The Deal Room: 2024 in Review – M&A, AI, Private Credit, and IPOs

Hello and welcome back to what is the final Deal Room show of this year. And what we're going to do is talk about the Deal Room in summary. And I must probably say, Stephen, on balance, I'd say I get more messages about the Deal Room than the Trading Floor. However, I get more messages about how handsome Piers is than your show. What do you think about that?

That is really, really tough to take. Um, look, I'm glad that people are asking questions. What that also maybe suggests to me is that my explanations are not clear enough. So what you've done is you've said that Piers is better looking than me and he's a better teacher, all in 30 seconds, Anne. This is a Christmas episode. I want some joy to the world. And you're— yeah, I don't know.

No, no, no, Christmas Grinch. No, you're, you're, you are the content king, and I've, I have that in written form from numerous people. So I congratulate you for always is being super consistent for sure throughout the year, which is a hard feat when we put out an episode every week, you and I.

Yeah, look, it's been a, it's been a great year and, and the best thing about these types of podcasts is that there's always something new to talk about and finance is so multifaceted that we can find something every week that has a teaching element. And our goal is not just to talk about the headlines, it's to also do a little bit of teaching. And that's obviously what, what we get really excited about, and there's just, there's always, there's always something interesting, and, and I've got some interesting ones today.

Yeah, so we're not gonna— we'll talk about the 2025 interesting areas that you, I, and Piers will be looking at in the final episode of the year. But before that, we're going to talk about all key themes that we've had in IBD of this year. That does mean AI, deal flow, IPOs, and private credit, things like that. Also tying them, as you've just explained, to big company events. So JPMorgan, NVIDIA, BlackRock, some of the main flagship stories, if you like, in that world from this year. So where do you want to kick things off then, Stephen?

Yeah, so this, I, I, there's a lot of podcasts that, that do 2024 summaries or a year ahead in 2025, and they just pick some key themes. What I wanted to do was pick some key companies, and those companies are going to be representative of the key themes that we saw on the podcast again and again. So these companies and these stories, you would have, if you're a regular listener, and I know, and I know a lot of you are, you would have heard about all these stories before, but let's just bring them all together as a good representation of what 2024 has been from an IBD perspective. And just before I get into my first company, Exxon. I just want to give you, give you the key themes that we're going to speak about through these 5 companies. AI driving everything. Talk a lot about that. Deal flow remaining muted, but not in oil and gas. IPOs rebound, but there's still pent-up demand and pent-up companies waiting to IPO. The rise of private credit and alternative investments and more industries becoming a winner takes most. So scale related transactions being the order of the day. Loads of conversations around economies of scale and the big companies winning out relative to the smaller ones. So let's start with number 1, Exxon. This feels like a very long time ago. The Exxon Pioneer transaction that was announced actually in October 2023, but closed in May 2024, and it's been the biggest transaction of the year. A $60 billion transaction from Exxon, all stock, to acquire Pioneer. The reason why I thought this story was worth resuscitating was to take a look at the M&A deal values, all the kind of M&A activity on a sector-by-sector basis. I've got a great slide here in front of me looking at what, what sectors, what industries are still well below their kind of 7 or 8 year average in terms of deal volume and deal value. So in front of me, the biggest underperformers in 2023 and 2024 in terms of a deal volume perspective, technology, healthcare, and media. Says on my slide, this is a Bain slide, that technology, the amount of deals that have been done in technology in '23 and '24 are 40% less than the average from 2015 to 2022. So there is still, you know, we've spoken about a few big technology deals, but there's still, we're still well below the industry average from 2015 to 2022.

Wouldn't that period, 2015 to '22, be somewhat influenced by the '21, '22 figures or not?

Oh, totally. And obviously 2021 was such a bonkers year. It's like including the tech bubble in any piece of analysis. You have to think, all right, what was actually going on during those 7 years? But what's interesting about this graph in the context of Exxon is pretty much the only industry apart from maybe retail, the only industry where 2024 has been pretty representative of the 2015 to 2022 average in terms of deal volume and deal value is energy and natural resources. $570 billion of deals happened in 2024 across energy and natural resources. And if you were to, I don't think many people go through the archive of the podcast, but if you were, you would see in Q1 this year, 2024, we were speaking a lot about the oil majors, whether it was Chevron or Exxon, doing some pretty big things, especially in the Permian Basin. And what's quite interesting about this, about revisiting this deal, is you can actually, you can actually see how it's going. Now the deal was only completed in May 2024, so we don't have a lot of case history, but what I do know is that as of November 2024, Exxon had confirmed nearly 400 job losses relating to the integration. Remember, you've got cost synergies that are hopefully going to be achieved through potentially getting rid of some people in, in the new combined organisation. But on the plus side, there's been some production synergies as well. We talk about cost synergies and revenue synergies. There's a load of production synergies in this deal, mashing Exxon's technological innovation and expertise with the tracks of land that Pioneer has for resource extraction. All this has led to a November Q3 earnings report of $8.6 billion in earnings, well above Wall Street expectations, and actually pretty consistent with this time last year despite a 17% drop in average oil prices this quarter. So, you know, dividends boosted by 4%, earnings per share $1.92, again, beat expectations, $11.3 billion of free cash flow. When the deal was announced, it was expected to be earnings per share accretive from day one. Now, if you strip out the effects of the change in oil price, which is obviously such a big one for Exxon, this looks like it might actually be earnings per share accretive profitability on a per-share basis from day one, which is always the sign of a pretty reasonable valuation on the transaction. So Exxon, my first, my first company as a representation of 2024.

Trump, His new phrase, uh, or at least when he was in the, uh, pre-election phase was drill baby drill. So just given the emphasis that he's gonna have, we've talked about it a lot, recent episodes about the broader environment under probably his steer. Do you think oil and gas still remains favorable then as an a, as a pocket?

Yeah, I think it probably does. I think US oil and gas is gonna be relatively resilient over the over the Trump presidency. I also, as we've discussed before, I also think that Trump will say the thing that is A, at the top of his mind, and B, is best likely to get a cheer in the convention centre that he's at. So whether it's, you know, he's desperate to keep TikTok, or whether it's drill baby drill, or whatever it might be, or whether it's relating to, you know, landing on Mars or something like that, he'll just say the thing that's in his head at the time. So, you know, I don't think that the oil and gas industry will face any particular regulatory or environmental headwinds as a result of Trump. So yeah, I mean, I think the outlook looks pretty reasonable.

All right. I did see Reddit on your list and I know there's perhaps a personal, personal narrative that runs through the year here. So what do you want to tell me about Reddit to wrap up the year?

Well, what I want to tell you about Reddit is my family are in line for a bumper Christmas Day, you know, as a result of my early investment in Reddit. I think you, again, just to remind you, I think you were quite bearish, or at least you were neutral. I was pretty bullish. But anyway, so Reddit, I wanted to pick Reddit, A, because it makes me feel good about myself, but B, it's also such a brilliant representation of a number of themes. The theme of the IPO market bouncing back with some big 2024 IPOs and actually reopening for what we expect to be a much bigger 2025 in terms of initial public offerings. But also that little bit of gold dust, that little bit of secret sauce that you sprinkle when you talk about artificial intelligence and Reddit being one of these key providers of training data, well, of, of source data of trillions of lines worth of human level interaction that the likes of Google are now paying $60 million a year for to train some of their large language models, or as the base dataset for their large language models. So just as a reminder, Reddit IPO'd at $34 a share. That is what the original investors, the IPO investors paid when they had received the roadshow and were thinking about investing. That's That's what they paid. The stock bumped 48% on day 1. So that's kind of what we are paying, $50 a share if you got in pretty early. It is now at $173 a share. So those $34 a share IPO investors, what an unbelievable 400% return they have gained. And it's now a $30 billion market cap company. Why? Obviously the AI boom, but also in October, as a reminder, they released quarterly profit for the first time. Their user base had increased by 47%. Their revenue had increased by 68%. You know, this is, this is pretty exciting stuff. And there's a lot of road to run for a company like Reddit. It's, again, it's only a $30 billion market cap company. Again, I'm kind of pushing this for my own benefit, but let's just think about this. And I don't know, and if you've seen this when you've been doing your, your kind of Google searches, you'll see a lot, you'll see a lot more Reddit up in the top 2 or 3 search items because just coincidentally, Google as a result, not necessarily directly of its newfound data sharing relationship with Reddit, but Google has tweaked its search algorithm to prioritize more user-generated content. So overnight, Reddit's gone from being maybe on page 2 or 3 of the search history to being item number 2 or 3 on the search for a particular item. That is transformational.

Well, what do bankers think when they've run a deal like this and then they look back retrospectively several months later and it's up 400%? Is there any, did we sell this appropriately and we got as much out of it as we could have done for a fee perspective at the time? Or is it always like that? And there's always the benefit of hindsight because some go badly wrong, of course.

Yeah, I don't think they'll, you know, bankers are a relatively stubborn bunch and I don't think that they would very readily admit that they had got something wrong and they would've said, look, we priced it appropriately with all the information that we had at that time with the market conditions and look, it was 'fantastically successful. We'd rather see it up 400% than down 80%. Look what great people we are.' Maybe in the very, very dark recesses of their mind, they might be doubting themselves a little bit going, 'Hmm, probably could have at least got squeezed a little bit more out of this.' Just as a reminder, Reddit was valued in the private markets in 2021, private fundraising, at $10 billion. So, you know, I would be, yeah, maybe, yeah, over a glass of Christmas port, I'll be thinking to myself, might have slightly underpriced that one.

Okay, so that's what you guys drink over Christmas. All right, well, look, Nvidia, Nvidia is probably the most frequent word on the Deal Room show of 2024. So I guess, how do you surmise the Nvidia story of this year? Because it's been a wild one.

Well, it's a really interesting one because Nvidia is one of these companies that I probably say the word Nvidia more than almost any other word, especially when I'm teaching and doing these types of podcasts and talking to people like you. But outside of our relatively narrow echo chambers, no one really knows what Nvidia is. So, you know, try to, you know, I wouldn't recommend talking at a dinner party about Nvidia because half the audience wouldn't really know what Nvidia is. Okay, fine.

right?

So it's definitely the biggest talking point in our small world, in part because of the financial performance of the company. Again, just as a reminder, Nvidia has made up almost 20% of the S&P 500's total gains in 2024. And that's in a world where a lot of other big companies have gained quite significantly as well. Its share price has risen over 180% year to date. Its price earnings is up over 50 times, but it's also its quarterly revenue has jumped 94% year on year, $35 billion at the last quarter. Its gross profit margin, 76%. Its net income is up 109% year on year, et cetera, et cetera. So we talk about it, A, because it's been the driving force of the S&P, B, because it actually does the numbers stack up. It does kind of justify the hype in terms of the numbers that it keeps pushing out and the earnings beats that it keeps issuing. But there's also this kind of third point, which is, all right, Nvidia has been the first mover in this AI revolution. Billions of dollars have needed to be spent on core AI infrastructure, GPUs, et cetera. NVIDIA has been by far best placed to, to take advantage of that, and it's got a 94% market share in GPUs. However, what is going to happen over the next couple of years? Who are the winners going to be over the next couple of years? Is it possible that we sit here this time next year and NVIDIA's a $5 trillion company, or is it actually more likely that A, some of the upside from the AI revolution will start to trickle into companies that have actually benefited from significant cost savings, or their products have started to become multi-billion-dollar B2C, business-to-consumer product lines? Or is it alternative TPUs coming in, the Google rival to the GPU? Maybe there are alternatives that are going to start chipping away you'll see Amazon, Google starting to develop their own chips in-house. So maybe the Mag 7 or the Mag 6 will be less dependent on Nvidia going forward. So this is why we love this story because it's such an anchor to the whole markets this year and to the greater kind of fourth and fifth industrial revolution or whatever we want to call it.

I almost feel like when, uh, this time of year, normally forward-looking, you kind of plot out these, these road signs throughout the calendar year thinking, okay, this is when the Fed— so the Fed are going to cut this week, uh, the next cut's going to be in March, it's priced at this, and you'd look at, okay, there's this big— yeah, when we look retrospectively for this year, the election was happening in November. I always feel like you need to plot out the Nvidia keynote speech, some sort of tech conference, the new rollout of this product, it's as big an event for global markets as it is from one of those central bank decisions, it seems. And I, that's definitely not going to change, I don't think, in 2025.

Yeah, absolutely. And, and look, whether you, whether you missed out on owning Nvidia as an individual stock, as I've done, and I feel very bad about it, or whether you own an index fund or an index, uh, tied ETF, you know, this still is going to matter to you. And also if you own any of the derivative stocks, any of the AI adjacent ecosystem stocks, Nvidia coughs and then the market's going to move in some way, shape, or form. So that's why, yeah, that's why we need to care about this from a deal room perspective.

Okay. Well, the two big banking giants then as your vehicles to describe your last two themes. So JP Morgan and BlackRock, what do we have?

Yeah, JP Morgan is, it's just been, massive runaway success over the last few years? It seems, and, and, and you might have a view on this, it seems like they've kind of been in the right place at the right time. It's a combination of high-quality strategy, you know, a little bit of taking advantage of the situation, whether that's First Republic or, or other, other, other similar situations, and, and just their sheer scale and brand name. That has just meant that they are outstripping and outperforming their peers on a quarterly, quarter-by-quarter basis. Their share price is up 40% year to date. It's a $670 billion market capitalization company. It's quite remarkable. And let's just focus on IBD for a second because that's what this podcast is all about. It's IBD revenue this year, is $6.65 billion, which is a 20%, 23% increase year on year. Second biggest IBD bank in the world is Goldman Sachs with just under $5 billion. So it's by far and away the biggest bank in the world from an IBD perspective. And if you look across the different divisions that the FT splits IBD into, M&A, equity, bonds, and loans. JP Morgan is number one in the league table in 3 out of 4 of those and is second only to Goldman Sachs in M&A. So this is an organization that is absolutely dominating the world of investment banking, execution, underwriting, advisory, et cetera. And it's actually performing well outside of the investment bank as well. Its most recent quarterly reports, uh, $4.37 per share, beating estimates of $4.02 per share. Revenue at $42.65 billion ahead of a $40 billion consensus. So, you know, JP Morgan is flying again. Let's think about next year. What other potential headwinds? Well, What's quite nice about a business like JP Morgan is that it's got, I would say the biggest headwind for JP Morgan in 2025 is a lower interest rate environment, which a lower interest rate environment tends to squeeze or lessen the spreads between your lending rates and your deposit rates and therefore lessen your loan book profitability. But on the flip side, as we might talk about if you attend the Ant, Piers, and me 2025 prediction session, it seems like it's going to be a pretty good year for IBD in 2025. There's a lot of good vibes going on, a lot of good data to suggest that 2025 will be a really, really good year. And obviously JPMorgan's going to benefit from that. So it's a nice business model because it's kind of countercyclical. When interest rates are high, IBD revenue is relatively low, but the spreads are high, and then vice versa. So it's pretty resilient. And JPMorgan, what a standout company, and definitely one of the companies of the year that we've spoken about quite a lot.

There is one area of JPMorgan where they are quite clearly the worst on the whole street, but you're going to have to tune in for the 2025 outlook episode, which will be coming next. So make sure you stay tuned.

Can I guess that it's the way that Jamie Dimon treats his CFO on earnings calls? He's nasty. He's a nasty man.

You can't say that and not give us some colour. Come on, what happened? Give us the skinny.

No, well, I mean, it was, I think we were on a couple of months ago on the podcast. It was just Jamie Dimon basically saying to the CFO, Why hadn't you prepared that in advance? I do not want to answer questions on this topic because you should have briefed the investment community. I'm going to stop answering questions on this topic. And the CFO just kind of went silent for a few minutes, got told off like a little schoolboy.

It's a schoolboy error, deserves to be dealt with. So let's move on then. Let's talk finally about BlackRock, which again has been a very dominant force, it seems, both in mainstream media in terms of coverage in the likes of the FT, but also busy moving into new markets. So yeah, where, where are we at with BlackRock?

Yeah, this BlackRock has to make it onto our top 5 companies of the year in terms of the Deal Rooms 2024 retrospective, in part because it's the world's largest asset manager. And, uh, again, when BlackRock coughs, the market moves in some way, shape, or form. But more significantly, from a deal room perspective, BlackRock has completed or completed or announced two of the most significant acquisitions in the alternative asset space. And as we on The Deal Room cover things like private equity and private credits and all sorts of areas like that, it's really important to note that BlackRock is going big on the world of alternatives. This was first represented by the acquisition of Global Infrastructure Partners, a deal which closed in October, adding over $100 billion of assets under management to Goldman Sachs' infrastructure roster. That's a $12.5 billion acquisition. And then we spoke about this last week on the podcast, the acquisition of HPS Investment Partners, again, $150 billion of assets under management, mainly in the private credit and high yield credit space. Now, this is super, super important because BlackRock is now a $600 billion private alternative asset manager. So it's one of the biggest alternative asset managers in the world playing a significant role in the world of private equity and private credit and infrastructure investing and all of the stuff that we talk about quite regularly on the podcast. It's also a very good representation of this scale-related theme that has pervaded through 2024. A lot of the acquisitions that we've seen have been scale-related. I am buying that, I'm buying that company in order to get more scale. It's not necessarily in order to diversify or in order to get particular comparative advantages from a technological perspective. It is, I am adding scale to my operation, whether it's Exxon buying Pioneer to add more barrels of oil per day, or whether it's BlackRock adding more assets under management. This has been a year for scale. And again, economies of scale have won out. The best performing companies across sectors have been the biggest ones. That's not always the case. It can be that the best performing companies are seen as lumbering Luddites that aren't reacting quickly enough or are holding a bunch of assets that are not central to a company strategy. But this year, as represented by the likes of BlackRock, by the likes of JP Morgan, by the likes of Exxon, this has been a year for the big companies.

Yeah, I was just reminding myself because BlackRock, BlackRock were talking to Millennium Management, the hedge fund as well, the multi-strat hedge fund, about a strategic tie-up. So final question then, what makes— you're right, you kind of think someone like BlackRock who's so huge, it's kind of like either steering the Titanic into a new direction, so very slow to move, not particularly agile, or a lack of incentive internally because they are just the leaders already. Even prior to this. What do you think culturally makes BlackRock such an exception to that rule then, being such a big size already, even before these transactions?

Yeah, it's a really good question. I'm going to use a football analogy here. So the key to an Alex Ferguson Manchester United team that has managed to stay on top through so many different cycles is getting new people on board, is refreshing the squad, is refreshing the team. And BlackRock has been known as one of the best acquirers in the space, all the way back to its acquisition of what's now iShares. So it is staying on top by bringing in new elements of the business that, A, create a little bit of novelty within the business, a little spur of additional motivation. but also bring in very, very high-quality, hungry people that want to make their name within a bigger, a bigger organisation. Again, that is so, so, so, so difficult to do if you are number one, as we're seeing at the moment with Manchester City, to use, to continue the football analogy. It's so easy for very, very good players to just get demotivated, to get tired, and to need a new lease of life. So I think that's why BlackRock's done so well staying on top, staying hungry, and adding more kind of strings to its asset management bow.

Cool. Brilliant. All right, Stephen, we will wrap it there. Thanks everyone as ever for listening. Don't forget that if you aren't already following the show and have got your notifications on, please do. Another episode will drop in the coming days, which will be our final of this year. And so Piers will be joined by Stephen and I to talk about 5 things to look out for in 2025. So hopefully catch you then. Thanks again, Stephen.

Thanks, Ant. Merry Christmas all.