Pound Slides, Quants Cash In, and a $49B M&A Gamble

Hello and welcome back to the Market Maker podcast. And he's had a haircut, folks. If you're watching video form here, look at that. Look like you're about to join the army here. Or is it, have you been called up as an extra in some sort of Tom Hanks movie or something?

Look, I've gotta sharpen up, I thought. So that's what I've done.

I'm glad that the show is that important to you. You know, video podcasting is taking off, but look, we've got 3 3 topics to cover over the next half an hour or so. Number 1, the Great British Pound slid to a 7-month low this week as markets reacted to Chancellor Rishi Sunak's pre-budget speech, which is a bit unusual, a pre-budget speech, but lots of nervousness around the UK's fiscal path. So we'll look at that headline. And then another one, an article in the FT that drew a lot of attention kind of industry-wide. I don't think it's because it's something new to people, but it's getting a little bit more airtime, and that's London fast becoming a global quant hub as data-driven firms and top talent reshape the future of finance. So we'll look at why London perhaps is a bit of a draw rather than traditionally New York for quant hedge funds. And then finally, the community's always asking for more M&A deals. So Saab, our researcher, has delivered. And we're going to dive into Kimberly-Clark striking a near $50 billion deal for Tylenol maker, Kenvue. So that's what's on the agenda. So perhaps we could start with the UK. Let's start at home. And yeah, 7-month low. Rachel Reeves previewed, is what they're saying, her fiscal stance ahead of the 26th of November UK budget. Just to get things going, this isn't normal, right? It's not normal for the Chancellor to come out so explicitly, so close to a budget, right?

Yeah. Well, we're kind of 3 weeks off the budget and yeah, it's not, it's not, it's not common. I mean, I think as you all know very well, it's kind of, it's kind of normally a stealth, stealth tactic. Where the government will essentially drip feed the press little snippets, and then the press will start to kind of report. And this kind of guides and shapes the kind of people like financial markets and the public's kind of opinions and expectations as to what's going to land on budget day.

Yeah. I remember when way back when pre-Amplify days when you used to trade and I was squawking, I used to hate budget day. Because it was so painful to have to sit there listening to the Chancellor when you knew every single point, line item that she's going to say because you had the entire thing. And the only thing we cared about, or you cared about as a rates trader, was what's the gilt issuance? And then that would move the gilt about 5 ticks and it was either done and dusted or we can go home then. Or go to the pub.

Yeah, but I mean, that's true. Really dull. But that's actually the sign of a well-executed budget announcement where transparency, you know, we want and need and expect transparency in a democratic society. That's what we want, right? We don't want to be surprised. And so yeah, it's a really big multi-week, multi-month even effort to just try and shape. And look, it's also the government, I would say, using the press and using these little speeches they have and then the press reaction and the public reaction thereafter, using that as a little litmus test as to what kind of policies they should actually roll out come that budget day. So yeah, this is a little unusual here this week because it probably indicates that there's a gap between what the government feel like they have to do with this budget and actually what the current media and public perception is about what they're going to do. And looks like Rachel Reeves here needed to rein this gap in. And so she was way more kind of, yeah, blunt about what she was saying than you would already see in a, normally see in a run-up to a budget.

So we know that the pound's seen a decent move lower. Can you just give me some context? Where, where, how's the pound been performing this year and then other asset classes? Yeah. So fixed income, gilt, UK yields, how did they react?

Right. Yeah, exactly. So I mean, actually it might be worth stepping back cuz like how did the pound react? Well, really we're, we're down at levels like this is against the dollar, right? And look, the pound has weakened against most currencies here. We're, we're down at levels we haven't seen since April this year. Okay. So you, you, we're talking kind of 6, 7 month lows here. And most notably, I guess we almost hit the 130 handle as we would call it. So that's $1.30 to the pound. For, oh, you know, throughout the whole summer and into the autumn here, we've kind of been range-bound, you know, with the top of that range actually 137.50. That was at the start of July and the kind of bottom of the range was like 132. We're kind of bouncing around that range. So we've broken out to the downside here. Sterling weakness, but I actually thought it might be interesting, you know, 1.30, 1.35. I mean, what does that mean? And I thought I'd step back and actually just very briefly go back in time because really I would say there's been 3 broad price ranges for this exchange rate over the last 20 years, and major events have kicked it into one of these other ranges. So, if you go back pre-financial crisis, well, actually the range was more around kind of 180, 190. There was actually a moment in 2007 where it got above the 200 handle, right? So over $2 to the pound.

I was in New York at that point. I was like, free of New York. I remember that literally, 2007, I was in New York. It was brilliant.

Heady times for the British tourist out and about. So that was, then the financial crisis hit, right? And fine, obviously that was a global thing, but it turned into a Eurozone debt crisis as well. And like Europe was the epicenter of the crisis. And so actually really it knocks that currency from the kind of 180, 190 range into a new range, which was more like kind of 150 to 170. Right? $1.5 to $1.7 to the pound. And we kind of stayed there then until about 2016. And then a notable event happened in 2016. It's called Brexit. And there was one particularly, you know, on Brexit vote day where the news came that we'd decided to leave the EU, that the sterling collapsed. And so this knocked this exchange rate now into its, what's been its current quite large trading range. Over the last sort of 9 years. So it kind of kicked it below the 150 handle and we've been trading, you would say, really between 120 and 140. So 1.2 to 1.4, you know, ever since 2016. One notable foray to the downside, we almost got down to parity even. We got down below 1.1 briefly in 2022, kind of, you know, whatever, post-COVID and so on. But broadly it's been 1.2 to 1.4, Right? So where we are now, we've gone from 1.35 a few weeks back down to 1.3. So we're still broadly in this range we've been in for the last 9 years. But, but still, you know, there's, that's the kind of wider context. But when you're looking shorter term, well then sure, yes, the pound has devalued quite sharply over the last few weeks with Reeves's comments where she said, quote, we've gotta make some hard choices, you know, balancing public spending with reducing debt. I mean, Labour can say all they want and they've been spouting off all they want all year. They're gonna hike tax. Taxes are going up. That's what Labour does. You know, I know Starmer came in on this idea, we're not gonna touch the kind of three core tax taxes on society and it's going to be more about the kind of wealthy and those with the broadest shoulders should bear the biggest sort of cost, right? And all this stuff. But look, they're going to raise tax and it's because they've got no choice. They've been backed into a corner. You know, the UK economy's underperforming and the government's spending a lot of money. And when the economy's underperforming and tax revenues aren't as high as you'd want them to be, or you had budgeted them to be, Well then, all right, you get a deficit and then you've got this kind of gap to fill. And ultimately, how do you fill it? Well, you either cut costs or you increase revenue by increasing taxes. And we're coming into this budget and the government are, they're going to have to increase tax. I mean, I'd love them to cut more costs, but that's not really a Labour strategy. So tax rises are coming and it's going to have a drag on the UK economy. Which is ultimately what's led to the sterling valuation kind of dropping. It's about future growth expectations.

Just connecting the dots then here between the government and the Bank of England. And so if this was the US, Trump would, or one of his guys would be saying, Powell, you need to cut rates, you need to cut rates, you need to stimulate the economy to close this gap that you've talked about. So is there any of that within this of what Reeves attempting to do speaking a few weeks ahead of this big announcement?

I actually think there is something in that. It's a very diluted, very British way of doing a threat.

It's a Hugh Grant way of doing a threat.

Yeah. Yeah. It's a kind of very polite, incredibly veiled, it's so hidden you can hardly see it message. To the Bank of England to say, oi, please cut rates. And why has she come out and said these comments recently? It's because there's a rate decision today, right? And so it's the last Bank of England meeting before the budget. And yeah, it's a veiled message to them to come on, help us out here. Again, but look, the UK got a similar problem to the US in one respect in that inflation's ticking higher, or well, it's come down a little bit, but it's still too high. Inflation's 3.8%. That's more than double the 2% target, right? So that's their key issue when it comes to cutting. But look, the growth outlook's looking pretty dire. And so really, I mean, I'm definitely in the camp that the Bank of England should get on with it. And actually the bond markets agree. And this is one of the things that Labour have repeatedly mentioned, and Reeves particularly, where she's saying, look, I'm a safe pair of hands. I need to hike taxes because it's the right thing to do to sort out our public finances. And check out the bond markets. They're telling you that I'm a safe pair of hands. They're not telling you that I'm a Liz Truss and I've lost control, right? Now, so what do I mean by all of that? Bond yields have been dropping. So what does that tell you? Well, really that's pricing in interest rates coming down. It's pricing in inflation coming down. You could argue that weak economic growth in the future should lead to inflation expectations dropping, right? So bond yields would drop as a result. If the Bank of England are going to carry on cutting rates, Well, again, bond yields will go down, right? Bond yields would be going up if the financial markets had lost trust in the government's ability to sort out their public finances. That's what happened to Liz Truss. So right now, Truss is, oh, sorry, Truss, Reeves is using that as actually a kind of, that a validation point, if you like, for her strategy. So the Bank of England are meeting in like 3 hours' time. They're going to announce, are they cutting? Are they not? It's on a bit of a knife edge. Maybe you can tell me what the current probabilities are. I think it's still in favor of no cut.

Yeah, I think so. Yeah.

But if you look at the rate cutting cycle so far from the Bank of England, they started cutting rates in July 2024. And they have cut rate very consistently every other meeting. They have a meeting every 6 weeks. This is the meeting if they're going to carry on with that schedule. This is the meeting where they cut. And they tend to cut every other meeting because it kind of coincides with, it's that meeting that the Bank of England report on an updated kind of economic projections and so on. Right? And so, they kind of have more information flow to explain why they're changing rates. So really, if they want to carry on their cutting cycle as they have been doing for 15 months, they need to cut today. So it's actually interesting that the probabilities are actually leaning only just that they won't cut. And that's just because of that inflation situation that's just proving to have, you know, been more stubborn. Inflation stayed higher for longer than we thought. I'd like to see them. I'd like to see a cut today, but who knows? Let's see.

Yeah, I was just having a quick look at the Bloomberg preview. So economists are expecting, like you said, tight decision, but a 6-3 split is what the analysts are expecting. One thing I've just caught here—

6 to hold, 3 to cut. Yeah.

One thing that is mentioned on this preview is a communication overhaul, which I wasn't aware of. The central bank will make its biggest step yet in refreshing its monetary policy communications. If you remember, remember Bernanke did a review for central banks, the Bank of England reforms over how they communicate. So in addition, in addition to the MPC members individually explaining their decisions for the first time, oh, okay. The report will include a clearer narrative with various elements of the central forecast, economic outlook, and policy decision pulled together into an overview to explain the Bank of England's position. It will also include analytical boxes, alternative scenarios, which will show how interest rates may react under certain policy rules rather than the MPC's judgment.

Hmm. Okay.

So if you were trading this, interesting. This is quite interesting now, isn't it? Yeah. Because anytime there's a new, anytime there's a new element that brought into the communication toolbox, because it's never been seen before, as much as we know as I've just described what we're looking for, you've never seen the market react to this information or how indeed it is in fact presented.

Yeah.

In what shape and form. And so there's going to be some scrambling around when this comes out if you're trading this intraday.

Okay. This has just got a lot more spicy. All right. So do you need to leave? Yeah, I've got to go.

So to wrap then, overall, That's quite interesting what I've just mentioned, but Reeves' speech reflecting a shift between, you know, this kind of preemptive strike or preemptive market management, let's call it. There's a balance here, credibility, market confidence, and then the pound's, you know, kind of this longer-term narrative that we're in. And perhaps it's just a bit of a reshaping to reality of the Labour leadership, essentially. Okay. Well, look, before we move on to the second story, which is a super interesting one about quant firms in London. Just one thing I wanted to mention, because I know a lot of the community here are students, whether they're first-year students or recent grads. We are for the first time, I think it's, correct me if I'm wrong, Piers, since 2019. So I think it was pre-COVID. We are running an in-person 5-day finance bootcamp, all the best of our simulations in London on the 15th, the week of the 15th of December.

Absolutely. Yeah. Back, back in action in terms of, you know, just getting people in a room and yeah, it's going to be right in the heart of the city. So I think that'll be quite cool as well, just to kind of get the vibe. The Christmas season vibe in the city is always quite cool. And so, you know, really gives you a taster of what it's like to work, you know, in and around that environment. And yeah, we're going to have We're going to be covering trading, investment banking, quant finance. It's kind of all packed in there. It's basically got our kind of best top simulations in the schedule. And yeah, well also it'll be you. Well, and me. I think I'm making an appearance as well.

Yeah. So indeed.

Right.

I think I'm taking them out for the social on the Tuesday night, so I'm fully involved.

Well, sign me up for that.

No, but if you're, um, obviously there's offers going out and whether you've accepted, whether you accept one or you don't get one, I think the course, uh, the program serves both purposes because either, yeah, it's all going well, you've secured a summer place or a spring week. This is really great to upskill and make sure you can really deliver and convert those opportunities. And then if you haven't been successful, then this is a really great way to fill that. That experience, knowledge, and CV gap, and so that you can start to reapply in the next cycle. So what I'll do, we've got 10 exclusive tickets, and if you just go into the checkout, I'll put the link to the program, just the Amplify Me Finance Bootcamp program in the show notes. If you click on that, when you go to the checkout, if you use the code BOOT150, all uppercase, then you'll get £150 discount on that program. But let's get back to the show and let's talk a little bit about the quant firms in London. And so yeah, this was quite an interesting one because there was a chart and it showed London's quant groups and their revenues over the kind of last 4 years or so. And that is pretty hockey stick-like revenue growth that they're witnessing. So First of all, before we dive into like XTX, Cube, Quadrature, I would probably imagine most listeners have not heard of any of these firms. So yeah, before we get there, why don't we talk about what is quant finance? I know a lot of people have heard the word, a lot of people are aware, but there's a whole bunch of people that don't actually know what that entails or how it differs from trading at a bank, for example.

Right. So yeah, it's about, I guess broadly you would say it's data-driven strategies kind of replacing what was the old school traditional human-led decision making in short, right? But data-driven strategies, I mean, what does that mean? So there's a lot of flavors here and these are the kind of hedge funds that have been pioneering kind of this direction of travel. But we're talking about things like statistical arbitrage, So this is where your, yeah, and kind of modern kind of computing power and AI now more broadly, you know, has helped drive this evolution. But statistical arbitrage is scouring the planet for financial assets that have a correlation. Okay. Then you're calculating what's called the beta. So how strong is that correlation between, let's say, two things. And then you are exploring, you're identifying products that have a high enough correlation, but then you are trying to identify moments where there's a divergence, an unusual gap between the kind of direction of travel of these two asset prices. And those divergences are supposed to be unsustainable given the statistical analysis has indicated that the correlation is of a certain strength. So when that correlation breaks, unless there's a fundamental reason why, well then look, we should expect the divergence to reconverge and they do a long-short strategy to take advantage of that. That's one example. Continue on the buy side, you might have stuff like machine learning. Now, huge efforts going into that space where they're essentially trying to predict the next price. It's like in these large language models where you are predicting the next word, same thing. You're just predicting the next price, right? And so there's huge amounts of compute power. There's, you know, and obviously clever machine learning algorithms are getting built to try and do that. Then that's kind of on the buy side. You then got market making, which is more on the sell side, and there it's about just efficiency. Of process, being more clever and dynamic at how you're pricing your bid-offer spreads. And then it just being what— so that's more about optimizing efficiency, I would say. So look, you got a lot of these sort of more quantitative-derived methodologies about going about your strategies and your execution in markets. That's essentially in a nutshell what quant finance is.

Yeah, I was just trying to quickly find, I know BNP on the sales side have, I think it was called like Chameleon or something like that, which is this box of like tools that you can deploy as a client. So, right. Very low touch. So ways that you can systematically kind of, it distributes orders into the most liquid pools or, and how you want to chop it up. Which traditionally, obviously years gone by, would've been a human expert delivering these sorts of things, but it allows greater control on the user side or the buy side in this sense.

Yeah. And I'd say the general kind of trend in the industry has been that this stuff's been pioneered by hedge funds. Well, I should say market makers, like let's say Citadel Securities, Jane Street, for example, have pioneered this kind of direction of travel. What you're finding now is that the banks The big investment banks, JP Morgan, Morgan Stanley, and the rest of them, they're now kind of playing catch up, but they're definitely, they are catching up, or at least they're moving in that direction for sure. So there's a huge amount of quant hiring going on at the big major investment banks now, which didn't used to be the case. That was more where you'd go to your hedge funds for that kind of stuff. But yeah, I mean, the big four, Well, are they the big four? I mean, the ones the FT focused on, at least in their article. Again, you were mentioning perhaps firms you haven't heard of, XTX, Cube, Quadrature, people like GE Research. Like XTX, if we take, they're the kind of biggest here. Their revenue this year was $2.7 billion. And they've got great margins because $1.3 billion of that was profit. So, And that's a 54% increase on the profit side in the last 12 months. And my point earlier about throwing, requiring a huge amount of compute there, they've committed to spend €1 billion on building a massive data center in Finland just to power and feed their kind of efforts on the quant side. So yeah, it's big business or it's become big business because The rate of growth has been so rapid. And yeah, it's just interesting that London, I mean, we're right in the middle of this, which is awesome. I mean, normally we're talking about London kind of losing its place in the world as being, you know, top dog. This is actually one of the few bright sparks in the system.

Yeah. So maybe we could talk about why London then. Both from a talent and geographic, so regulatory environment perspective. So there's a couple of interesting pieces here. Obviously the UK historically, I would say, has always been right as the kind of premier academic institutions of the world because we have such rich history with the likes of Oxford, Cambridge, Imperial College, probably one of the newer, but very well established and most desirable ones because we ran a big session actually this week. The team were there with 250 students in a room, I think at Imperial, and 78% were STEM students, either engineering or mathematics. Just to sort of show you how this is changing. These are non-econ, non-finance students who are all exploring to go into markets because they've obviously heard about This is growing opportunities. But on the university front, what I wanted to ask you is that don't other countries have great universities? I know ETH is a really impressive technical college in Switzerland. There's obviously the traditional ones in the US, MIT probably being one of the top ones as well. So is that really a hand to play, would you say, on the university system? Isn't that more evenly distributed now than If we went back a few hundred years, sure. I'd say Britain, obviously, but nowadays, is that true?

I mean, yeah, I mean, you've got, where are these businesses hiring from? I mean, I'd say in the UK, it's definitely, it's of course Oxbridge, it's Imperial, as you mentioned. It's quite an interesting, like Warwick for maths, maths students out of Warwick is actually quite a hotbed for talent in this sort of field, actually. So they're the kind of places in the UK, but then yeah, you've got some great places on the continent as well. The ETH, as you mentioned, there's some great French universities that are kind of hardcore on maths and the kind of STEM subjects. So they'll get a bit of action, but it's not that broad a kind of set of institutions that you are kind of necessarily hiring from. But why London? So it's kind of, I mean, only one of those universities I've mentioned are in London and that's Imperial. So why London? Well, obviously London's a great draw for a student. You know, it's obviously a global city and it's a great place to live. And look, English is still the language of choice, right? And when it comes to the business world and the finance world, And so that kind of brings a kind of natural draw. And because it's a big financial center, you know, you've got these big institutions have decided to kind of headquarter there, or at least European headquarter themselves here. And so, you know, they're recruiting, you know, we go to Paris, for example, a few times a year to run quant sessions for target demographic students that these institutions are looking for, you know, in our effort to try and help them find talent, we'll run a quant simulation. And then through that, we're able to kind of start to identify who's got that natural ability in those seats. So yeah, we're in Paris quite a bit where we're at in Geneva, uh, sorry, Zurich with ETH, and then obviously running sessions at Cambridge and Oxford and Imperial.

Is there a post-Brexit benefit here as well? I know part of the the whole spin on voting to leave the EU is that we can make our own, we can define our own destiny from a regulatory perspective. I don't really know the ins and outs here of what rules would apply to hedge funds, for example, but is there a lighter touch but still credible environment? I mean, when it comes to like, right, again, it's one of those things that Britain, just because of that period of history, it's like we are, you know, a lot of the standardized forms and mechanisms in place today were created in England. So London still has that thoroughbred status when it comes to law, for example. So is that also benefiting this situation?

That's definitely benefiting. And also that regulatory side, I mean, certainly versus the EU, which is a kind of always seen as a kind of regulatory nightmare. So yes, I think definitely Step Brexit, you could say is the, again, it's about direction of travel. I wouldn't say necessarily our regulatory framework for the financial sector has diverged particularly massively from the EU's. Again, I'm not an expert on this, but it's the direction of travel in that it can soften. And I think there's been a conscious decision at government level that we need to revive London generally as a financial center. And that's why I think that regulatory direction is softening, but as you say, still retaining that kind of credibility. And actually in the US, the financial regulatory system is pretty complex. And so maybe the UK's even been seen as a kind of sort of lighter, slightly lighter touch regulatory framework than you might be forced into over in the US as well, possibly. So there's maybe an argument there.

So thinking of the actual candidates, the people who are being hired themselves. So I'm assuming traditionally, like if you think about when we started our career, quantitative finance was in its infancy. There definitely wasn't even probably on the radar as very specific places that were dipping their toe into these sorts of things. So any tech-orientated student, all of those Imperial engineers and so forth, a lot of them would have gone to big tech and probably particularly if you're in North America where it's just much more ever-present, I would've thought, particularly if you're on the West Coast at some of those big Californian universities. So do you think that there's a bit of, I mean, you see a lot of these big tech firms chopping tens of thousands of jobs. And then you look on the other side, hang about, this quantitative hedge fund that I've never heard of, I can get paid half a million bucks straight off the bat first year. Like, hang about. So is there a bit of a shift here where it was quite concentrated in big tech, but now actually it can look more attractive to go to a quant hedge fund? Because one of the things that I've seen from going to a PhD researcher conference with one of these hedge funds, in Canada a few weeks ago, was that they're definitely positioning themselves as, look, this isn't finance. This is like, it just happens to be in the financial realm. What you are doing is we are equipping you with capital and intelligent people and technology to solve really complex, challenging problems. And when you talk to a PhD researcher, it's like, That's exactly what I want to do. Like, it could be Amazon, could be a quant hedge fund, but just to make a difference here, because I think a big sell-side bulge bracket bank definitely has the allure of the prestige of you working in finance. You know, you've got your gilet on, it's your core zip and all the rest of it. Whereas, I mean, I was talking to this one guy, he had blue hair like Sonic the Hedgehog with a Barbie backpack on. And the guy's banking half a mil straight out of uni. And I was like, wow, this is what I'm talking about. Yeah.

I mean, look, it's the bleeding edge, right? Of like machine learning in a way. And financial markets are so massive and so it's such a massive beast that is so difficult to kind of predict. So, right, can we actually achieve that? And so, yeah, it's an interesting draw. Obviously the money, look, the money is just ridiculous and that's clearly a big draw. They went after the talent. I mean, there's a war on talent here and to beat the big tech firms, they had to just start to stump up a lot more cash. And look, it coincided with big tech, I'd say post-COVID, let's say 2022. 2023, big tech went on a bit of an austerity drive. This was before the kind of AI thing really started getting going. So there was that couple of years where I think you saw that pivot from the student community saying, well, all right, big tech are firing. You've got these hedge funds coming along with big massive checkbooks, you know, talking a good game in terms of, ah, this is a really interesting conundrum. We need to try and solve for. And so yeah, there's been that pivot. And now the AI thing has kind of, I think, flipped back. And now, you know, maybe these big roles in these AI labs at the big tech firms, again, maybe they're now draw— and look, they've obviously stepped up the game with their checkbook as well. Like if you got Zuckerberg paying $100 million for some professor, then they're not messing around.

When I was at that conference. So the hedge fund, which will be unnamed at this point, so they're one of the 3 that got the $100 million deal at Meta, used to work at that hedge fund as an intern.

Oh wow. Is that right?

He actually texted Guy when that headline came out just to check it was legit. So it's so funny. It's such a, like, I think one of the things to To put into context here was that when I was talking to this guy who was like the main recruiter, he was saying, I'm going after the top, top 50 people in the world.

Yeah.

And he knew, like he had the phone number of the main MIT professor. And it was like, unless you studied as under the advisor of just 3 advisors, i.e., professors at one or two institutions academically in the world, unless you studied under them, you've got no chance.

Yeah.

It was like, I think it's just to, because I think sometimes a lot of people listening might go, oh yeah, I quite fancy half a million dollars, like to get my career up and running. But just to put it into context, I mean, it's like trying to make, trying to become captain of the England football team. It's like, sure. Like you might, you might want to do it, But the likelihood of you becoming that person is very slim.

Yeah. And look, the other point back to London is just perhaps, you know, big tech. I mean, London missed that boat, right? Who are all the big tech firms? They're all in the US. All right, fine. They've got big offices here in London. Sure. But, you know, we kind of missed that technology revolution, I would say. And so where are all the students going? What are the choices for students? Here in London, in the UK, more broadly in Europe, well, big tech is less of an option. And so again, that kind of lends itself nicely to the financial route. And then these kind of hedge funds, you know, perhaps having a larger, the lion's share of talent here, it's an easier path to finance than perhaps it is in the US.

All right. Well, look, let's, Let's move on just onto the third segment of the show, which is an M&A deal. So Kimberly-Clark agreed to acquire Kenvue in a cash and stock deal valuing Kenvue at about $48.7 billion in enterprise value. So maybe if you could get me up to speed, because I haven't really been following this one too much myself on the deal strategy. Yeah. What's going on, the mechanics, the financing. I know JP Morgan's involved in this as well, so. Yeah. Take, walk me through it. Of course.

JP are never far away from big deals. That's for sure. This is like about creating, so Kimberly-Clark and Kenview coming together. This is about creating a leading health and wellness company. So strategies around complementary categories in terms of product categories and then complementary geographies and so on. Basically it's about trying to create the largest pure play consumer health business. That's the long and the short of it. There are a lot of concerns about this and like going into this. So you've got Kimberly-Clark who are the bigger of the two entities. You know, a lot of analysts were saying that they've, they're kind of too exposed to tissues and toilet paper. If you are going to be exposed to anything, I mean toilet paper. Yeah. Anyway, they're famous for Kleenex and Cottonelle, are their kind of big, big brands, right? But the idea was they're quite narrow in terms of their product play. And so one of the ideas is, well, let's kind of diversify with buying Kenview. Kenview, well, yeah, they're kind of famous for, you mentioned Tylenol. There's problems with that I'll come on to, but Listerine is perhaps a name a lot of you might be more familiar with. But look, there's issues here. I mean, like on a top, top, top level over the last few years, we've seen two giants like these two coming together and ultimately it's failed. And particularly like Kraft Heinz would be top of that list, but Keurig, Dr Pepper, and Kellanova would be other examples where you've had these two giants, you've tried to mash them together. Yes, on paper, you know, all the clever business analysts have said, yeah, this is going to be amazing. But the realities and practicalities of trying to put these two monster entities together has failed. So there's that context kind of lurking in the background. But look, that hasn't stopped them. They're going ahead, or they're hoping to go ahead. And the way this will work, the deal will be where, so This is Kimberly-Clark buying, um, Kenview, and they're gonna pay 3 point— there's two parts to the financing of this. They're gonna pay $3.50 per share in cash, right? So the Kenview shareholders, $3.50. The remaining amount will be in Kimberly-Clark stock. So the ratio for every one share owned by Kenview, you're gonna get 0.1 for 6 shares of Kimberly-Clark, right? Basically, this is a $21 per share deal for the Kenvue shareholders. $21. 3.5 of that is cash. The rest is in stock. Okay. This basically values them at 14.3 times last 12 months EBITDA, right? Profits. So the post, if the deal gets done, and look, there's a huge way to go here, but if it gets done, the combined entity would essentially be 54% owned Kimberly-Clark, 46% owned by Kenvue shareholders. You've got stuff like, you know, the headquarters will be the Kimberly-Clark headquarters. The Kimberly-Clark CEO will be the group CEO. So, you know, Kimberly-Clark are certainly the senior partners in all of this. And then ultimately, you know, who are the players from the banking side? And this is interesting if you're interested in careers. In banking, or if you're interviewing at any of these shops, you need to be all over this deal when it comes interview day. But you've got on Kimberly-Clark, the advisors are PJT Partners, whom, you know, you might not have heard of. But then obviously you'd have heard of JPMorgan Securities. They're the other one. Canview, because you have sell-side advisors and you have buy-side advisors. So Kimberly-Clark are the buy-side, they're the buyers. So they're the buy-side advisors, PJT and JP. And Kenview, they're on the sell side, right? So they're selling and they're using Centerview Partners and Goldman Sachs. The deal's expected to close like second half of next year. We're talking here, this thing's going to take a long time and there's a lot of regulatory issues that are going to have to get dealt with along the way. But that's it at a top level.

So two questions there. One is you mentioned about the failed kind of Kraft Heinz, Dr Pepper, Calanova deal. And so how much, if you are an analyst, you said the business analysts are salivating. I can imagine the fees generated on such a large transaction. How much they incentivize to create the harmony in the financial statistics and strategy in order to execute this deal? Because once the deal is done, it's Thank you. Advisory done. They're not part of a board. They don't sit on, it's not like private equity where you've got a vested interest over time to steer management decisions, to have some influence over. It's like it's a transaction and by definition there's a beginning and an end, and then you're out.

Look, the way these things work, a company will be going along and I don't know, they're going to get McKinsey in or they're going to get some consultant in if they're not particularly happy or their shareholders aren't particularly happy with growth or the growth outlook. We'll talk about some activist investors in a second on the Ken view side, but you might have activist investors coming in and start to grumble about business strategy. So fine, all right, let's get the consultants in. Again, massive fees here, but look, McKinsey will come in and they'll go, oh, X, Y, Z, you know, you should think about changing here and that and that, right? And part of that Analysis might lead to, well, we need to diversify. We should have an acquisition strategy to diversify our revenue stream, right? At that point, you go to the banks and you say, right, find us some targets. So of course now the banks do all their crunching and their analysis. And yeah, of course, all of these consultants, all of these advisors, you know, there's a little bit of a conflict of interest in so much as they're charging huge fees. For this company to do a deal. So of course they want them to do a deal. So they're going to find them targets and then, you know, with management, they'll come up with a shortlist and they'll whittle them down and they'll find the optimum one, right? But this is all on paper. It's all just theory. Theoretically, this is a good target, but you know, the cold, hard, you know, reality of trying to merge together two giant, giant entities. I mean, you can have all the consultants you want in the world, but that is a difficult job and often it's too difficult and doesn't work.

Yeah. Yeah. Makes sense. And my second question was about the JP Morgan. So I'm assuming if you were kind of backing a horse, you would always back JP because its sheer magnitude in terms of its size and its presence and its capability So here they kind of advise and fund. So it's kind of, well, as a seller, or let's say as a buyer, for example, Kimberly-Clark, I'm like, well, it's much more streamlined and makes my life easier if you could just run it end to end as a process, surely.

Absolutely right. Yeah. So like on the financing side of this deal, they're going to finance. So remember they're stumping up $3.50 per share in cash, right? So that's the bit they need to finance. The majority of the deal, remember it's a $21 per share deal overall. The majority is just in Kimberly-Clark stock, right? They don't have to come up with any financing for that. It's just then transferring stock. So, but the $3.50, so that's going to be a mix. How they're going to find the money, it's going to be a mix of cash they've got on their balance sheet. Then they're going to issue some new debt. That's where JP Morgan come in because their debt capital markets team will be very happy to help raise some finance by issuing some corporate bonds. And then there's some proceeds that have come through from some divestitures. And again, JP Morgan can help with that if they want to sell some kind of non-core assets here and kind of divest those out of the business. Well then of course that can also be a source of funding as well. So yeah, I mean for sure these big giant banks like JP Morgan, the biggest of all, it's a one-stop shop. And just fewer vendors just makes the whole— what, what, it's an immensely complicated process, just makes it a little bit easier.

So when I, when I saw the reaction on how these companies and the market perceived this deal, I mean, Kenview spiked 14%. Kimberly-Clark did the complete opposite. So fell 14%. In fact, it was one of the worst received major merger deals in recent years as far as the market's initial reaction in their share price. So why so negative for Kimberly-Clark? I mean, 14% of a company of that size is monstrous. So what are people reading here they don't like?

This is the interesting part of this whole thing. Canview spiked higher 14%. Kimberly-Clark collapsed. Lower, 14%. What does that tell you? Well, even without looking at anything, clearly that tells you, hang on a minute, Kimberly-Clark, why are you doing this? This looks like it's going to be a mistake. And for Kenvue shareholders, it's like, hey, you're going to pay how much? Awesome. Basically, this is a Kenvue story. It's not a well-performing business would be an understatement. And over the last 3 years, zero revenue growth. I mean, literally, in fact, you could argue it's just trimmed lower a little bit, but actually, so 3 years of flat, nothing. Then they're actually trending down this year, and so they're tracking at about 4.4% revenue decline this year, right? Year to date. Their share price was down 33%. That's before this deal news got announced, I should add. So down 33%. So you could say the timing here from Kimberly-Clark is quite strategic, because remember, a lot of this, most of this deal's financed in share swap. So if the, if the Kenvue share price has collapsed and the Kimberly-Clark one has not, well then relatively this is getting a cheaper and cheaper and cheaper deal. For Kimberly-Clark given they're paying mostly in stock, right? So a timing thing here is key. They've probably been waiting. I would say the investment bankers have probably identified them as a target. I think they've probably been waiting just for that share price to trend lower and get to a low enough point that makes the deal viable. But look, why is it trending lower? Well, they, I talked about calling in the kind of The sort of consultants. So they've had a massive strategic review this year because of lack of performance. Part of that, the CEO exited, I mean, or got booted out, you might say, which is obviously never a good sign. But essentially there was a lot of weakness around one of their key or core kind of segments, which is skin health and beauty. And like particularly the revenues coming through there are declining. And so obviously this is bad news. Whenever there's bad news, whenever you say the business has maybe just lost its direction, it's lost its mojo, you tend to get activist investors sniffing about. Just meaning that, right, the stock price is down sharply. Activist investors believe that they have an ability to come in, buy up stock whilst it's cheap, buy it up. Secure a large enough shareholding that they can then force a seat on the board. With a seat on the board, their plan is to then have a really big say in changing the strategic direction of the business, what they think will be for the better, and then that share price will rise back up as business strategic performance, you know, starts to improve, right? So you've got Starboard Value are the key activist. They've actually managed to secure themselves 3 board seats in 2024. And so, sorry, March '25. Sorry. They've been an activist on this stock for a long time, but in March '25, they finally secured 3 seats. You've also got Tom's Capital, Third Point, DE Shaw. They're all trying to hoover up stock in an activist way and try and turn this around, right? So that's the kind of situation. The other thing that's hanging over Kenview are 2 big litigation issues. One's with Tylenol, and Donald Trump has been mouthing off about this one. But basically, there's a lawsuit saying that Tylenol, an active ingredient in Tylenol, is potentially causing autism. Still in the courts, definitely not proven, but that's a risk, right? So thinking about Kimberly-Clark now buying this, this is still a live risk. That the outcome of that lawsuit's in the future. So Kimberly-Clark could buy here if that turns out to be that the lawsuit gets activated and it is true, then, you know, clearly that's not good for that particular product, which is a key product in their locker, Tylenol. Then you'll have heard of Johnson Johnson, or, oh, sorry, I should say Johnson's, not Johnson Johnson. You've heard of Johnson's baby powder. right? It's one of the leading baby talc products on the market. There's a lawsuit on that at the moment. Apparently that causes cancer according to the lawsuit, right? Again, that's a live litigation situation. So clearly if you're buying this stock, you're buying that risk and the outcomes there as yet unknown. So this is why when Kimberly-Clark made this announcement, their stock dropped sharply because You're like, well, hang on, you're buying a company that's massively underperforming. You've got the awkward situation of activist investors in amongst this. You've got these big litigation risks, plus it's just that broader story of trying to mash together two giant entities à la Kraft Heinz and how we've seen in recent years that just hasn't worked. So there's a lot to be skeptical of here. If you're a Kimberly-Clark shareholder.

Yeah, I almost think it's a double whammy in a sense of all the things you've described. But then my question would be, so knowing all this, the fact that Kimberly-Clark still want to pursue it, what inherently is really wrong at the core of Kimberly-Clark to be so desperate to want to take on such a challenging play? I mean, either they're desperate or the advisors have done a stellar job in convincing them that this is a strategically strong play if they can pull it off.

Yeah. Or they've got a playbook where they think actually there's a really interesting strategic kind of situation here. And like the activist infa, you know, you wouldn't have activist investors buying if they didn't think there was a playbook to turn this around. Right. So, you know, that's the other point. Maybe Kimberly-Clark think they can do that.

So just to wrap up with this story then, so how do you see this potentially kind of playing out and what are the lessons learned from this deal that people could take away if they are going to think about this sort of thing for an interview?

Yeah, I mean, the key thing is it's not a deal yet, right? It's a long way off. And just, I mean, the Kimberly-Clark shareholders have to vote this deal through. Okay. One thing on that, actually, a slight sort of technicality. They've, and don't forget, the activist investors can also vote. They can obviously gather together a group of voters and try and push through a no vote, for example. But technicality here, when it comes to the vote, they're going to, it will be, the deal requires what's called a majority of shares voted. So if everyone voting, if a majority of those voted say yes, it goes through. It's not a majority of shares outstanding. Because often at these votes, a lot of shareholders don't vote, right? And if you need a majority of the whole, you know, shares outstanding, that's a much bigger hurdle than just a majority of the shares of the voters. That's one thing to say, at least that's a good thing for maybe the deal going through. But look, you know, there's a lot to play for here. There's a $1.12 billion termination fee in cash. So if any side pull out, You can't see Kenview pulling out, to be honest. But if Kimberly-Clark pull out, they've gotta pay Kenview $1.12 billion in cash. There's obviously regulatory hurdles that are going to have to be overcome. And so look, there's a long way— this story's going to roll for sure. And obviously the litigation risk is live and who knows how long that stuff takes to kind of resolve, right?

He who dares falls over. All right, well, look, we are going to leave it there and wrap up. So hope that was useful. Any questions at all, as usual, please do let us know wherever you watch the episode, whether it's on Spotify, which has the comment option, love to see those comments. And don't forget as well that in parallel to our normal weekly catch-ups, We have been every week dropping a guest conversation, typically someone from industry sharing their career journey and insights. Had a really wonderful episode we put out on Monday with Terry Duhon, who I interviewed a few weeks ago. Definitely got to catch that episode if you really want to feel inspired and pumped in what I know is a really challenging time of year for going through applications. Watch that video. Yeah, you'll feel great again and you'll be ready to Pick yourself up and go again. Otherwise, Piers, thank you very much, and we'll see everyone next week.

See you later.