As the investment, wealth and asset management industries navigate the fallout of coronacrisis they ought to be rethinking and reshaping their client coverage and distribution models. Here are my thoughts on how the investment management industry could protect and enhance client relationships, revenues and margins as well as adjust to a changing world.
The NY Times Fiday, June 19, 2020, B6 “Europe Takes Steps to Block Chinese Bargain Hunters”.
Europe is doing too little too late to block Chinese investors (backed by government that provides financial support and subsidies) to snap up distressed European companies at bargain prices. It can borrow much from the U.S. which has been way ahead.
We draw attention to changes in US regulatory environment for foreign deals in the Trump presidency. The national security landscape has shifted in recent years, and so has the nature of the investments that pose the greatest potential risk to national security. Recent amendments to the Committee on Foreign Investment in the United States (CFIUS) process now brings significant hurdles to foreign investment in ‘sensitive’ sectors. The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) was signed into law after receiving broad bipartisan support in Congress and new regulations are expected. We provide historical context, highlight recent evolution and provide color on consummating such transactions.
#ActiveAllocator Research – The typical investment banking M&A process is dull, static and has not evolved much in the past two decades that I have been observing it. What is needed is innovation – sadly conspicuous by absence in a largely secretive world. I have long believed that financial options, modern finance can bring much to investment banking. To illustrate/ amplify my point I show how the time period for closure during announced M&A deals can be hedged using simple put and call options. Happy to provide more esoteric examples and variants too. We describe in a very simple illustration the mechanics of setting up and implementing a hedge.
Step 1: Deciding between Floating vs. Fixed Exchange Ratio Collar
Step 2: Designing a Hedge – Objectives
Step 3: Designing a Hedge – Parameters
Step 4: Designing a Hedge – Deciding on Collar Width
Step 5: Designing a Hedge – Pricing the Hedge (Illustrative)
As the coronavirus pandemic continues to mercilessly unfold, I recommend that large companies recognize and immediately act on significant business risks and stifled growth prospects in the months ahead. To not do so would be willful blindness. Top management in all publicly listed firms now needs to pay special attention to funding and capital structure issues, to ensure adequate liquidity, to manage cash properly and improve capital productivity. Firms should creatively avail of the spectrum of available financing options. To catalyze creative thought, I present these along with their pros and cons in a visual here.
ActiveAllocator Research- An excellent Forbes article points out that the M&A environment has radically altered in the coronacrisis. Among other things, pandemic induced uncertainty increases negotiation period, surfaces newer due diligence issues as well as increases effort to obtain third-party consents. It also delays antitrust and regulatory approvals, makes buyers and their boards of directors much more cautious, shifts more closing risk and indemnity risk to sellers, brings added risks of “buyer’s remorse” and above all raises valuations concerns.
We recommend a collar to hedge the time to closing risk and point out the advantages and disadvantages of fixed vs. floating ratio hedges.
Source Forbes article: https://www.forbes.com/sites/allbusiness/2020/04/17/impact-of-coronavirus-crisis-on-mergers-and-acquisitions/#3cae7092200a
Mechanics:
I illustrate a variant of the M&A collar through a floating exchange ratio. This is rather atypical but I have encountered it in the past. Here, issues differ from a fixed exchange ratio giving rise to multiple possible events at end points. There are many ways one can prepare for this including : (i) Terminate / Walk Away (ii) Renegotiate Exchange Ratio (iii) Pre-signing Agreement to Accept Fixed Exchange Ratio (iv) Possible Cash Top-Up
Given heightened market uncertainty, volatility in share prices, a cloudy outlook it is now important to hedge time period to closing risk in M&A deals. We recommend that a collar around announced deals is especially useful.
If acquiror share prices fall or rise beyond a certain point, the transaction switches to a floating exchange ratio. Collar establishes the minimum and maximum prices that will be paid per target share. Above the maximum target price level, increases in the acquiror share price will result in a decreasing exchange ratio (fewer acquiror shares issued). Below the minimum target price level, decreases in the acquiror share price will result in an increasing exchange ratio (more acquiror shares issued).
Proposed Uber Grubhub M&A lends itself to be a game theory case where the acquiror (Uber) and target (Grubhub) share holders have opposite interests in pricing – i.e. how to get the acquiror and the target to agree on a price at which the acquirer can purchase the target. Locking in a floor and cap brings benefits to both parties.
ActiveAllocator Opinion – I profoundly disagree with U.S. Rep. David Cicilline, D-R.I., who chairs the House’s antitrust subcommittee, and has come out in opposition of the Uber Grubhub deal. In a statement, he described it as ” marks a new low in pandemic profiteering”. I compare the pros and cons of fixed price (number of shares issued varies depending on acquiror’s stock price changes) and fixed exchange ratio (constant number of shares issued, value delivered changes). The Uber offer is a fixed exchange ratio and show in this visual that in my opinion Grubhub investors interests are well served. This is not pandemic profiteering!
Uber recently approached Grubhub with a potential all-stock takeover bid. Apparently it is structured as a Fixed Exchange Ratio (Floating Price) offer. This suggests Uber does not expect stock price to rise during the time it takes to consummate the merger. In public market M&A transactions, where at least part of the consideration is stock of the acquiror public company, the value offered is subject to market risk as the acquiror’s stock price changes. A visual illustrates.
COVID-19 stimulus proposals has revived the stock buyback debate. A week later Congress continues to remain locked ( as of 3/23/2020, 8 AM EST) in acrimonious debate on details of a proposed trillion-dollar stimulus package; meanwhile these funds are critical and urgently needed. The contentious issues being prohibiting excess executive compensation and restricting corporate bailout capital injection from being used for shares buyback. While the former is intuitively obvious, the effects of the latter less so.
I support the push for a ban on share buybacks as a condition of any financial assistance. To bring clarity, we explain how share repurchases will be an egregious transfer of economic rents from the US tax payer to corporate shareholders without benefiting the economy in this visual.
We describe the general considerations behind privatization
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ActiveAllocator, aside from organic growth, seeks to have a dialog with established firms ready for M&A. We intend to spin off a portion of our business in 2021. My co-founder and me have done around $40 billion M&A, allocated to activist and private investments and share attached our thoughts on a potential carve out of our business to socialize a prelim conversation. Please get in touch if you see this as something you can bring value to or have friends who may want to work with us. Contact me for our deck on spin-offs
ActiveAllocator is unique in that it saddles the public policy , private investments and investing banking space. We have advised international Governments and are pleased to share our views on privatization; here we explain why governments privatize assets, suggest best practices, opine on key considerations for successful sale, present the larger institutional framework, highlight global privatization trends, PPP/PFI and sale structure alternatives. We applaud the Modi Govt’s courageous decision today to divest Air India, India’s national carrier lock stock and barrel! Hopefully the first of many more privatizations to come!
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ActiveAllocator is pleased to share with you our research piece on “Management Compensation, Retention, Severance in Private Equity Leveraged BuyOut “. Gleaned from our own experience across over $40 billion in M&A, poring over scores of SEC filings, and our private investment diligence credentials we bring visibility to a topic long shrouded in secrecy. Our deck sheds light on why the average CEO pay is 271 times the nearly annual average pay of the typical American worker, why select normal senior executives become extra ordinarily wealthy during certain corporate events, and other subjects of conversation. We describe the main components of compensation, the general features of equity retention and severance arrangements and employment contracts, and conclude with a few case studies to illustrate calculations.
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Institutional investors running deep pools of capital moving to in-house management, now increasingly do club and direct deals outside allocating to traditional private equity fund sponsors. They compete and win and also outperform co-investments. The ones who do, usually have excellent in house talent, access to deals etc. But what exactly is a deal? How do you buy a company? The actual process has long been shrouded in secrecy and practitioner jargon. Having done +$40 billion in M&A, seen and evaluated hundreds of buy offers, having sold portfolios of assets and companies, we bring sunlight to the ‘investment banking’ buy space.
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ActiveAllocator is pleased to share with you our latest research piece ” Event Driven Hedge Funds – Share Buyback”. Event Driven hedge funds exploit pricing inefficiency before, during or after corporate events. Episodes of shares buyback or around dividends announcement are a potential source of alpha. We explain the capital redistribution framework and illustrate the mechanism of a tender offer to provide color.
ActiveAllocator summarizes the imminent Aramco IPO- soon to become the world’s most valuable company. We touch upon the offering, the firm’s vision, status, synergies between its upstream-downstream business, competitive strengths, risks to investing and general prospects.
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Disclosure: Inputs sourced from internet searches, offering docs, conversations. Shares are not offered in the USA and some other countries. This is not an offer to sell or a solicitation of any offer to sell any securities.