Investment Banking: Bravery Facing the Bear
by Kimberly Lange, PricewaterhouseCoopers
There's been a lot of talk about the bear market that our country has been facing. In order to help understand its complexities and our fears in dealing with it, the U of I College of Business hosted a Finance Roundtable on April 9th. The session, sponsored by PricewaterhouseCoopers, featured a panel of experts, all of whom are CoB alumni.
Mark L. Dosier is a Partner at Sonnehschein Nath & Rosenthal LLP, and has experience working on a variety of corporate and securities matters. David M. Kidd, Jr. joined Lincoln International LLC in 2004 and is now a Vice President there. Paul A. O'Connor, Managing Director at Stifel Nicolaus, holds over 20 years of experience working with financial institutions as a regulator, commercial lender and investment banker. These three gentlemen thoughtfully and thoroughly answered questions about investment banking, which were posed by moderator Dan O'Connell, Director of UIUC's Stanley C. Golder Center for Private Equity and Entrepreneurial Finance, as well as Roundtable attendees.
To start things off, the panelists were asked about the status of investment banking today. Kidd stated that transactions, particularly mergers and acquisitions (M&A) are getting done, but are taking longer to complete. He also noted that foreign acquisitions are becoming increasingly important. "Awful" is O'Connor's description of the investment banking world from a bank stock perspective. Valuation has fallen and although deals are getting done, they are now much more complex. Dosier agrees that the overall market is down but notes that it does vary by sector. Home building/construction is very bad and large shop deals have been significantly reduced. According to Dosier, for the first quarter of 2008, M&A volume is down 22 percent, while firm backing decreased a whopping 66 percent.
So does all of this make now a good time or a bad time to be an investment banker? Dosier says that although structured finance deals are down, M&A is still doing okay. O'Connor and Kidd agree that the fact that it's a challenging time to be an investment banker can actually have the positive effect of bringing out the quality of the banker and force him/her to offer more creative solutions.
The recent events at Bear Stearns prompted opinions from the panelists on how the investment banking world is affected. "Liquidity killed them," says O'Connor about Bear Stearns. "There's a crisis in the market, but the market will find the next guy." Kidd sees the effect of the crisis at Lincoln, who is starting to receive more resumes from job seekers, mainly those who had offers from Bear Stearns but who are now without a position.
The $19.4 billion buyout of Clear Channel Communications by two private equity firms elicited plenty of discussion from the panel. The banks that initially agreed to finance the deal now want to back out or at least renegotiate the deal, which was put together before the recent credit crisis. This brings up several issues such as what can you do to get a shaky deal going forward? Do fairness opinions come into play in such a transaction? How can you address risks of a deal in legal documentation?
O'Connor feels that if the banks cannot walk away, they can still make the loans and then sell them down. Kidd believes pricing expectations must come down: "Deals get done when you accept lower purchase prices." Dosier notes that material changes, as well as market changes, affect companies and their ability to send loans out to others.
Going forward, all the panelists agree that foreign entities, already market players, will play an increasing role in deals such as the Clear Channel buyout, M&As, etc. In addition to predicting an increase in cross-border activity, they say the range of industries in which foreign companies are involved will widen. The low value of the US dollar enables even "widget" makers to be more competitive, which can cause distrust and fear, perhaps leading to more scrutinizing than in the past. Banks are starting to use clauses in legal documents as the basis to not fund activity, and more unusual lawsuits are starting to crop up. O'Connor cites the example of Kennedy Homes, which sued its lender for lending it too much money. To avoid involvement of the courts in your deal, Kidd advises you to do a sufficient amount of due diligence before signing any legal agreement.
Finally, panelists were asked their opinion on how, if at all, the upcoming presidential election will affect investment banking. Kidd is confident that tax rates will go up, and Dosier says the largest potential impact is on small business taxes. O'Connor predicts that the capital gains tax will be a big issue but feels it won't change dramatically no matter if it's Clinton, McCain or Obama who is elected. He points out, "Raising taxes is the only way to pay for our debts, which the president - any president - might be forced to do."