In this week’s episode, Michael Brown, co-editor of The Deal, and veteran financial reporter Charlie Paikert discuss the pandemic’s impact on corporate mergers and acquisitions.


Jeffrey Freedman: Hello and welcome to the RP HealthCast by RooneyPartners. I am your host, Jeffrey Freedman. The public health and economic fallout from the coronavirus has been well documented but the pandemics impact on other financial areas such as mergers and acquisitions is not as well understood. So we’re going to talk about that and to help shed light on the state of play for business purchases and mergers, we’re joined by Michael Brown, co-editor of The Deal and Charlie Paikert, veteran financial reporter who currently contributes to RIABiz and Family Wealth Report. Charlie’s also been a senior editor at Financial Planning and Investment News and a contributor to the New York Times, to Barons and to Reuters. And is the co-author of a book on college basketball entitled ‘Madness: The Ten Most Memorable NCAA Basketball Finals’.

Gentlemen, it’s great to have you here with us today.

Michael Brown: Thank you, Jeff.

Charlie Paikert: Thanks Jeff. Glad to be here.

Jeffrey: Great. So Michael, let’s start with you. Why don’t you give us the broad strokes and some data points on the pandemics impact on the deal industry.

Michael: Sure. So, I think so far in in 2020 since mid-March, we’ve seen both deals being announced that is pulled back and then the deals that were announced prior to the pandemic, a lot of those have been redrawn. So you’ve seen a few deals fall through. I think Victoria Secrets, L brands that sealed the Sycamore was one of the bigger ones that fell through but I think others have gotten now renegotiated. So, it’s changed the scale of deals as well reduce those evaluations obviously and at the same time the announcements volume is half of what it was this time last year. I think especially at the top of the room, you are not seeing a hundred billion dollar transactions, you are seeing those companies kind of look inward and say, “How can we fix what we have and deal with what we’re going through” as opposed to write a hundred billion dollar M&A deal, check.

Jeffrey: Right. To most people, these are numbers, right? Fantastically large numbers and big figures, hundred billion dollars, we can’t– I personally can’t wrap my mind around how much money that is, right? But why should our listeners really care about a healthy deal market? What does that matter to people right now?

Michael: Well, look. I think deals are what powers change and innovation in a lot of ways. Whether it’s a large company looking at an encore division that they haven’t been investing in. They can use M&A to sell that division to an investor that can appreciate and grow and scale that business. At the same time, I think from a markets perspective, it’s another catalyst for stocks. It’s another place where debt can be offered and at a healthy price and again, these things you need liquidity, you need these markets moving. You have no deal activity, there’s a pretty big bottleneck within a lot of the markets out there.

Jeffrey: Right, and it makes a lot of sense and as you know, this is the RP HealthCast, my business fellow Healthcare and Pharma and BioTech companies and I know for them, from a deal scenario, it’s still quite frothy, right? So, have any other sectors of the economy been spared from this downturn?

Michael: So I think, similar to what you see in the public markets. I think the Technology companies have held up a little bit better. You’ve seen some Tech deals. You’ve seen sort of the consumer Tech business in Postmates, GrubHub. Those deals have been going on and continuing I think the urgency and sort of the switch to some of these consumer trends that we were already doing pre-COVID only accelerated and now companies such as Uber are seeing the value in having that delivery service in the scale of that delivery service. And then Healthcare as you mentioned, I think a lot of companies are– there hasn’t been a slowdown in a lot of Investments there whether it’s new drugs or new applications for existing drugs. I think people are still putting money to work in the Healthcare, in the Pharma and BioTech space at least.

Jeffrey: Yeah, so that’s where deals certainly are getting done in the Technology and high-Tech and BioTech and Healthcare. But you mentioned before, a couple retail establishments, manufacturers some of those deals that were expected to close were pulled hold as Myers saw to either back out. And can you walk us through some of the high-profile transactions that were scrapped due to the coronavirus?

Michael: Sure. So I think again, like I said the Victoria Secrets sale to L Brands was probably the most high profile and Sycamore pretty prolific retail private equity firm. They’ve done a lot of good, a lot of bad some– but some would say in retail over the years but I think that is probably the quintessential deal. You’ve seen a few others that I think are on the ropes. Probably the most interesting and maybe not the most high-profile but Simon Properties and Tubman. They’re two mall operators that were merging and that as far as I know still going on but there’s going to be I think some jostling over the price there whether those guys should continue with that deal. So yeah, those are probably the two that I am most interested in have been–

Jeffrey: Yeah. I mean it’s fascinating. So much goes on as part of the M&A. So, as part of the transaction, right? So you are negotiating the price but as part of that you have to assess the risk and to assess the risk, you have to a heck of a lot of due diligence not just on the markets and comparables but on the company itself and usually do that by going into a data room, going through file cabinets, going through all sorts of material. Now, how are companies and investment banks handling that due diligence process? They’re not able to visit plants and facilities and go into these data rooms are this–?

Michael: Yeah, you can’t have you know dinner with the executive team of a particular target you are looking at. So I’ve heard a couple of funny anecdotes that I’ve heard over the last couple of months on the– I think on a grander scheme, we’ve seen a few investment banks employ drones to do due diligence and whether you are going through a factory or a plant and the foreman is walking you through with a drone saying hey, can you fly it into that corner of the factory? Can I check out this piece of equipment? And we actually have a middle market. The Deal has a middle market event going on and we were talking to a couple of investment banks that work with smaller companies, family-owned companies and they were saying how they’re still doing the due diligence having the zoom calls and that but for their local businesses, they’re looking– they’re driving a couple hours and meeting a guy or gal that they would have had dinner with. They’re meeting them in their driveway for a drink and doing take out, having a sort of conference call in a socially distance sort of way. So a couple of I thought, those were pretty interesting. But it’s tough. I think Tech and BioTech, the physical space– BioTech maybe a little bit different but Tech, the physical space is not as important. It’s a human capital business. I think there’s a lot of industries that are human capital. So there’s– not as affected by some of this but with the manufacturing that kind of thing. Some interesting tactics being employed.

Jeffrey: That is I mean, necessity is the mother of all invention, right? That’s fantastic with the drones.

Michael: Yeah.

Jeffrey: Alright. So from very broad point of view, before we bring Charlie in. What’s your expectation for the remainder of 2020? As companies navigate the business challenges around the pandemic, do you think that M&A activity will soon begin to increase? And what sort of pressure are some of these funds going through by their investors?

Michael: I mean, I think that you are going to see continued status quo for M&A. I think it’s going to stay very similar. You’ll have a few drips and drabs of big transactions that make the second page of the front page of a Newspaper but I think it’s going to be pretty subdued for the rest of the year. I think the smaller sides of transactions company selling smaller divisions to concentrate on core. Smaller businesses where founders have to sell. Those kind of deals will continue but I do think it’s going to be tough to see a lot of large cap deals. Potentially some take private opportunities out there in the market for private equity. But yeah, I think it’s going to be a tough second half if I had to guess but barring a dramatic shift, but I do think things will remain relatively steady or be it maybe not the trajectory we had seen in 1819.

Jeffrey: Yeah. Great. Absolutely makes sense. Now Charlie, from your side of the business and you deal in something called RIA for the most part and now I want you to describe kind of what that is for our audience. Have you seen that sector slow down as much as Michael alluded to with the others?

Charlie: All right. All right, it is a registered investment advisors and they are otherwise known as independent advisors. They are fee-based for the most part. They’re different from brokerage firms like the Merrill Lynch’s of the world and they have a higher fiduciary duty to their clients. They’re the fastest-growing sector of the financial advisory business. They’re gaining I think at double-digit percentage increases and eating into the market share of the wire houses or brokerage firms. There has been a slowdown in the second quarter. Up for the last six years, the M&A market for RIAs has been going straight up. It’s been one increase after another. Quarterly and certainly annual increase but the second quarter of this year for the first time had a big double-digit decline–
a 17 percent decline in deals. This is according to the Devoe and Company statistics. There are an industry consultancy for M&A. And it was the slowest quarter I believe in deal volume in two years. Notably, the activity for smaller firms with less than one billion dollars in AUM assets under management declined dramatically. However, the activity– more than a billion in assets. The deal volume for those firms actually increased a bit. So that was interesting. Devoe thinks that this is what he calls the lull phase of M&A for this year impacted by COVID of course, and he does think a surge is coming but it all depends of course on the severity of how the virus is impacting the economy because advisers especially smaller advisors who do not have somebody who’s just focused on business, they’re busy dealing with clients. Whether it’s retail clients or smaller businesses. They need to spend a lot of time with clients and of course COVID is also impacting projections for the future and for a while anyway, it was impacting assets of the advisory firms, which is the lifeblood of advisory firms. So, still very uncertain times.

Jeffrey: Absolutely, and thank you for that. That was very broad. So, in a nutshell, deals are slowing down right? Due to the pandemic this [crosstalk] advisors.

Charlie: For now. Yeah.

Jeffrey: Smaller advisor, there’s a lot of hand-holding but it seems that while deals have slowed down, the structure of those deals have changed dramatically. So from what I understand, they used to be very rich upfront payments. You are paying for a book of business. And since this is changing, how are the deals now being structured in this pandemic world?

Charlie: So because of COVID, deal structure is changing, upfront payments were as high as seventy to even sometimes over ninety percent. Sellers were getting that cash up front and that has now gone down to around fifty percent more or less. Buyers want to mitigate the risk they’re taking and they want to share risk with sellers. So that’s a big change. The sellers are no longer as much in the driver seat. There’s more emphasis on what’s called contingent payments or earn outs where the seller has to hit certain targets in the metrics that they are expected to generate for the buyer. So, one other change in deal structure is that those contingent payments are now stretching out to three or four years. Whereas in the bull market up until March had been compressed to sometimes as short as one year or two years, but as John Fury whose prominent industry consultant has said the emphasis now in M&A is shared risk based on shared outcome.

Jeffrey: Right. And that makes sense. Certainly with more risk in the marketplace. Now, what about the negotiations between the buyers and the sellers? Is a negotiation more protracted, is it more difficult to bring a deal over the finish line now?

Charlie: I think it is. The negotiations are more difficult. I did a story recently for our RIABiz and one of the big buyers in the industry used the term, use the phrase ‘heightened tensions’. It’s not as casual. It’s obviously not in person anymore. And as I mentioned earlier, there’s a lot more risk. They are negotiating exactly what are their earn out incentives going to be? Before the pandemic, it sometimes didn’t really matter as much if the sellers didn’t meet their earn out targets. Buyers either let it go or was actually in the negotiations there was some cushion, but now as Corey Kupfer who’s a prominent attorney in the field told me for that article, sellers are not in the driver seat as much. The sellers are not in the driver’s seat as much anymore. So, it’s a different ball game, but it’s also mitigated by the fact that seemingly the supply, the demand exceeds the supply. There are more buyers than sellers. One negotiator told me that he is seeing as many as ten buyers for every seller. I think that might be a bit exaggerated, but there does seem to be agreement that it still is a seller’s market. So, that makes things very interesting.

Jeffrey: No, absolutely. Well that bodes well for sellers, but it doesn’t excuse the risk that is still at the marketplace right now.

Charlie: Right.

Jeffrey: Switching topics for one quick sec. So, I want to talk about one non deal question. Something that is kind of affecting everybody in this pandemic. It seems a number of financially secure RIA firms received a number of funds from the Payroll Protection Program the PPP and like a large firm like Ritholtz Wealth. I think it was written that they accepted 1.3 billion dollars or something from the Payroll Protection Programs. Were you surprised that wealth managers would seek money is meant for small business owners at the risk of losing their businesses?

Charlie: Oh, that’s been a huge topic in the industry. I wrote an opinion piece in RIABiz a week before last and the point that I think a lot of people kidded on was– So on the one hand, wealth managers were telling reporters, myself included, that they were doing great. They were getting new clients. They were getting new business. Everything was good. And I believe they were telling clients similarly that they were doing well. However, a lot of them it turns out at the same time, who were applying for and received PPP loans had to certify. Certify to the government that the funds that they were seeking were quote “necessary to support ongoing operations”. Wow! So, which is it? Right?

Uhhh wait a minute, you told me you are doing great? But to get the money you told the government that you needed the money to keep in business. So that was a big point of contention. The other point of contention, and this was raised by Dan Weiner who is the chairman of Advisor Investments. He’s an RIA who originally applied for a PPP loan, but then withdrew and decided not to because he thought that small businesses were more deserving and he pointed out that wealth managers who emphasize of course financial planning to their clients and tell clients that they need a rainy day fund of six odd months of cash on hand. Apparently didn’t have one themselves. So… what’s going on? Why weren’t they better managed?

Now, from their point of view, the RIAs would argue that they need liquidity like everyone else and at the time in March when– perhaps in April, early April when the loans were originally being applied for. There was a severe market downturn and their profit margins and ability to pay was presumably in question. However, that market downturn of course turned out to be very short, but from a business point of view, if you can get low-cost working capital from the government that is available, perhaps you can argue as they do that you should take advantage of that as a going concern. But again, someone like Wiener would argue that if these loans are forgivable as they could be if advisors spend sixty percent of the loans on salaries within twenty-four weeks, Weiner would argue that that’s double-dipping, that their advisors are charging client fees and they’re also ultimately getting another slice of money from clients through their tax dollars. And then I think the final argument is that however much the RIAs wanted and we’re able to receive this money, the fact is that unlike restaurants and hair salons and other small businesses, their business never closed. It always stayed open and demand for their business by all measures seemingly never went down. And recurring fees kept coming and the conclusion of the article, the opinion piece that I wrote, I quoted “Another industry consultant Jamie McLaughlin who said that this is not a glorious chapter in the history of the RIA industry.”

Jeffrey: Well, thank you. Now, one last question for the both of you actually. Before time runs out on us. During the past five months of the pandemic, where have you seen the smart money quote unquote “smart money”, the private equity and venture capital financing’s go? Michael, let’s start with you. Where are people putting their money? Where’s the M&A? Where are these– if cash are being stockpiled right now, where is that little bit being spent today and where do you expect to being spent by the end of the year?

Michael: Sure. So, I think there’s a couple of places I think. Like I said earlier the sort of small and mid-cap areas of the world are going to continue to see deal activity. I think sort of across all sectors, but I think if you are watching the public markets and you are watching some of these companies like Norwegian Cruise Lines or Dave & Buster’s, they’ve done what are called ‘pipe deals’ where they’re selling these big swaths to private equity firms. I think you are going to see more of those transactions going on. And I think that when you look at those companies that private equity firms are investing in in the public markets at a reduced evaluation, that’s going to be something that I think a retail investor might want to take a look at and say “Oh, why are they putting the money into this company that seemingly has no end in sight to their troubles.” Sort of zigging when everyone else is a zagging or zagging everyone else is zigging if you will. So I would look to those types of industries and things that people are really aren’t looking at right now from a retail perspective.

Jeffrey: The smart money you feel is kind of being contrarian or will be contrarian for the end of the year?

Michael: Yeah.

Jeffrey: Okay. And Charlie, from your side of the business?

Charlie: In the advisory business, we are seeing private equity still continue to invest in RIA, M&A when they can. Now, as we discussed previously, there is a slowdown for the reasons we discussed because of the pandemic and advisers have a lot of other things to do, but when they can invest they are Mercer advisors is one of duh big RIA firms who is controlled by certainly backed by one of the big PE firms. They are aggressive buyers. We’ve seen over the last few months. We’ve seen PE firms takes stakes in big RIAs who are also buyers themselves like Beacon Point, Creative Planning both have sold stakes to private equity. And one of the biggest RIAs, Hightower, that is controlled by TH Lee, a big PE firm. Just today they announced that they have taken a minority stake in a three billion dollar Texas Firm Frontier Investment Management. So, PE is full steam ahead when they can.

Jeffrey: Got it. Well gentlemen, thank you so much. This has been really interesting and very enjoyable. So thank you for joining me.

Michael: Thank you Jeff.

Charlie: Yeah, Jeff. Thanks for everything.

Jeffrey: We hope you enjoyed this week’s podcast. If you have any questions comments, or future story suggestions, please reach out to us on social media. Thank you, and we hope you enjoyed the RP HealthCast.

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