done feel positive. The equity market receptivity is new. So we had never previously seen the stock prices of buyers going up upon announcement of transactions, and going up sometimes (INAUDIBLE).
SCHATZKER: They usually get discounted.
LEMKAU: They usually get discounted. There is usually some risk around the execution. But right now the market is giving credit for the accretion that’s being announced in these transactions, and giving credit ahead of time for the implementation of synergies.
RUHLE: Meaning the market assumes these deals are going to go through, not worrying about —
LEMKAU: And we’re seeing the (INAUDIBLE) of deals will go through, and that synergies will get delivered as the companies are saying they will get delivered. And that’s been a change from the past five years.
RUHLE: Yes, but they won’t have to see if those synergies get delivered for another four or five years, and are there really long-term investors anymore?
LEMKAU: There are some long-term investors. I think it’s people have to find somewhere to put their money. So they’re keeping their money in these stocks, and they’re not necessarily voting with their feet and selling. They’re staying in there and trying to influence the outcomes.
SCHATZKER: What kind of a factor are hostile bids playing in today’s market?
LEMKAU: It’s interesting. And we’ve seen a big pickup in what