Inside the Biggest M&A Deals You Need to Know This Week

Welcome back to The Deal Room, and it feels a little bit like back to business because we're going to talk about M&A deals. We had a little bit of a segue over to the world of ESG. So if you haven't checked that out, that was a mini two-part series where Stephen unloaded on the, the area of ESG. So definitely one worth, worth going back and having a listen to. But in this one, there are four M&A deals that we've heard about from last week, which we're going to unpack. Some big ones. There's Capital One's $35.5 billion takeover of Discover Financial. You might remember that one. One of the biggest ones in recent memory got approved by the US. So we'll have a look at that. And then in financial services in general, or professional services, that's the, the theme of this episode. Nomura close to a $2 billion all-cash acquisition of Macquarie Group's US and European public asset management business. So have a look at that as well. And then moving into the world of accountancy, because I know there's some accountants that listen. So this one's for you. Don't get enough love perhaps than, uh, than is due. Is Grant Thornton in US is expanding globally through private equity-backed acquisitions and Baker Tilly is in advanced talks to acquire Moss Adams in a deal valued at over $2 billion. I thought, I thought deal flow was just dead as far as what I've been reading in the press, but these are some chunky numbers.

Yeah, it's really interesting. And firstly, before I kind of launch into this episode, I've got a bit of an accountancy-related bone to pick with you. And when we were discussing this just before we went on air, I really wanted to make this all about accountancy, the big, you know, Baker Tilly, BDO, Grant Thornton, all these sexy names. And you said, no, no, no, no, put it to the bottom. Let's talk about $35.5 billion acquisitions. So I think, you know, your audience may be slightly better than I I do, but never mind.

I mean, who's with me? Come on, let's, let's hear about Capital One first. So let's kick it off there.

All right. Well, look, so Capital One, this was a deal that I was just looking back through all of our back catalogue and we actually went and spent quite a lot of time on this deal on March 4th, 2024. So if you want to get a proper review of this deal, because we're only going to cover it very briefly in this episode, definitely check out that March 4th episode and the, and the, The headline was, as is now, Capital One $35.5 billion takeover of Discover Financial. The addition to March last year is that we've got this separate bit at the end, approved in the USA. So when we spoke about this back in, back in March, a big element of our discussion was, this is a $36 billion financial services deal. Is this going to get over the line? Feels like there's going to be a lot of regulatory antitrust FTC scrutiny. So much so that there was a $1.4 billion breakup fee if this deal got kiboshed during the antitrust phase. But just as a reminder, Capital One and Discover Financial, they wanted to unite together to provide the world's, or actually the US's largest credit card company by loan volume, even bigger than JP Morgan or Citi, and actually start to prepare a real challenge through the Diners Card at the Diners Club Discover Network, a real challenge to the big beasts of Visa and Mastercard. So actually, when thinking about antitrust, one of the main arguments that Capital One and Discover Financial made was, look, you know, it's not us that you need to be worried about. It's Visa and Mastercard. They're a duopoly. They run so much of the credit card transaction processing mechanism that you really need to take a look at those guys. In fact, what we are doing by uniting together is giving a little bit of firepower to try and rival these two companies. So if anything, it's pro-competitive, not anti-competitive. And just to kind of round this little bit out. Just looking at some of the statements from the Federal Reserve and the Office of the Comptroller of the Currency, the OCC, who said, after careful analysis of the effect of the merger on communities, the banking industry, and the financial system, we have decided to approve this merger. So that's the kind of language that they're using, a kind of multi-stakeholder approach to trying to figure out whether Communities are going to benefit, customers are going to benefit, the financial services system's going to benefit. Put it all together and also probably get a little bit of a push from our good friends in the White House. And this signals something, right? It signals maybe mega deals are, are back in business, right? This is a big one. This is $36 billion, two big US companies.

Yeah, just two quick questions then from what you've just said. The first one is kind of an extension of the latter point about, like in law, does this set a precedent then? The fact that I know this is quite self-contained within the sector of which it sits, but does this now, do you think, allow some other transactions to come to the table? I know market broader macro conditions aren't fantastic, but Is that how it works in this sense? Like a legal precedent?

Yeah, it's not a legal precedent in the way that we would have precedent, uh, precedence in the U— in the UK, but it's certainly, uh, cultural or trend precedence. So I would be, if I was looking at doing a mega merger or a mega transaction, I would be watching this one extremely closely as a representation of the approach that these different bodies are going to take in a Trump era. And, you know, again, taking a look at a little bit of the opinion on this, would it have got through under a Biden presidency? He was putting up a lot of barriers to this over the course of the last year. Probably not. So I would say that this is a green light for those companies that are thinking, all right, I really want to do something big this year. Maybe because, maybe because that there are cheaper assets in the market due to the market sell-off, maybe due to the law of large numbers and the security in being a bigger company during times of volatility, this might now be a really good opportunity to go in and say, look, let's do this deal because, well, a big guy like a $36 billion one just got away. So yeah, I think you're probably right that the sentiment is positive for US big dealmaking.

And my second and final question was just about if I was running the book for this, let's say I'm a sell-side bank, When do I actually get paid?

It's a really good question. So you, you will get paid when the, um, sale and purchase agreement, the SPA, gets inked by all parties. And that will be right at the end of everything from deal, you know, deal negotiation, pricing announcements, due diligence, antitrust. All of this kind of stuff needs to happen legal. And then finally, when you sign on the dotted line, that's when the funds get released. Because if you think about in the world of M&A and in the world of acquisition financing, you always put together a sources and uses table. So you have the sources of funds and then you have the uses of funds. So if I'm buying a company for a billion dollars and I buy that company with a combination of debt and equity, my sources of funds will be let's say $510 million of equity and $510 million of debt. That's more than the billion dollars of purchase price, but wait a minute, we have to pay $20 million of bankers' fees. So it's only when the everything, you know, everything that happens all at once and those sources will get translated, will get issued, whether it's a loan or whether it's equity, will get issued and then paid out as soon as that agreement is completed. So, it all kind of happens on a very, very significant day when the loans are in place and when the legals are in place and things like that. And only then can you finally have your closing dinner and everyone clinking a glass of something probably quite expensive.

Okay, so let's move on. You mentioned there the kind of combination of how a deal can be transacted, debt, cash. This was an all-cash deal and Nomura. So what's happened here?

Yeah. So Nomura, I thought I'd raise this one because this is a company that hires graduates, hires interns, and is a, you know, it's a global bank, a global investment bank and a global asset manager as well. So this is the headline, Nomura Holdings, the Japanese bank, all cash acquisition of Macquarie Group. So Australian asset managers, US and European asset management business. So this actually got announced just last week. And this is really interesting for a couple of reasons. So Nomura has had a bit of a checkered history, and I'm sure you know all about this, Anne. I mean, its last major acquisition was 2008, where it bought the distressed Asian and European assets out of Lehman Brothers. And that didn't go very well from a culture clash perspective, from a toxicity of brand and personnel perspective, let's say. They didn't necessarily really learn their lesson because I don't know if you remember the Archegos scandal liquidation. So Credit Suisse obviously got brought down by the massive leverage positions of this private wealth manager, but Nomura lost about $3 billion through its prime brokerage. And that's a pretty significant hit. And it's forced them to really rein in things like their prime brokerage, their ability to lend a lot of money into these speculative transactions, speculative trades, and actually has forced the company, forced the bank to pivot more into stable asset management. So it's really interesting. If you think about the way that a bank works, you want complementary and dovetailing sectors or business units. So business units that do well at different points in the economic cycle or at different times within a particular trend within the market. And the best combination, or a very valid combination, is sales and trading. We all know that sales and trading does extremely well in times of high volatility. You've seen the bank earnings reports over the last few weeks. Inversely proportioned to investment banking, which tends to do really well when things are a little bit calmer and stable, more stable and low interest rate. More deals get done, more advisory fees get picked up. But actually underpinning all of this, what you really want is a nice chunky asset management division, which pays you regular fees regardless of performance. Remember asset management and wealth management, it's a percentage of assets under management unless you're a hedge fund and you get the 20% upside. For most of these long-only asset managers, you get paid like 0.5% of assets under management, maybe 1%, whatever the fee is, and that's there come rain or shine. So as a more of a defensive strategy, Nomura coming out and going, look, we've been burnt a couple of times in sales and trading in IB. We want to really bulk up our AUM, assets under management, in our asset management space by acquiring Macquarie's European and Asian assets, it seems like a really, really sensible and it seems like a really smart play.

So give me some context here because I know Nomura has an asset management division. I think a lot of young students might just look at Nomura and think more that pure play side that you talked about, more banking, trading, investment banking. How big is their asset management division? What AUM are we talking about and how much does this acquisition bolster that figure?

Yeah, it's a good question. So after— so this acquisition will bolster Nomura's AUM by $180 billion, raising the total AUM to $770 billion. So that's a lot of money. That's a lot of billions. But again, you think about the real big players, the BlackRocks, $13 trillion of assets under management. They dwarf almost every other asset manager, but this is not an insignificant asset management division, and it's certainly one that can really underpin the success of the company. I just want to give you a little bit more of a kind of strategic element to this deal, something I found really fascinating. So to an extent, this is all about the Japanese investor. So Japanese investors or Japanese households, have about $15.8 trillion in financial assets. It turns out that about half, they hold half of their $15.8 trillion of financial assets in cash and deposits. Remember, that would be madness in an inflationary environment because if you just hold your cash as cash, it's just going to get inflated away at 2, 3, 4, 5% annual inflation. Now remember that Japan has been the global outlier for having a generation of deflation, which means if you hold your cash, your purchasing power effectively grows. So it makes total sense for Japanese households to sit on this money and not invest it because you're going to get an effective risk-free return on your investment from a purchasing power perspective. However, as we also know, over the last 2 years, Japan has actually moved out of the deflationary cycle. And is starting to show modest inflation and represented in slight changes in interest rates. So what Nomura is doing is it's positioning itself as a global asset manager serving the needs of this 15— well, this 50% of the $15.8 trillion of cash that's sitting around the Japanese household. So what better than to go, hey, you know that there's inflation. We are now coming to you as Nomura. We've got a presence not only within private and public markets in Japan and Asia, but also Europe and America because we've just acquired Macquarie. If you're going to invest, which I think you should, by the way, because of inflation, you probably should invest with us. Because we've got the full suite now, we've got the full package. So in my mind, this is pretty smart. And again, it all rests on really kind of sound macroeconomics.

Yeah. Yeah. I was about to say it's really nice intersection there, bringing the two sides together to explain the rationale there. So let's move on then. Before we jumped on the call, I did say to you, who, who are Baicatilli? Is that, is that a consultancy? So, yeah, I've seen some stats now. To give a bit of context, but yeah, why don't you provide me with, first of all, the headline is that Baker Tilly is in advanced talks to acquire Moss Adams in a deal valued at over $2 billion. So when people think of accountancy, particularly in the UK, we think of the Big Four. So where in respect of that do these guys sit?

Yeah, it's totally nuts. And I don't think we've really covered accountancy as an industry much on this podcast, but it's a really good opportunity to do So you're right, the Big Four absolutely dominate in Europe as they do in the US. So PwC, Deloitte, Ernst Young, KPMG, they, along with, I think, BDO and maybe Grant Thornton, they basically audit all of the S&P 500 and all of the FTSE 100, those top four. And they're the big beasts. But every firm needs an accountant. Every company, big or small, needs an accountancy firm. So if you're a, you know, mom-and-pop shop, or maybe even if you're a mid-sized manufacturer, it's probably not the best value for your money to go and try and get a Deloitte to do your annual audit. They'll be too expensive. It's like, you know, trying to sell your small company and getting Goldman Sachs in. It's just not, doesn't make a lot of sense. So there's this huge layer of kind of mid-tier, still very big, but mid-tier accountancy auditors, the likes of, as I've mentioned, BDO, Baker Tilly, which we're talking about today, Moss Adams again, that we're talking about today, CLA, Grant Thornton, although that's trying to break into the top 5. So there's a lot of this middle tier and this deal Baker Tilly acquiring Moss Adams is a really, really interesting one from a number of different strategic perspectives. So I'm going to start maybe by talking about consolidation, and then I'm going to move on to maybe talk a little bit more about partnership structures in the context of private equity. So there has been, and there is in process at the moment, a significant consolidation happening across accountancy firms. Around the world, unless you're the Big Four, everyone is trying to consolidate and join together. This is interesting because historically, if I was a chartered accountant, I could set up Barnett's Accountancy firm and have my clients based in the town that I live and run a pretty nice business, get a couple of other accountants on board, and that's good enough for me. I can make a decent amount of money. Now, as scale has become ever more important and the centralization of shared resources has helped benefit these larger accountancy firms, there's been a much bigger drive to say, hey, look, we are, we're pretty big, but we only really cover the East Coast of the US. Well, we're pretty big, but we only really cover private equity-backed businesses in terms of our accounting function. Why don't we combine, have a much bigger footprint, and actually benefit from the classic age-old economies of scale and actually start to compete as more of a full-service platform with the Big Four? So to an extent, Baker Tilly, which is again one of the, I think maybe the 10th biggest in the US, buying Moss Adams, maybe the 14th biggest that just, this just smacks of pure play economies of scale, but there's quite a lot more to it than that.

Yeah. So what, how does private equity fit into this equation then?

Yeah. So this is super, super interesting for anyone that's a bit of a nerd. Historically, accountancy firms operated under a partnership model. So the partnership model is that every equity partner of a business owns the business. Partnership models range from actually historically the likes of Goldman Sachs through to McKinsey, through to Clifford Chance, the law firm. You, your goal is to make it to equity partner and effectively you get a profit sharing arrangement and the profits are pretty large at these firms. So accountancy firms, because they're made up of individual rainmakers that have their relationships and bring in money to the partnership, They've operated as a partnership and have not therefore been in any way attractive to private equity firms because it's a partnership model. It doesn't have shares in the traditional sense. You're not going to acquire 100% of the share ownership of the likes of Baker Tilly. However, over the last few years, and actually I'll bring up the 2021 deal that kind of opened this all up. There was a company called EisnerAmptner, 2021 deal, private equity-backed accountancy deal backed by a private equity firm called Tower Brook. And this was the first of the deals where it's just like, look, instead of buying shares, I'm going to buy out the equity partners who effectively own the company and turn the business, turn the partnership into a normal business with normal share, with a normal share structure. So this is bringing these accountancy firms out of the partnership model and into the more normal corporate model. And therefore they become much more attracted to private equity because what does private equity love? A, companies with pretty solid cash flow, which accountancy firms tend to have because they have relatively low capital bases. And also industries that are ripe for consolidation. So this deal that I just mentioned, the Eisner-Amper deal, just got a quote from the CEO saying, prior to the Towerbrook transaction, we averaged about one M&A transaction a year. In the last 13 months since we got bought, we've done 9 transactions. So this is a classic buy and build private equity strategy. Once we acknowledge that these accountancy firms are quite up for getting rid of their partnership structure and moving to a normal business structure. You know, we're all open for business. And that's exactly what's happened with the deal that— with Baker Tilly and Moss Adams.

Would you ever get— I don't know how it works, but in a partnership model, wouldn't the partners be quite opposed? Surely when you get to partner level, You're like, this is it now. I can just go on, play for the next 10, 20 years and know that I'm pretty guaranteed a certain level. Whereas, yeah, I mean, what ability do you have as a partner to push back against the overarching powers that be of coming out of that structure?

Yeah, it's a really interesting question. So, so why, so why partners within these accountancy firms up for doing these private equity deals. So the first is, well, they get, their partnership share gets acquired. So they get a nice big payday. It's like being a founder. You sell your shares and you get a load of money. B, you'll still have a slice of the pie, an equity slice of the pie. So it's not as if you get nothing. You just convert your partnership equity or put your partnership shares into equity. So you're still kind of getting a little bit of the upside. Thirdly, if you convert to a normal share ownership structure, you can raise investment in a way that a partnership model can't. So you can go out and do acquisitions. So if I'm a partnership model, very, very difficult to raise external capital. So you don't really have the share structure to do it. You need to create a separate entity that acts as a kind of quasi-partner. It's very complicated, but in a normal share, a normal business, you have 100% share capital. You raise more money by issuing more share capital and diluting everyone, but that might be appropriate to go after acquisition opportunities. And then finally, there's been a big trend in the industry where the industry's just not getting enough good talent. From a junior perspective, because if you are a junior and you've just done your chartered accountancy, uh, you've just done all of your exams, you might have to wait 20 years until you become an equity partner, right? And a lot of accountants are just not waiting that long. They'll do their qualifications and then go in-house somewhere where they can get a nice slug of equity before having to put in their 20 years, the old school model, and then eventually become partner. By recapitalising and changing to a normal shareholding structure, then everyone can benefit, right? The juniors can get a little bit of equity. The senior ex-partners can get a lot of equity. To an extent, it makes sense.

Okay, cool. Well, look, the last one, Grant Thornton, which I think is what, double the size of some of those, even though they're not Big Four, they're still big.

Yeah. Grant Thornton's a lot bigger. And I just wanted to round this off because it's just interesting getting a couple of different deals. Just to show the arc of what's going on in this industry at the moment. So Grant Thornton is a really weird beast and might be representative of a lot of other accountancy firms, but I'm not so sure. Grant Thornton is a global brand with lots and lots of very totally independent units. So for example, Grant Thornton US is a different business from Grant Thornton UK, which is a different business from Grant Thornton Luxembourg, which is a different business from Grant Thornton UAE. They're totally different businesses. They just have the same name. So Grant Thornton US is now private equity backed. So they sold a majority stake to New Mountain Capital in 2023. International consolidation became a priority. So the first thing they did was go out and acquire, a strange word if you think about it, acquire Grant Thornton Ireland, but it's a different company. So you have to go out and acquire these network of different independent businesses that are operating under the Grant Thornton label. And what really brought this to light, super, super interesting. What really brought this to light was that And then about November last year, there was a headline that basically said Grant Thornton UK is up for sale, and there were a lot of potential bidders, including Grant Thornton US, private equity-backed Grant Thornton US. And you scratch your head and you go, what's going on here? Why Grant Thornton UK in a competitive process to be bought by the US company? It's pretty bonkers.

I did. There's a couple of flags going off here from the PE guys. So you just said they acquired Grant Thornton Ireland, and then so Ireland, Cayman Islands, UAE. This all sounds a little suspect in terms of strategic locations of where these particular units reside.

Yeah, you're right. And they're, you know, So on a per capita basis, these places are very, very overrepresented by, uh, our, our friends, the accountants. So yes, there's a lot of business that goes on in Jersey, Guernsey, Cayman Islands, et cetera. Happily enough, there's a little bit of name washing. All of these entities are going to be consolidated under a new company called Grant Thornton Global Advisors. Adds the veneer of credibility to Grant Thornton. But anyway, to go back to the UK, to go back to the UK story, it was announced last week that Cinven, the UK-based private equity firm, had bought Grant Thornton UK, beating Grant Thornton US to the acquisition. So Grant Thornton UK is now owned by Cinven. Grant Thornton US is now owned by New Mountain. So it is a really, really strange story. And again, it just goes to show the activity, the consolidation in what has historically been a super fragmented space. Everyone is getting, well, lots of firms are getting private equity backers going on this consolidation buy and build play. And look, we'll see how it all shakes out, but it's definitely one for any aspiring either banker or accountant to be pretty aware of.

Just to finish, because as we're talking about accountancy as a general theme, and I get this question to me on LinkedIn messages all of the time, where there's accountants, trained accountants looking to pivot and move into sell-side banks. Can you talk me through, um, strategically what roles they would target, how they would go about that? Just a very Quick summary.

Yeah, it's a really interesting one. I mean, investment banks, advisory firms love accountants. You're on the right track if you're a chartered accountant working for one of the Big Four or the equivalent of the Silver Circle, the Grant Thorntons and the BDOs of this world, because you have immersed yourself in businesses and in the nitty-gritty of working through the financials and the operations of businesses as well. So firstly, you're in a really, really good space. Probably a few different ways to navigate it. The first is you do your chartered accountancy and then within your Deloitte or your KPMG, you join the corporate finance advisory or due diligence arm of that particular organisation. So you kind of move away from audit and into consulting, into advising. That's a really nice segue because you get to meet, you get to be working a lot on a lot of the same transactions as the investment banks, whether it's a capital raise or whether it's an acquisition, and you get to build your network out. You could also go straight, you could also try and go straight into an investment bank role or maybe even a private equity role crying out for really, really good accounting talent. And as the mid-market kind of, yeah, medium-sized businesses, as that gets ever more attractive, from an M&A perspective, from a private equity perspective, having good regional accountants, and I don't use the word regional pejoratively, it's going to be worth their weight in gold. People that have trained as an accountant at KPMG up in Leeds, know the players, know the industry, know the companies that are potentially going to be really interesting private equity targets. You're already three-quarters of the way there. You're very well trained. You've got a good network. You're based in the right region. and it's definitely a fallacy to think you need to go to LSE, get an internship at Goldman Sachs, and that's the only way to do it.

Brilliant. All right, we'll finish it on that note. So as ever, thank you very much, Stephen. And always drop us a comment if there's any questions at all. I know you can do on, on Spotify or wherever we share this episode, but until next time, thanks for listening.

Thanks, Ant.