Morgan Stanley's 2010: A 'Strategic' Year for M&A
Anticipating continued growth, Morgan Stanley M&A chief Boublik talks about the kinds of deals 2010 will bring
January 15, 2010
Michael Boublik, a 20-year veteran of Morgan Stanley's mergers and acquisitions practice, may look back at 2009 as one of the most challenging chapters of his career. It was a rough-and-tumble year that started with a great deal of uncertainty for Wall Street, but ended on a positive note that likely will drive broad-based M&A activity in 2010.
Boublik, 43, says M&A activity will likely see modest growth this year, but he points out that corporate senior managers remain cautious. The chair of Morgan Stanley's M&A practice in the Americas believes this year's business activity will come from both corporate and strategic buyers as well as PE firms that may be rolling up targets with their portfolio companies.
Last year's distractions tripped up some firms but Boublik says he and his colleagues maintained focus by reminding each other not to get caught up with the daily headlines.
The results are evident: the firm's M&A team was top ranked and it captured more market share with such notable transactions as the behemoth Pfizer-Wyeth deal, DirecTV's purchase of Liberty Entertainment and Suncor Energy's purchase of Petro-Canada. Morgan Stanley is also advising Cadbury, which is being wooed by Kraft Foods.
Earlier this month, Boublik sat down with IDD at the firm's midtown Manhattan offices and talked about his impressions of dealmaking over the last year. He offered an outlook for 2010. Following are excerpts from that interview.
IDD: How was it doing business in 2009?
Boublik: As you look back over the course of the year, the first comment you have to make is that the markets repaired themselves and we got back on a positive track a lot faster, a lot more efficiently, and a lot more effectively than any of us would have guessed. A year ago, the biggest challenge was not to get distracted. Different financial services and advisory firms had very different strategies to navigate the waters. One of the largest positives for us was that from the senior-most members of management down, we would continually be reminded, and we'd keep telling all of our troops, "Focus on and affect the things that you can actually impact. Obviously, there are certain forces, which are bigger than any of us, that will drive the direction of the markets. All we can do is worry about our own individual job descriptions, and make sure we are performing our day jobs and focusing on our clients."
IDD: What was the biggest distraction? New legislation and regulatory issues, the credit markets storm or the public outrage leveled at Wall Street?
Boublik: It's all of the above. Starting from the largest going down to the more institution-specific, there was obviously the health of the financial markets, broadly speaking. There was the health of the credit markets and the equity markets, each of which had very different drivers and didn't always necessarily work in tandem. Then, you quickly got to more specific issues that institutions up and down Wall Street faced individually, and the different competitive advantages and disadvantages that each of the institutions had.
IDD: What were you saying to keep your team of bankers focused and keep up their esprit de corps?
Boublik: There's no way to isolate folks from outside distractions. They were there 24 hours a day. But what you want to do is make sure people have the ability to recognize what's important and what's not. There were a lot of different scenarios to worry about and the challenge was not to get consumed by them. You had to maintain the ability to say: "Here are the three or four things that I can proactively and productively do that will make a positive difference for our clients, for our colleagues and for our firm. Let's focus on those three or four things." Now, obviously that is not always possible, human nature being what it is. You get distracted by the news of the moment. For me personally, when I was talking to folks who work alongside and with me, it really was in the spirit of being motivated by the things that we can influence and that we can impact. If everyone did that in their small way, then the collective effort would be a very large success. That's what you had to do to be successful as an institution. People were very clear on what our job descriptions were and we, in turn, made sure that our colleagues were motivated by the long-term opportunity. We knew there were a lot of our competitors who were, for good reasons, very distracted. We knew that in all the distraction and dislocation, there would be opportunity. We weren't always sure of the exact path to get there but we knew that there was ultimately an opportunity for firms that stayed focused and true to their mission to come out in a better position.
IDD: What is your outlook for this year? Do you agree with the expectations of a 20% to 30% increase in global M&A?
Boublik: I think that modest positive growth is as good an educated guess at this point as any. I do see evidence from our client discussions and from the general pace in the business that suggests a more robust outlook than that of a year ago. That's not a high bar to clear, but nonetheless directionally appears positive. People are still cautious. Memories are, and should be, long. People are going to proceed a bit more slowly than they would have if this had been a robust environment throughout. I think that is healthy. Obviously, the markets in many ways got ahead of themselves.
I think it is important at a time like this to reflect, step back and think: "How do we move forward from here?" But the good news is the fundamental needs our clients have — whether it be access to capital, whether it be growth via acquisition — those haven't changed. How they exactly morph is something we as bankers need to stay on top of and need to be in a position to advise on. But the core fundamentals are very positive in that the services and the access to capital that we provide and the advice that we give is every bit as necessary in an uncertain volatile market as when things are a lot more straightforward. So, there is an opportunity here for us to add more value and clarity in an environment that has less clarity than what we have seen historically.
IDD: Do you think see most of the M&A activity will be driven by PE companies or will it be strategic buyers?
Boublik: I think both. At this point, there is a lot of pent-up demand. Most of our corporate clients over the course of the last 18 months have been internally focused, largely optimizing balance sheets and income statements, becoming as efficient and as lean as possible. A lot of companies met expectations on the bottom line and didn't meet expectations on the top line. The way they did it was by becoming more efficient or disciplined in terms of their own expense and cost structure. That is an exercise that is finite. At some point you have done everything that is really productive as it relates to positioning your business for success.
Ultimately, you have to return to growing it on the top line. A lot of that growth, if not most of it, is done organically. But, companies will again face chapters in their evolution where they grow through external acquisitions. Projects have been deferred. Acquisitions have been deferred. There has been conservatism in terms of building up cash. You can't do that forever. At some point you have to go back to delivering on the top line, growing your company and meeting expectations of investors because if you don't, your competitors certainly will.
On the corporate versus sponsor side of the equation, I think it's dangerous to write off any of these constituents. The financial sponsors clearly have not been active in the same way as they were in 2006 and 2007. The types of deals available to them in those markets are not actionable today. But you don't have to reset the clock too many years to get back to an environment that is consistent with the types of leverage multiples that we are seeing now and the types of deal sizes we're seeing now. A billion dollar acquisition for a financial sponsor just five years ago, or certainly 10 years ago, was a very large transaction. We got used to transactions, particularly with unprecedented access to capital, getting much larger. I think now it's a little bit of a return to prior practice.
Private equity provides efficiency [in] getting transactions done that sometimes corporates cannot, or aren't willing to, provide. They'll continue to be a very important part of the evolution in deal-making and the evolution of the growth in our economy. Now that there are larger and more meaningful companies embedded within the private-equity portfolios, you'll start seeing those private-equity shops use those companies as acquisition vehicles and roll-up vehicles. It may not be for the $10 or $20 billion deal, but they'll be for synergistic reasons. In a way, they are uniquely positioned going forward with their successful prior deals to now use those portfolio companies as acquisition vehicles and get all the synergies that another corporate would get. Sponsors are very focused on making sure they optimize the health of their overall portfolio, and M&A activity will be an important variable.
IDD: With PE firms having to return capital to investors, will that help drive M&A?
Boublik: On the margin there might be some more of that. But I've seen few examples of private-equity firms pursuing deals just because the clock is ticking. They tend to be both patient and creative about talking to investors and making sure investors understand that if now is not the right time to do a deal, let's not let the pressure of the clock influence us. On the margin, there may be some increased activity there but I think that they really think longer term just like the strategic and corporate entities that they compete against. I think investors have sympathy and enthusiasm for that.
IDD: What industry will be most active? Will pharma stay busy?
Boublik: A number of sectors will be increasingly more active from an M&A perspective. There will be a fair amount of change in the regulatory environment that could clearly render companies either better or worse positioned to pursue acquisitions. Any time you have a company with a very material R&D budget, those dollars are an alternative to acquisition dollars.
It's coming out of the same till. I do think health care will continue to be active as a sector that pursues growth via acquisitions. It's not clear to me that it's necessarily pharmaceutical-specific. Health care M&A activity will likely be more broadly distributed, and it will be a function of where acquirers in health care will see the highest growth.
IDD: Away from health care, are there other industries that will be active?
Boublik: By and large we view most sectors as likely to be more active than they have been historically. As companies have gotten better access to capital, and in many cases have raised capital, over the course of 12 or 24 months, they are getting more enthused about moving forward. Investors are once again rewarding growth. M&A is a key component of corporate growth, and it is not limited to certain industries. Well-capitalized competitors across industries recognize that. There is every reason to think that these companies will continue to be enthusiastic about M&A going forward.
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