The Deal Room: 5 M&A Trends For Your Investment Bank Interview

Alright, welcome back to The Deal Room, and we've had a lot of technical difficulties getting up and running on this episode. So Stephen, I hope you're not feeling too stressed here. How are you feeling?

Yeah, not, not bad, Anthony. I think there's— technology's an interesting thing, isn't it? It, it, it can be so useful. Fantastic use of ChatGPT yesterday for a number of different things. And then you can try plugging in a microphone to your laptop. Using a new piece of software and it just doesn't work. It just doesn't work. And maybe, and maybe we're just old, maybe we just don't understand technology anymore.

The last 10 minutes of our lives were just a reflection of our age, Stephen. I think you're probably right there. But, um, but look, really excited with this particular conversation because I loved the title of your notes. And your title of your notes was 5 M&A Trends to sound like you know what you're talking about in an interview. And as much as we joke, you know, we definitely want to impart more than just superficial knowledge. I think it's an absolutely ideal conversation. I saw earlier this week, and actually maybe you could fill me in, I saw HSBC, Deutsche Bank, a few other companies have opened opportunities, but Deutsche Bank specifically, I think it was their investment banking origination and advisory Weren't you involved in that when it launched earlier this week?

Yeah, I mean, we are super busy at the moment. We've been involved, well, we were involved with Deutsche Bank's opening of their applications for internships on Monday. We were involved with UBS for a very similar session on Wednesday. Goldman Sachs next week. It's a, it's a fantastic, it's a fantastic time and the learnings that we're getting. Listening in on these types of engagements. Obviously we run the simulations, the business runs, uh, gives an, provides an overview of, of the application process. It gives us a really good insight across firms as to what they're looking for and what types of things students need to prepare in order to absolutely smash each level of the process. And I know you had a, a great conversation last week in terms of nailing some Spring Week offers, so we'll kind of continue from there.

Yeah, so a bit of a prelude here. We've got the state of the market, interest rates, going to talk a little bit of course PE, also mega deals, and I'm sure some of these related to some of the names that you've just mentioned. So look, let's just dive straight in. What is the state of the market as it stands right now?

Yeah, I prepared these 5 trends just thinking about if I was an interviewer trying to ask a bunch of questions to sound out whether that student, that their applicants knows what they're talking about and has read up on the news. I think these 5 are really important, and obviously it's a really good place to start. What's going on in the M&A market at the moment? What is the state of the market? And we predicted at the beginning of this year that 2024 would be a big bounce back from the extremely anaemic 2022 and 2023. But so far, H1 2024 in terms of deal volume and value around the world, we're up 4% year on year according to BCG, but we're below the 10-year average. So it's a weak, uneven recovery. And when I say uneven recovery, 61% of all M&A activity is based in the US. So the US, and, and this is going to be a theme throughout the next 5, trends, the US is just absolutely running away with it. Just think about— and I know that you talk about this a bit on your podcast with, with Piers— think about the state of the US economy. They've defeated inflation, they're cutting interest rates, economic growth is still at 3%, they're part of the vanguard leading the AI boom, they're energy self-sufficient. What an economy! I'm very jealous.

You must say USA.

Absolutely, let's get over there. It's quite, it's quite remarkable. But what I've tried to do in some of these overviews is I've tried to give a kind of high level, and then we'll go a little bit of intro analysis just so that you've got something smart to say, and then something maybe a little bit more advanced so that you can get into that next layer of understanding. So the headline is higher deal volume and value than last year, but not particularly, only 4%. The analysis, if we go into a little bit more detail, is that from it, this recovery is super, super uneven. Think about the US up 33% in terms of deal value year on year. The UK is actually up 75% year on year in terms of deal value, whereas Japan and China are down 40% and 33% respectively. Why is that? You know, you might want to get into that next layer of analysis. Why is Japan down? Well, obviously The weakening yen has made the power of Japanese companies to buy outside companies, it's weakened that power because their currency's worth less. There's an inflation, for the first time in years and years, there's an inflationary scare in Japan. Lots of uncertainty, interest rates rising. So Japan is, is really struggling just as countries like the US are getting out of the 2022, 2023 deal, um, deal drought. So it's really interesting to kind of get into a bit of analysis on that.

Yeah, it feels like if you were going to take the polar opposite end of the rate spectrum on the differentials, that's a good example. You've got Japan on one end, and then, well, might have changed a little bit more recently with Japan with that whole episode a few weeks ago, but generally speaking, as she said, the emergence of inflation just as we're going into this jumbo rate cut in the US initiating the downward cycle of rates in Japan, that, that differential has been widening. And so to the disbenefit of Japan.

Uh, absolutely. And just to kind of zoom out again from, from that more in-depth analysis, just to give listeners a little bit of perspective on this. In 2021, the absolute bumper year for deals, there was $6 trillion worth of M&A deals. Last year it was about $3.4 trillion. It's looking like it's gonna be about $3.5 trillion this year. So, Yes, there's a little bit of recovery. There's some positive green shoots coming from a little bit more stability in Western economies, but we're a long way away from the, the, the real, the real highlights of 2021.

And I guess, uh, pending US election in like less than 8 weeks, Trump could become back into, uh, into power and therefore more conflict with China perhaps. And so might as well stand off any unnecessary risk in going into talking deals prior to the election.

Yeah, absolutely. And, and, and, and as you, as you rightly say, China's down 33%. They've got their own problems from an economic slowdown perspective, but geopolitical tensions are very much hanging above all of these conversations. I would expect that whether it's Harris or Trump, the US will continue to go gangbusters from an economy perspective. It's, it is definitely a unique outlier economy compared to the rest of the world. But yeah, what the US does affects the rest of the markets. And remember, the US companies tend to buy a lot of international companies, and if there's geopolitical tension, then that's going to decrease the attractiveness of Chinese assets for US companies.

Okay. Something you said in our last conversation was that if you're stuck and you need to answer a question, you can always say the magic word, which is interest rates. So this is kind of a, I guess, a natural kind of feed through into that previous point. So what do you have on interest rates?

Yeah, so interest rates, again, this is the, whether you're in markets or applying for a banking position, if in doubt, just say interest rates and you've got a 50/50 chance of being right. Either interest rates going up is bad or good. So you're, you're halfway there. But interest rates obviously drive so much of what we talk about across both podcasts, and they have been the number one topic of conversation in every single M&A trend report that you want to read, whether it's Bain or PwC or Clifford Chance or Nomura or whatever it might be. The high-level point is we've just had a 50 bps rate cut from the US Fed, which should, on the face of it, start to really encourage ever more M&A activity. And superficially, this is relatively obvious because as soon as the cost of capital starts coming down, more assets, more acquisitions start looking more attractive. So that's your kind of headline. Interest rates low, cost of capital low, M&A targets become more attractive, and M&A deal volumes and values go up. So there's 50 bps cuts, 25 bps in the UK. We're starting— well, we've ended the hiking cycle and we're on that hopefully steady kind of downward trend down to 2 or 3%. It's what we hope. If we want to go into a little bit more detail, let's go advanced. So take a look at the funding markets for M&A. So superficial, lower interest rates, low— lower interest rates, lower cost of capital. But it's not just cost of capital, it's availability of capital. And if interest rates are really high, lots of organisations, lots of lenders, whether they're private lenders or bank lenders, are going to get a little bit concerned about lending to riskier acquisition finances because the interest rates are too high for that company to service the debt, to pay interest on that debt. So as interest rates have started to lower, and remember banks will look ahead 6 months, 9 months, 12 months and set their own rates relative to the forward-looking rate expectations. What we're seeing in the markets is a massive increase in debt issuance. So the bond markets, for example, corporate bond market issuance is up 30, 31% year on year. Leveraged loan markets, so this is things like term loan B's, acquisition finance for private equity firms, that surged 96% in the US in H1 2024 and 97% in Europe. So these slightly more riskier acquisition financings have absolutely rallied and, and come back in force. And often it's kind of the tail wagging the dog. If finance is available and it's becoming a bit cheaper, then you are going to see the knock-on effect that people start doing more deals. So lots more fuel to fuel hopefully a kind of buoyant H2 2024.

I was just having a quick look in terms of what the market is currently pricing in, in the short end of the fixed income curve, and it's basically looking for 75 basis points of more cuts by year end.

Really? That, I mean, look, we don't— what do we know, but that sounds pretty punchy to me.

That does indeed sound punchy. I think peers will have a problem with that. Current market pricing when I talk to him later today.

And just to, just to kind of take on that, take on that point just a little bit more. And if you want to go even more advanced than the, the link between interest rates and availability of funding, just want you to, to start thinking about the difference between corporate M&A, so one company buying another, and sponsor M&A, where a private equity firm buys another company. And think about the way that they fund themselves. So corporate M&A is recovering quite quickly because actually stock prices are relatively buoyant and a lot of companies can use their own stock to purchase another company, right? They don't need to think about leverage. They don't need to think about expensive debt because their share price is doing all right. And therefore we've seen a bit of a rise in all stock purchases, where you buy a company in exchange for shares of your company, whereas sponsors are private equity firms are so heavily reliant upon debt to make their business model work. They're still like, come on, really need these interest rates to go down because that's our business model. So it's just really interesting getting into almost kind of peeling the onion, getting into that next layer of analysis. What is the market impact, the M&A market impact of a change in interest rates?

Okay, you mentioned private equity there, and I know that was your third point. So what's this private equity bottleneck you speak of?

Yeah, this is a really interesting one, and we'll probably go straight into kind of advanced analysis. But private equity, because it's now such a big asset class— assets under management, private equity firms topping $15 trillion— they are such an important driver of the wider M&A market in terms of deal volume and value. And private equity's been in this really, really weird situation for the last couple of years where they bought assets when the going was good and valuations were pretty high. And they've been waiting and waiting and waiting to offload these assets, offload these companies at a really good valuation. But because interest rates have been pretty high, valuations have been depressed. So, bit of analysis from BCG. Private equity firms own over 27,000 portfolio companies. At least 50% have been held for more than 4 years. Now, a private equity firm model, or private equity fund model, is that you own for 3 to 6 years, and you make sure that you sell in order to realise a liquidity event, realise return on investment for the limited partners that are part of that private equity fund. So the fact that 50% of these 27,000 companies have been held for over 4 years suggests that there's this massive bottleneck of, I want to sell, but the valuation's not right. I don't want to see a hit. Imagine if I bought a company for a billion dollars and I can only get $800 million for it now, cuz valuations are depressed. I don't want that to appear. As a kind of a locked-in loss. So we're kind of in this weird dance where yes, we want to get— private equity wants to act, but the valuations are still not quite there. Maybe there will be a glut of M&A, but let's get into the advanced analysis. So what do private equity funds do when they don't really want to sell, but they do need to realise a liquidity or a cash-out event for their fund's investors. Because remember, the fund's investors are there for 6, 7, 8 years, but eventually they want their money out. This has led to the rise of the continuation fund, which has been a big trend across private equity over the last few years. Continuation fund is basically, if I'm Apollo, I've got a European fund that's, you know, it's been around for the last 6 or 7 years. I've got a load of companies in there that probably need to be sold. but the IPO market's not great and no one's really buying at the right valuation. So here's a clever, clever idea. Let's launch European Mature Fund 2, which effectively buys the company out of Fund 1, realising a liquidity or an exit event for those early investors whilst keeping hold of that company and making sure that there's no loss. It feels a bit dodgy, but that is what's happening at the moment.

Wasn't this your graphic you designed months ago with the cake, the layering of the cake?

The great private equity cake. Yeah, eventually that cake— I don't know, you can't, you can't have wheels falling off a cake, but maybe the cake will fall over or someone, I don't know, someone will eat the cake. Anyway, the analogy is we are— we keep pushing forward when the rubber hits the road and we realize that the assets are not quite, or the company's not quite as good as we thought they were, who's going to left— who's going to be left holding the cake? I'm mixing my analogies too much here, but yes, there is a problem coming down the road, and continuation funds are just kind of— everyone's just waiting until valuations go up, and maybe a continuation fund is the bridge to plug that gap.

What could possibly go wrong?

What could possibly go wrong? Exactly.

Good.

Okay, looking forward to analyzing it.

All right, so We're on number 4 now of 5. So we've got a little bit of a special one for number 5 that I think if you're a student, you definitely need to listen to the end of the episode for sure. A big fundamental question for you coming. But before we get to that, mega deals, they seem to be back. So what are some of the big ones we've seen?

Yeah, so mega deals. So 35 mega deals were announced in H1 2024, uh, 16% increase in the same year, same time last year. One country, the US. Two sectors, energy and tech, dominate. So these are deals over $10 billion, and there's been a lot of them, and we actually have spoken about quite a few of them on the podcast. But let's go into why energy and technology have dominated H1. Whereas there have not been a lot of mega deals in the healthcare space or in the retail space, it's all been energy and technology. So energy, why have there been a lot of big deals? Well, a couple of factors. The first is that oil and gas is going to be around for a long time, and I think people have realized that, yes, there is an energy transition, but scale consolidation in the oil and gas market is extremely important. And we've spoken about mega deals by Exxon and Chevron and ConocoPhillips over the last year or so. Remember, these companies also have quite a lot of cash on their balance sheets as well. But also, there have been a lot of deals related to the energy transition and the Inflation Reduction Act-related subsidies. So again, renewable energy is a really attractive place to be at the moment, especially in the US. So you've got this combination of, alright, let's consolidate in oil and gas to achieve economies of scale and make the most of our cash, but let's also make sure that we are exposed to the subsidy-rich renewable energy companies that are starting to be bought, sold, and consolidated as well. So that's why energy's really, really kicked off in H1 2024. Technology. Well, it's all about AI. AI is one of the, one of the best case examples of work of a technology that works better at scale. Right? The more data you have, the more infrastructure that you have to support the large language models, the bigger your data centers can be, the more GPUs you can buy, the better your product is going to be. And obviously we talk billions and billions of dollars, Sam Altman talks hundreds of trillions of dollars, but this is a scale business. So you need the big beast to be working, it to be buying up the smaller beasts in order to create these kind of AI megaliths. And, and that's, and that's what's been going on. There's been a really big consolidation across technology as we all future-proof ourselves for this AI world. And I don't know, and if you've noticed across your non-AI-first platforms, you know, so we're not on ChatGPT all the time, but across almost every piece of tech I use, The AI is getting better, quicker, new releases. We're using a bit of audio recording software at the moment, and new AI is coming into the— into play. It almost seems like every month or so. So everyone's on this now, which is really interesting.

Yeah. I mean, until you posed that question, I didn't want to tell you, but you're not talking to me at the moment. This is, this is, this, this thing that you are seeing and hearing has been built on hours and hours podcasts. This is the fake AI, and it's pretty decent though, right?

To be honest, you've probably put out enough content now that we could train, we could train an LLM on you, and then, and then we wouldn't even have to pay you anymore.

Right. God forbid.

That's the dream.

That's the dream. I know that there was, um, to conclude the mega deals, there was a few you said to, to check out in line with the tech kind of energy theme. So What would those be?

Yeah. So I've just picked 4 and I picked these 4 just because they're not the massive, massive headline stories and it's worth, it's always worth having a big one that's maybe not the one that everyone else is going to pick. So, uh, Permira, the private equity fund acquiring Squarespace. This is a really interesting one in the context of Squarespace going public a few years ago and not realising its value. So that's a really nice take private. SAP acquiring WalkMe for $1.5 billion. This is exactly in line with this AI consolidation play that I was talking about. ConocoPhillips acquiring Marathon Oil for $22.5 billion. That is a mega deal. And, uh, Sonoco— I think I pronounced that wrong— acquiring New Star Energy for $7.3 billion. Those are just 4 reasonably good case studies that you can just choose to take a little bit of a deep dive so that you've got again that next layer of analysis. Just think about an interviewer acting like a child and going, why, why, why, tell me more, tell me more, tell me more, until you run out of things to say. And hopefully this podcast is giving you 3 or 4 layers so that you don't run out of things to say straight away.

Uh, that would— my response, my default habitual response to that is Why? White tablet. I'm a bad parent. I'm just gonna, I'm just gonna admit it. Um, okay, cool. So we've, we've kind of equipped our aspiring bankers with deals, rationale, the whole kind of backdrop, state of play, interest rates. So let's talk a little bit about then making sure that young people have managed expectations. And ask themselves, and I think you're a great person to kind of talk about this subject because you have lived it yourself. You've gone through exactly what these people are about to begin in their early careers. And it's the elephant in the room, which is all about working hours, working conditions, work-life balance, because there was this piece in the FT, I think earlier this week, and it was talking about JPMorgan specifically. So tell me a little bit more about this, this story. And then, yeah, let's unpick this a little bit so that it can help manage people's expectations so that they know what they're signing up for if they do want to pursue this type of field?

Yeah, I think it's, it's, it's always, it's always been assumed that working hours in investment banking, especially M&A, are extremely long, and it's almost a rite of passage that you have to get through these 2 or 3 years of 70, 80, 90, 100-hour weeks in order for the grass to get a little bit greener and for you to have a lot of options in the future. But I, I get the impression that because this is a headline, because of what's happened in the Bank of America over the last few months, because of JP Morgan announcing that they're limiting working hours to 80 hours a week— still 12 hours a day, 7 days a week, if you think about it that way, that's quite remarkable. Um, oh, and also there's a lovely carve-out in there, except during deal execution, which can in busy times be all the time.

Yeah, I did see that, that, that one little extra line in the third paragraph of the story. Yeah.

So, so JP, it's not as if JP Morgan's got all soft and cuddly. It's still a minimum, it's still an 80-hour week except when you're on a deal. But, but it's really, I think, I think this is really important for young people to have a reasonable understanding, A, of why the working hours are so long, and B, your own response to those working hours. So let's start with why. So why are working hours so long in the world of investment banking? Well, there's a number of reasons, some of which are legitimate, some of which are maybe slightly less legitimate. So the reason why working hours are so long is because this is a, an incredibly competitive industry. If you just think about the bulge brackets versus the boutiques, everyone is chasing deals. and there probably aren't enough deals to go around, or at least that's the expectation. So if Goldman Sachs is gonna turn around something overnight, you better turn around something overnight as well, because the only differential that you really have, it's not like you've got a product that's got 5 more features than someone else. It's who is better at executing this piece of business, who is working fastest, with the highest quality for the longest period of time. That's basically what you're going to get rewarded on. And therefore it is, can I put in the hours? Can I be hyper-reactive to customers and clients? Can I get to that pitch a few days before a Rothschilds or a Lazards or something like that? So that's the industry dynamics, a very competitive and relatively product undifferentiated industry. Obviously, there are the mechanics of deal execution, which mean I need to get a bid together before the next deadline, or we need to make sure that this acquisition is completed before year-end or some kind of regulatory thing. So there are some legitimate dynamics. And then there are the slightly less legitimate dynamics, the kind of hazing, this is a rite of passage, I had to do it when I was young, so you have to do it.

Yeah. Yeah.

You, you, yeah.

Let me ask you an honest question then. What is, finger in the air, the rough balance between the hazing and the legitimate?

It's a really good question. I think probably, probably 70/30 legitimate to hazing. I think maybe previously it might be more like 50/50 and it depends on, depends on the, obviously the person and it depends on how busy the industry is. There is no getting around the fact that it is very hard work and you have to react to clients because of the nature of the industry. I think the hazing part, or the I had to do it, write a passage part, is more about the face time. And I really hope that we can start to create systems and processes such that if you're not busy, go. Because that was always one of my biggest pet peeves. I wasn't always busy, but I had to stay around because a director might want me to do something. And the nature of the industry or the nature of the workflow is, is so archaic relative to modern workflows, such that I will do a piece of work and I will send it to my associate director or director. I will wait whilst they do other pieces of work and then they'll get around to my piece of work. I'll have to stay until that piece of work is reviewed, and then I get it back and I have to update it. And that is not efficient, and it's really, really frustrating and demoralizing. And that's why you have to stay around for 12, 14 hours a day. You're not always busy, but that's what I would love, you know, for questions asked in an interview. What do you think could improve working hours across investment banking? Be honest. There are industry dynamics which mean that they're not going to be perfect. But also say, look, there's— there are ways of working that may be more efficient such that we do not feel it should be a badge of honor to be able to go home at 6, 7 PM because you have organized your schedule such that you're not having a load of dead time. That is the thing that I think probably needs to change most in the industry.

Yeah, I think one of the things I always kind of question, because I only know market side And the market side, you might be doing 11-hour days, 5 days a week. So the totality of the hours is less, but the intensity is higher. So you're kind of working pretty flat out and then you leave because you work around the dynamic of it's not an endless kind of project. The market closes, you kind of wrap up and you're off until the next trading session. So I think in my head, because I kind of think if I worked like I used to work, for 100 hours, there's no way I could survive it in the market's intensity. But I'm assuming that banking, it is a bit kind of lumpy on the course of a normal day.

Yeah, it's super interesting. So I've, I've had a variety of experiences. I've worked in an intensive bank environment, I've launched a startup, a venture-backed startup, and I've been a teacher in a classroom. And I would say that pound for pound, probably working in a bank was the easiest. And at the end of the day, if you've been, if you've been teaching for 6, 7 hours a day, you are shattered like nothing else. If you're trying to make decisions and your company's on the line, you're tired like nothing else. If you're hanging around waiting for someone to mark up a pitch deck, it's annoying. You're probably a little bit demotivated, but it's a different type of tired.

That's only true Because you're a good teacher, Stephen.

Yeah, I don't just stick on a video or something like that. Well, maybe at the end of term, but yeah.

All right. Well, look, we've hit 30 minutes on the nose. So I think an appropriate time to wrap up. Thank you as always for sharing your, your knowledge and insights with the community, Stephen. Till the next episode.

Thank you so much, Ant.