Given the explosion of M&A in the last few months, you must be very busy?
Shafir: It's been a great run in the last year. December was unbelievable; it was the largest month in the history of M&A. I think the cupboard is a little bare for everybody on all the big deals right now, but we do feel that the market still looks pretty good with a lot of activity and we're upbeat about what we're going to see.
What themes are driving the market?
The biggest is that CEOs are showing renewed interest in growth. Balance sheets have been cleaned up; a lot of the post-bubble trauma is behind people. We're seeing the tail end of scandals, we think, and this business is about CEO preference. CEOs are much more willing to take some steps.
Also in industries where there's overcapacity, there's a consolidation play where you try to take some capacity out of the marketplace and hopefully stabilize your core market. So those are the two big themes - growth and consolidation of the more mature markets.
How about geographic expansion?
Cross-border is still a relatively small percentage relative to the local market activity in Europe, Asia and the US. But I think we will see more cross-border deals as some of these industries consolidate within the local markets. As those industries continue to look for more growth opportunities, they will likely be a driver for cross-border deals, but it will be tough. You have different time zones and different cultures. Even between Europe and New York, it's a six-hour time zone difference, it's not easy and a lot of people have had problems.
There are industries that are clearly globalized, like some of the consumer businesses, technology, pharmaceutical and parts of the healthcare industry, where they've got a history of doing this kind of stuff, so it's not as hard. But I think we will see some sort of uplift in cross-border. We are forecasting it in our own internal planning. But we're not predicting a very large wave at this point. Local market activity is still dominant.
Are we seeing stock making a comeback as M&A currency?
In 2004 only 14% of the deals were all stock, a little over half of them were cash, and the balance was a mix of cash and stock. However, in the latter part of last year and the beginning of this year, the trend is toward more stock, which reflects CEO confidence in stock as a currency in deals. In certain industries like tech, where you get very high P/Es, companies don't incur debt, and you have to retain the engineers and the R&D staff, then stock is certainly the way to do it. Increased financial sponsor activity whose deals are all cash account for about 15% of the US market, and 8% or 9% of the global market.
As long as interest rates remain in a relatively benign environment, we see cash still as a very important currency. But in certain industries, like technology, the great preponderance of the transactions are stock for stock and I don't anticipate that that will change.
Is Japan back on the menu as an M&A destination for global companies?
I think it is. I have been coming out here for about 17 years as an investment banker, and I can remember there was almost no internal market activity back then and a large deal was $80 to $100 million. What I see today is a much broader and deeper market and a much more sophisticated marketplace from the standpoint of the management. There's also been some regulatory reform. We expect to see stock swaps in April next year. We're obviously interested in taking part and we think this is going to be a very good marketplace.
Are there enough willing sellers to get deals done? As the market gets better usually the number of willing sellers decreases.
I think that is a fair point, a fair question. You've got to separate it into the themes. I think that we're still in the tail end of restructuring of some of the companies so there may be some transaction opportunity there. I think that here there's still some internal activity. I do think that in certain areas like technology and healthcare you will see both in and out transactions. Those markets are fairly global - you've got US buyers wanting to buy here and you've got Japanese acquirers looking offshore. In any environment where the markets recover, entities that were losing money become breakeven or even profitable, you expect some greater reluctance to sell but that sometimes is just a function of price.
What we should mention is the amount of money that the financial sponsors have raised, and that money presumably will seek to be put to work, either as buyouts or possibly minority investments, even pipe transactions in public securities. So I think generally you are right, I'm thinking that there are a lot of processes at work here that suggest that shareholder value considerations are increasing and, as the market here becomes much more shareholder value-focused, I think that the buying and selling of assets in the context of portfolio management is likely to increase.
How about Asia ex-Japan? What's the appetite for doing deals in Asia and particularly in China?
It's smaller. There's a lot of interest in China, but that's not so much in an M&A context at this point, as in getting an R&D facility set up, perhaps getting manufacturing set up, getting distribution. Transactions can be tougher, whether they are in Singapore, Thailand or Taiwan. But in any global industry, when you look at market growth, this area is going to be a generator of growth over the next 10 to 15 years. So companies have to be looking at their investment strategies, looking at acquisitions or JVs or things like that. I think that a lot of it depends on specifics and circumstances in any given context, it's case by case by case.
So the view generally is that Asia is not going to be a place for transformative deals but certainly it's a place to invest for the long term?
Certainly outside of Japan that's probably right, although I would not discount the possibility that there could be something quite transformative in the Japanese market either an in or an out transaction. But when you're talking about 10,000 miles, several time zones and cultural differences, it takes a lot of courage to try and pull something like that off. So I think that CEOs are clearly in a mode of looking for new growth opportunities. But I also think that directors now are becoming more conservative, more process-orientated, asking much tougher questions, demanding much more stringent due diligence on the asset. And that's not necessarily a bad thing. So when you put that in the context of doing something that's across time zones, and with different cultures and different management styles, to do something transformative would take a very brave set of management teams to pull it off. But then I'm smart enough to never say never.
