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.”
Founded in 2007 by Dov Gertzulin, DG Value is a value-focused investment firm. The firm runs two primary investment strategies, the diversified DG Value Funds and the concentrated DG Concentrated strategy. Q3 2021 hedge fund letters, conferences and more The flagship DG Value Fund was launched in 2007, specializing in middle-market distressed situations and event-driven Read More
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 I call unsolicited transactions, either someone coming out and making an offer when a company wasn’t for sale, or probably more actively we’ve seen companies jumping other companies’ transactions. And what’s interesting about that is I’d say in the past hostile deals, there used to be a stigma around it.
If you were going to do a hostile deal, you’d better go win. And if you try a hostile and you lose it said something about your strategy or your ability to execute. And I think in this market, the stigma around hostile deals has really gone away. Companies are going out and they’re trying to get a transaction done. And if they get to a price that they’re not comfortable paying above, they stop and their shareholders say, okay, good try. You were disciplined. You went up to a price and you didn’t want to go higher.
SCHATZKER: And helped along by guys like Mike Pearson at Valeant, for example?
LEMKAU: I think helped along by all the aggressive acquirers out there who have done quite well.
RUHLE: All right. When we think about sort of deal making, consolidation and industries, in the beginning of the year I felt like all of our focus was health care, biotech, pharma. Are there any industries that are immune to this?
LEMKAU: Well it’s interesting. I think if you looked at the pickup of this big strategic way of activity last year, it was tech media, telecom and health care that drove it. And so it was end the game consolidation in U.S. cable that started things off, and we saw lots of activity across the entire health care space.
And what’s happened this year is we’ve seen that proliferate across other sectors. So you’ve seen big deals in consumer with Kraft, and Heinz, and P&G and Cody (ph). You’ve seen big deals in natural resources with BG Shell. And you’ve seen a big FIG insurance deal. So almost every sector has begun to activity. And so we’ve got an M&A market that was kind of running on two cylinders that’s probably running on four or five.
SCHATZKER: Are we not getting to the point though where some industries are going to be locked out of future multibillion dollar M&A? I mean that’s going to happen in telecom, right, pretty soon. DOJ signaled it with, right, Charter and Time Warner. It’s going to happen in health insurance, as Bill Baer from the DOJ told me just last week. It’s already happened in airlines. There is no more consolidation in the airline business. What other industries look like they’re running out of room to consolidate?
LEMKAU: Well you hit on — hit on it. And U.S. cable maybe there is a deal left. Health insurance there’s maybe a deal left or two. But there’s — and I think what’s driving part of the frenzy now is that end-game consolidation. And 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. We’ve seen — I think there’s sectors where there is continued room to grow, but I think in a couple of the plays where we’ve seen lots of activity year-to-date, we’re near an (INAUDIBLE).
RUHLE: What — hold on. What other sectors?
LEMKAU: Room to go, pharma, biotech can go on forever, for to use that example.
SCHATZKER: And if you’re trying to figure out where that room is running out, you’re thinking what about effectively potential antitrust, right? So you’re looking for impact on the consumer, impact on pricing power?
LEMKAU: Yes. I think that and one of the bigger risks of this M&A environment right now is antitrust. And it’s a handful of deals getting blocked, I think to date we’ve seen — so we saw Time Warner Cable, Comcast get blocked, and then Charter came in. And so it ended not being a bad result for the target in that case. I think the biggest challenge around the antitrust right now is these deals are out for a long, long period of time. So AT&T, DirecTV is still out there waiting to get reviewed after being out there over a year.
If a transaction gets done, I think that’s great. If the transactions don’t get done after a long period of review I think you’re going to see companies pausing before they go and embark on something that’s going to leave them out of play for 14 months, 16 months, 18 months without getting a deal done. And so I think if we saw a handful of big transactions get blocked that would chill some of the activity in these consolidating sectors.
SCHATZKER: Will Goldman ever worked for an activist?
LEMKAU: I think it would be highly unlikely to see Goldman work for an activist.
SCHATZKER: Why? It’s important for people to understand why firms like yours, why firms like (INAUDIBLE) Weinberg —
RUHLE: That’s a great question.
SCHATZKER: — do not represent activists?
LEMKAU: Our philosophy is that we want to be with the companies. The corporations are our clients. We to do lots of work with them. We advise boards. We advise CEOs. And I think we’re best suited to advise them in terms of how to deal with their shareholders broadly, whether it’s activists or not activists. And I think if you cross that Rubicon and you start working with the activists attacking a company, it becomes a little bit more difficult to be in the boardroom, and be intimate with boards and with CEOs and management.
SCHATZKER: They won’t trust you.
LEMKAU: I think they will be wary of you.
RUHLE: Let’s talk about you leading your business. You run the number one M&A business on the Street. Given the amount of deals so you have, your team must be crushing it. There is not a more labor-intensive job within investment tanking. We’re comparing this year’s deal flow to 2007. 2007 was one of the best-paid years on the Street. How do you reconcile that with how hard your team is working, how you’re crushing it, and the pressure that you’re under from regulators to not pay the way you used to?
LEMKAU: It was interesting. It’s the middle of the year, so we’ve got to finish the back half of the year before we worry about compensation. But I think in terms of what drives M&A bankers and people in investment banking, they actually love being in the middle of the deals. And so being able to serve your clients to get transactions done, it’s fun. 2007 was fun. 2000 was fun. 2015 is really fun.
SCHATZKER: Gregg, why is it that your clients are happy getting the C team? And the reason I phrase it this way is because you know the pitch that the boutiques make, like don’t hire Goldman, they’re just going to send in the C team. Hire us and you’ll get our A-team. Something must be working.
RUHLE: Because their C team is better than a small firms A team.
SCHATZKER: I want to hear it from his lips.
LEMKAU: We don’t have a C team. I mean — and we really don’t. I think the thing that really does differentiate us is we — the depth and breadth of our team. And so if you look at our senior M&A team, there are 10-plus bankers with 20-plus years of M&A experience. And they work across all industry sectors and work across transactions. There is a generation beneath them that has similar levels of experience. And so I would take our team against anyone’s team or the aggregate of everyone else’s.
SCHATZKER: Does it help having three co-heads of M&A? Does that help?
LEMKAU: It does. It does. I mean it’s a producer/manager business. You have got to help run the business and manage it daily, but you also have to go out and do transactions and deal with your clients. And so the more people you can share that burden with, the better.
SCHATZKER: Gregg, thank you.
RUHLE: Thank you so much for joining us, great to see you.
LEMKAU: Thank you. Thanks, good to see you, Steph. Thanks Erik.
RUHLE: Gregg Lemkau. He’s the Co-Head of Global M&A at Goldman Sachs.