x Abu Dhabi, UAEThursday 18 January 2018

Disney deal restores magic to Wall Street

The House of Mouse's purchase of Marvel and other recent mergers and acquisitions are reviving the very lucrative advisory business for investment bankers.

Walt Disney's $4 billion acquisition of the comic book publisher Marvel was the first multi billion-dollar deal to turn heads.
Walt Disney's $4 billion acquisition of the comic book publisher Marvel was the first multi billion-dollar deal to turn heads.

The House of Mouse's purchase of Marvel and other recent mergers and acquisitions are reviving the very lucrative advisory business for investment bankers. James Doran writes Merger mania is back in America and Wall Street bankers who have spent the last year wandering in a wasteland are clamouring for a piece of the action. Back in 2007 when markets in the US were at their peak, the start of the business week was known on Wall Street as "Merger Monday", such was the proliferation of mergers and acquisition (M&A) business announced on that day.

Since then, of course, Wall Street has shrunk in size by about a third and the idea of investment bankers being paid fees for advising anybody about anything seemed, until very recently, almost laughable. Aren't these the same guys who blindly lead us into the worst recession in 70 years? But in the past few weeks some rather interesting deals, with some hefty price tags attached, have been blazoned across the front pages in the US to mark a welcome return to the sort of business Wall Street is famous for.

On a recent couple of Mondays deals totalling more than US$37 billion (Dh135.9bn) were announced. It almost felt like the Great Recession had never happened. Disney's $4bn acquisition of the comic book publisher Marvel was the first multi-billion-dollar deal to turn heads. Not only was Disney able to get its hands on the biggest blockbuster movie franchises of recent decades - Spiderman, the X-Men and The Fantastic Four - but the House of Mouse was able to do so for $50 a Marvel share, a pretty good price for such a valuable stable of assets.

It is staggering to imagine the possibilities for Disney as it toys with introducing each of the 5,000 or so characters that have been created by Marvel in the past 70 years. The value in this deal for shareholders of both Disney and Marvel is fairly plain to see and highlights one of the principal drivers of M&A activity in a market such as this. Assets, whether we are talking foreclosed homes in California or vast tracts of intellectual property like Marvel, are priced very competitively, indeed.

The 2006 to 2007 M&A boom was fuelled in large part by the lowest share price to earnings ratios of companies in the Standard & Poor's 500 index in more than 15 years. Today the S&P 500 is trading close to its lowest level relative to profit since 1989, meaning the market is lousy with bargains. At the same time, since even those economists with the bleakest of outlooks, such as Nouriel Roubini, are calling the end of the recession, those prices are not likely to stay in the bargain basement for much longer.

So those corporations, like Disney, that have the cash or the paper and the balance sheet to fund a big acquisition are doubtless running their slide rules over any number of seemingly undervalued prizes. Not long after the Marvel deal was announced, the food giant Kraft took a big swing at Britain's Cadbury with an offer of $16.7bn for the maker of Creme Eggs and Dairy Milk chocolate. Kraft's chief executive, Irene Rosenfeld, was disappointed however when her Cadbury counterpart, Todd Stitzer, rejected the deal out of hand. So she should be, as her shareholders will doubtless be banging on her door before long to ask why earnings growth seems to be eluding her.

The potential Kraft-Cadbury deal is very different from that hatched by the superheroes at Marvel and Disney. While the Hollywood wedding was all about the endless possibilities of introducing Marvel's characters to Disney's massive studio and distribution resources, to extract lots of value down the road, Kraft wants Cadbury simply to help it bulk up in lean times. By consuming all the chocolate Cadbury can pump out of its UK factories, Kraft hopes it can automatically add a few pounds to its cheese-filled girth. This sort of lumpy and old-fashioned growth by bolt-on acquisition strategy rarely delivers what it promises.

For this principle of M&A to work the deal must include lots of cost cuts, or synergies as the advisers on Wall Street call them. And indeed, Kraft believes there are synergies aplenty to be had in acquiring Cadbury. Even Mr Stitzer, who is still officially opposed to a deal with Kraft, admitted earlier this week that there might indeed be some significant overlaps between Kraft and his sweetie business.

But it should not be forgotten that there are endless studies showing that chief executives always over-estimate the supposed efficiencies to be had in a merger. In fact Hay Group produced a study recently that showed close to 90 per cent of the mergers struck in Europe in 2007 fell short of their goals. This Monday saw Dell announce a $4bn deal to buy Perot Systems, the information technology company chaired and founded by the former US presidential candidate Ross Perot.

This deal reveals yet another driver of the resurgent M&A market as the recession fizzles out. As companies fired employees, shut down factories and generally cut costs like crazy over recent months they accumulated hoards of cash on the balance sheet, thinking they might need it for a great many rainy days to come. Indeed, US commerce department data show that American companies posted annualised cash flow of more than $1.5 trillion in each of the past three quarters, the highest level on record.

With overheads still shrinking, many analysts think that these great piles of cash make US corporations more attractive to buyers who plan to fund acquisitions either fully or partly with debt. Whatever the reason for a merger or acquisition, or indeed whether a deal succeeds or fails, Wall Street is the certain winner. Even though Kraft has yet to make a formal bid for Cadbury, the investment bankers are already lined up, ready to advise the US company on how best to proceed.

Bruce Wasserstein, the chief executive of Lazard in New York is said to be in the pole position to advise Kraft should the deal go ahead. If he is hired, Mr Wasserstein can expect to earn as much as $42 million for passing on his pearls of wisdom. Wall Street banks have seen a big drop in their fees form advisory work this year. So far this year, the big firms have been paid some $11.58bn in advisory fees, according to Thomson Reuters data, the lowest annual take in more than a decade.

Last year the same firms made $35bn and in 2007, when M&A was really booming, they made $49bn. The reason Wall Street loves M&A advisory work so much is that there is absolutely no downside, it takes very few resources, and the best bit - the fees are almost 100 per cent profit. So for those who thought the last year of economic hardship was a bit like the 1970s, take heart: with all this M&A activity it seems like the 1980s are just around the corner.