Slack times as urge to merge fades

Highly-paid M&A bankers have precious few deals to keep them occupied in the present cautious climate. Advice is taking up much more of their time, as is research to find the likeliest candidates for that elusive business breakthrough. They are also reorganizing to focus on sectors that are not entirely dormant.

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Carlo Calabria

"There's no crisis out of which an M&A professional cannot make money," says the head of M&A at one investment bank. Except perhaps the crisis of no activity at all. Even before September 11, volumes for 2001 were set to be far down on the previous year but the events of that day froze the market.
Only one or two deals have been announced since. The US directors of one large company have flown to London to begin negotiating a major UK acquisition, says one banker. There's plenty of theorizing that the world airline industry must now consolidate. And private-equity buyers - those that is not totally preoccupied with collapsing values of companies in their portfolios - are sniffing around bargains in distressed sectors from insurance to transport. But there are precious few deals to shout about. UK advertising group WPP has made the headlines by trying to pull out of its £434 million ($608 million), £5.55 per-share offer for media-buying group Tempus, on the grounds that the terrorist attacks have wrought a material adverse change in its business.
The crucial questions among M&A bankers now are when the thaw will come and what they should do to keep their hands warm until then.
Few have an answer to the first question. If anyone could predict when the markets will turn they'd be making a lot of money - and probably not just in M&A. But the people who head M&A departments worldwide have no choice but to come up with solutions to the second quandary that will satisfy their bosses. The teams of bankers they manage are among the top earners in most institutions and none can afford to have these expensive resources sitting around idle.

It is that bad. With volumes down 46% globally on this time last year, managing directors of M&A departments are fighting a losing battle to hold on to their staff. Will the cuts be deep? Euromoney asks the head of M&A at a US investment bank. "I hope not," he replies. But what are all your people doing? Euromoney continues. He raises his eyes to the ceiling, whistling tunelessly and makes a twiddling motion with his thumbs, before hastily asking if the interview is on the record.
Others are less forthright, or perhaps less honest. But in contrast to mid-2000, when pinning down the head of M&A at any of the top 10 banks for a meeting was a major feat, they have time on their hands. Few are travelling - a sign of nervousness following the US attacks certainly, but also a signal of a further drop to come in volumes.
The time lag between awarding mandates for a deal and a transaction actually taking place is often six months or more. For there to be a busy first quarter of 2002, pitching would have to be going on now. Though appearances can be deceptive, that doesn't seem to be the case.
A common and very predictable response to the question of how M&A professionals are filling their time is that they are working at developing closer relationships with their clients. This might mean talking about strategy, potential deals or perhaps introducing prospective partner firms to each other. "The dialogue is shifting from the next transaction to a broader strategic direction," says Nick Draper, chairman of European M&A at JP Morgan. Bankers do have a tendency to come over all warm and cuddly when business is scarce, but this time they are all joining in. "Things must be bad when even Goldman is talking about the long term," quips a rival.
A time for talking
Banks are having to face up to the fact that there probably aren't going to be any major transactions in the market for some time. This means putting their penchant for deal-making on the back burner and being prepared for a lot of talking instead. As long as CEOs aren't having to be concerned about what their competitors are doing - because they're not making acquisitions either - they can just batten down the hatches and wait for conditions to improve. "CEOs aren't going to win any brownie points for sticking their heads over the corporate parapet in this market," says Philip Yates, head of European M&A at Merrill Lynch.







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What's really putting the brakes on the corporate market, though, is the prospect of valuations falling further still. No CEO wants to find himself having to explain to angry shareholders why he agreed to buy a company when its shares were e5 each and they're now trading at e2.50: hence WPP chairman Martin Sorrell's efforts to back out of the Tempus bid. Of course if a CEO waits, and valuations deteriorate still further, other buyers might start circling the target, which could push up the price again.
It would be easy to imagine that M&A is the last thing a CEO wants to discuss in a downturn. Not so, say bankers. Directors realize that they can't abandon formulating long-term strategic plans altogether, even if projects won't see the light of day until the middle of next year. "Our efforts have to address the fact that the market will at some point turn around and you cannot afford to miss that," says Carlo Calabria, head of European M&A at CSFB. "When we do the small things with companies, we focus on the big picture."
A major strand of the bear market strategies of CSFB and other banks is to identify the key players in each industry - in other words, the companies most likely to survive, thrive and do the biggest or most lucrative deals in the future. "We're trying to get close to the right clients," says Charles Alexander, head of European M&A at Lehman Brothers. Achieving this is in part a function of having a comprehensive research department, which Alexander says Lehman is now building after a period without a team of analysts. He also points out that relationships between firms and their M&A advisers are often in flux, giving those outside the inner circle a chance. "It's also about being bold and persuasive with our clients," he adds. "Everyone responds to good ideas."
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