Most often it just leads to more shut-downs, write-offs, and layoffs.
Investment banks have not been very lucky in extracting fees from Corporate America so far this year, and overall fee income has plunged 18% from the same period last year. But there was one standout: technology companies.
Nowadays “tech” includes non-tech companies such as shopping sites, home-delivery apps for beer, anything having to do with the new gig economy, anything that takes place on a device, rather than inside a brick-and-mortar location.
These tech companies have handed Wall Street investment banks $5 billion so far this year in fees related to Mergers & Acquisitions – up 5% from the same period last year – for advice on M&A and handling the associated debt deals, equity underwriting, and syndicated loans.
That’s the highest amount paid since dotcom-year 2000 when they’d paid $8.3 billion, according to Dealogic.
The tech M&A boom came into full bloom last year and is continuing this year. Since January 2015, tech companies have announced $1 trillion in deals, according to Dealogic, cited by the Wall Street Journal. Investment banks make money on numerous aspects of these deals, coming and going. Advising on deals alone generated 42% of the fees. But there are also bonds, syndicated loans, and, sometimes peculiar, equity offerings involved.
Dell’s highly-leveraged $67-billion acquisition of EMC has captured the wildest dreams on Wall Street. It’s the new “largest tech deal ever.” Dell is privately held, so paying for the acquisition, announced in October last year, by just issuing more shares wasn’t in the cards. This complicated things, and generated massive fees, including for advisory work, a $20-billion bond offering, syndicated loans, and the issuance of Dell’s iffy VMware tracking stock where potential investors don’t know what they’re getting, only that it’s not anything real, and are clinging by their fingernails to the hope that this, unlike other tracking stocks during the dotcom bubble, will work out somehow. Dell’s EMC deal closed on Wednesday. Ka-ching.
Growth-challenged Microsoft, which finally finished sloughing off its botched Nokia purchase – After Losing $11 Billion on $9.4-billion Nokia Acquisition and Axing 27,650 Jobs, Microsoft Dumps Consumer Smartphones – went out again and this time is acquiring struggling LinkedIn for $26 billion, which also generated a bonanza of fees for Wall Street, including from a $19.75 billion bond offering to fund the acquisition.
Then there was chipmaker Avago Technologies’ $37 billion acquisition of Broadcom, at the time “the biggest tech deal ever,” $17 billion in cash and $20 billion in stock. Announced last May, it closed earlier this year. Getting this cash entailed arranging a very lucrative $16-billion loan that was syndicated to other banks.
Softbank is acquiring chip-design firm ARM Holdings, which had $1.5 billion in revenues, for an astounding $31 billion (so 20 times revenues!), hoping to boost its “Internet of Things” future, and paying investment banks out of its nose for this sort of advice.
Walmart is buying online retailer Jet.com. Everything is tech these days. Even old-fashioned credit bureau Equifax, founded in 1899, now uses the newfangled moniker “FinTech” to boost its shares in hopes for a big buyout offer from Microsoft.
In the startup space, Intel – after announcing 12,000 layoffs earlier this year, and after requesting 14,523 H-1B visas and green cards to bring in foreign workers – is chasing after Artificial Intelligence as the next big thing. AI has been the next big thing for decades. So in August, it agreed to acquire 48-employee Nervana Systems for around $408 million.
Apple bought AI outfit Turi for $200 million in August, after having bought AI outfit Emotient, which is trying to recognize and react to facial expressions, a capability your iPhone 7 desperately needs after you lost another $159-AirPod – the umpteenth in three days. Google, Amazon, Facebook, they’re all going after AI.
Outside of tech, M&A in the US has been a dismal year to date, according to Dealogic. Despite the rise in tech deals, acquisitions by US companies in the US have plunged 40% from last year at this time, to a measly $702 billion, the lowest since 2012. The number of deals plunged 18% to 5,177, the lowest since 2009. Mega-deals of $10 billion or larger are also drying up, with only 12 such deals announced so far this year, for $203 billion, down from 23 deals and $606 billion last year to date.
That’s bad news for investment banks. The only saving grace for them: $311.5 billion of inbound deals by foreign companies of US companies, up 7% from last year to date, and an all-time record. This includes the announcement on September 6 by Canadian oil & gas company Enbridge that it would buy Spectra Energy of Houston for $43 billion. Inbound US M&A reached a 31% share of all US M&A, another record.
In Tech, however, M&A serves a special role. Some of the biggest players, such as Microsoft and IBM, can’t figure out how to grow or develop new technologies on their own. For them, M&A is seen as the solution – a way to grow faster, or to grow at all, or at least to not be left behind too far, though it rarely works. For others that are still growing, like Google, M&A is a way to chase after the latest and greatest, even if they blow a lot of money on something will then just disappear.
While there are some examples where M&A actually worked and produced results for the acquiring company and did some good for the overall economy – I can’t think of any at the moment, but there are some – most often it just leads to more shut-downs, write-offs, and layoffs. But that doesn’t matter to the executives. They’ve already been paid their bonuses and stock options and got their ego boost. And some of them have moved on. And it doesn’t matter to Wall Street investment banks because they’ve already pocketed the billions of dollars in fees.
But taking on a lot of debt and buying Wall Street hogwash for six years turns out to have some drawbacks. Now reality sets in. Read… The Great Debt Unwind Beneath the Surface: US Commercial Bankruptcies Soar
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.