Let's start with credit, because it was one thing that does affect the pace of
deals. Is it affecting it from your point of
view right now? Absolutely.
It's getting better still constrained. Fourth quarter of twenty two, you had
nothing today. You actually have the markets loosening
up the right deals. Missing data point, for example.
Largest LBO in the past six, seven, eight months was a deal with Blackstone
and Emerson for their climate business. 14 billion dollar deal.
No bank debt was available. The private direct lending market
stepped in. Firms like Apollo, Blackstone, KKR,
areas that did five and half billion of financing to see it through.
Half of that has been replaced in the past week by the banks.
So it really depends on the credit and it depends on what the deal is.
But there is absolutely credit available.
Obviously, the key is it's much more expensive.
You should assume for a private equity transaction, it's 500
basis points or so higher than it would have been a year and a half ago.
And for a corporate deal, 200, 250 basis points.
And that leads to the next issue, which is how you price an asset for sale.
And obviously with multiple staying high and elevated and 18 times PE, it's the
same as it was last year, same as it wasn't 21.
But yet your returns in any transaction are more difficult.
So you have to think about how to get the buyer and the seller to
come to agreement. Not easy.
As I recall, some of you might have had something to do with the Everson deal.
We did. You could give us a plug.
OK, let's do that. So let's go to that question of buyers
and sellers and where they think the price is, because some of those prices
are coming down, valuations are affected by interest rates and also some slowing
of the economy in some places. Have the sellers gotten their heads
around the fact that their price might be lower?
They finally started to do that, which is actually why I think there is more
discussion. You don't see it yet in terms of
announcements, but you see companies thinking more about MBNA as part of
their thinking in twenty three. And I would venture to say that as we
exit the year 23 and get in 24, you'll see activity actually start to pick up
quite a bit. So you think it will come back?
Do you think we'll reach the levels we had before because we have some record
levels? Oh, boy, that was high.
You think about a 5 trillion dollar peak market
that probably unlikely. But the idea that you'll have a stable
global equity market of four trillion dollars or so a year, I think.
Absolutely. And what you find out generally about
emanate, David, now is it's less prone to cyclicality.
It's part of a company's core strategy. Most companies are actually very good at
it. And when you're thinking about new
average, new growth, new areas for your business, you're thinking about the pace
of disruption and how you combat that.
It becomes important for most companies to want to want to consider when you've
been on with us before. You've emphasized, Blair, that
uncertainty is one of the biggest factors in determining whether companies
want to do deals or not. Where are we?
Uncertain, because there seems to be a lot of uncertainty around right now.
We are in uncharted, complicated waters, starting with the debt ceiling, which
were to come back to the banking environment more generally.
And whether you think we're in a slowdown or
something more severe in the coming months.
I happen to be in a slowdown camp. I think there's a lot of resiliency that
we don't account for a lot tailwind that will
beat stability. But that uncertainty clearly is an issue
when you think about doing a transaction.
Remember, you want to be able to think of that transaction when there's a macro
tailwind because it covers up some of your assumptions that may not
pan out. It's just people do better in a growth
environment. Any company does so clearly an issue.
And I think until the debt ceiling situation resolves
and that's a question mark, I hope it'll be weighing pretty heavily.
We've had this debt ceiling situation before.
2011 was the time we had a downgrade actually from it.
And we have a lot of people, the president states, as well as Mitch
McConnell agreeing we can't have a default.
We actually had for President Trump saying this week, well, maybe it
wouldn't be that bad thing. How does it figure in the minds of
people doing deals, CEOs and others thinking about deals?
Are they taking that into account? They take it seriously.
So everybody second serious. And let's get away from the deal market
for a second. Let's talk about a company's
performance. I think the debt situation, the debt
situation already is having a big impact.
If you think about driving your car, your passenger and the
driver goes 90 miles an hour and then slows down, you're going to think twice
about getting back in the car. You have a ready.
It's simply the specter of it is probably hit GDP growth 30 basis points
is probably hit jobs 250000, according to CAA, the Council of Economic
Advisers. And then you start to think about what
the impact is if you go over and have a default.
That is measured in days and weeks.
The fact of the matter is, that's a half a million jobs.
That's a half a point of GDP growth. And that's before you start to think of.
The absolutely urgent consequences of
something that's protracted. Blair You know, Wall Street backwards
and forwards, but you also have some experience in Washington.
I talked with Josh Bolten for the Business Roundtable.
He said if you pull his CEOs, they all say we're not going to default.
But if you ask the second question, how are we going to avoid it?
Nobody has an idea. Can you see a path forward?
So, of course I can. Obviously, I'm not license to practice
politics in New York in banking, but everything from a clean debt ceiling
to a promise to negotiate, to kicking the can down the road is hard, but it
will tell you it is progress. I do think that the markets will not
embrace in any way some of the ideas that are copious or say more creative.
Everything from the 14th Amendment to privatization all difficult.
And I think that the markets will be, at a minimum choppy, but much more likely
highly volatile. In fact, right now, that's the credit
default swap spread is much higher than it was.
You reckoned 2011 were four times higher than it was in 2011.
That's one level of uncertainty. We also have regulatory uncertainty,
particularly in the antitrust area, both from the FTC and from the Justice
Department. Bloomberg actually had a piece this week
saying that that really is deterring or some of the CEOs from moving forward
because you're not sure whether we're going to prove.
But even more than that, how long it will take.
There's a lot of uncertainty surrounding it.
Are you dealing with that as you advise? Absolutely, David.
And it just it shows up in the numbers. To date, we have, I think, 14 deals over
10 billion dollars versus last year, 24 deals.
But you account for that and you're thinking if it's going to take 18 months
for a transaction to close. You spend a lot of time thinking about
how both the acquired business and the acquiring company manage their own
businesses, keep the base business performing well, and try to minimize
uncertainty for all the employees. You can think about different
structures. If you use stock, for example, on a
transaction, the selling company has more of a
vested interest of you, if you will, more of a
meeting of minds in terms of what it takes to do well.
And I'd also say you you think about the whole question of synergy in a different
way. I think that you need to be more
conservative, certainly on cost, and you need to be more
aggressive and absolutely committed to the idea that a transaction leads to
better growth, which lead to job creation, which leads to potentially
better outcomes for consumers.
All this factors into the thinking. I would also finally say that it's much
more the administration using a megaphone than actually litigating that
people are tended to. But all that said,
smart deals are still happening and they will continue to happen.
One last one. Blair, we heard from Jamie Diamond, J.P.
Morgan again this week, and he reiterated something he had said before.
I am far more concerned about geopolitics.
Ukraine, trade, you know, Russia, our relations with China, et cetera.
Does that affect your business? Of course it does.
Now, I would tell you that I don't know CEO who is not exquisitely attuned to
the geopolitical environment everywhere. They are experienced in operating
globally in all kinds of areas. And it absolutely goes into what kind of
advice and what kind of discussion you could have of the CEO, what kind of
discussion you'd have at the board, where should you put capital where five
and 10 year period, not just over the next year.
What are the black swan risk or frankly, what I call
a grey rhino, something that's staring you in the face, but you just don't pay
attention to it. And then it actually hits you.
All this makes being a senior leader in a company more difficult, more uncertain
than ever. And I applaud a lot of them for actually
steering the ship through this kind of complication.
But I also tell you that the companies are better than ever managing through
uncertainty. We've had a decade, a decade and a half
of uncertainty. Yet companies across the country began
small, performing better than ever. Just last quarter, 80 percent of our
companies surpassed estimates. Granted, estimates were revised but
surpassed estimates. And
companies are more nimble in how they make decisions.
We're nimble in terms of how they take that information and
figure out what the outcome potential outcomes could be.
And factoring that in so more difficult as a macro.
But we have an industry and a private sector that's up to the challenge.