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Will Biden Burst The Record M&A Bubble

Will Biden Burst The Record M&A Bubble

2021 has been a blockbuster year for virtually every banking product: from IPOs and equity offerings, to investment grade and junk bond sale and yes – even M&A: according to Goldman, through…

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Will Biden Burst The Record M&A Bubble

2021 has been a blockbuster year for virtually every banking product: from IPOs and equity offerings, to investment grade and junk bond sale and yes - even M&A: according to Goldman, through July 15, some $1.9 trillion of deal value for US-based acquirers has been announced, the highest volume of M&A by this point in the year since at least 2000.

Specifically, among the strategic deals over $100 million that have been announced by US-based acquirers, Tech, Leisure & Recreation, and Telecom firms account for a combined 56% of total deal value. Why? Because thanks to the 2020 depression and subsequent Fed nationalization of the bond market, we saw record debt and equity issuance resulting in trillions in cash new cash. Now, corporate cash balances are among the highest ever and S&P 500 managements are deploying some of the cash on M&A deals.

While there is nobody doubt the M&A market is gripped by epic euphoria, Goldman's David Kostin observes a curious twist: companies are funding their mergers in an anomalous way compared to history, paying above-average premiums and using less stock consideration than usual given high equity multiples,almost as if they have cash to burn. During the last 20 years, high S&P 500 forward P/E multiples have been associated with greater stock consideration in M&A deals.

This is intuitive; when equity multiples are high, the acquirer’s stock becomes more valuable in potential transactions. On an absolute basis, the S&P 500 trades at a near record high valuation. However, as shown in the chart above, only 28% of completed deal value (>$100 million) for strategic US acquirers has been in stock consideration vs. the almost 50% that history would imply. Within that universe, deals have also been completed at a larger premium than usual. In the last two decades, the mean deal premium to pre-bid price has been 32%. The average $100+ million deal in 2021 has been struck at a 44% premium to pre-bid price, showing buyers’ appetites to pay a premium for acquisitions post-pandemic.

Looking ahead, there are two possible paths: continued record activity or a regulatory crackdown by the BIden admin.

As Kostin notes, one reason M&A could continue to surge is the $104 billion in equity capital raised YTD across 336 SPAC IPOs, augmenting the $77 billion in SPAC issuance in 2020. Already, 154 de-SPAC mergers have been announced in 2021, absorbing $54 billion of SPAC equity capital and driving $384 billion of deal EV. But the Goldman strategist estimates that there is still $118 billion of cash in 394 SPACs currently searching for a target. On average, the aggregate ratio of target EV at merger announcement to SPAC capital is roughly 7x, implying that SPACs could drive $800 billion of M&A enterprise value during the next two years.

All else equal, Goldman forecasts that S&P 500 companies will spend $324 billion in cash M&A in 2021 (+45% year/year) and $340 billion in 2022 (+5%). The bank recently noted that cash M&A growth is positively correlated with S&P 500 earnings growth, and Goldman forecasts that S&P 500 earnings growth of 35% this year will drive a rebound in cash M&A, supported by the strong backlog of announced deals and record-high cash to asset ratios.

But while Goldman - which makes generous fees on advisory assignments - would love nothing more than continued record M&A activity, storm clouds are gathering. One headwind to the cash component of M&A is elevated equity valuations. On the other hand, the low interest rate environment that has supported equity valuations also makes it easier for companies to issue debt to fund acquisitions with cash.

A bigger concern as Goldman itself admits, and why the bank expects more muted growth in cash M&A in 2022, is due to policy risk, or as Kostin put it: "A key risk to the outlook for M&A is increased regulatory scrutiny due to antitrust concerns. This week, we explored the topic in more detail in our report on antitrust risk in the US stock market (Equities, antitrust, and the "inestimable" value of due process, Jul. 13, 2021)." The bottom line, according to Goldman, is that increased antitrust scrutiny has different implications for key stakeholders in the capital markets ecosystem:

  • First, company managements may find the prospect of growing by way of acquisition less appealing in a stricter regulatory environment. President Biden released an executive order earlier this week that calls for the FTC to take a more aggressive approach to regulating merger activity. The initiative will affect firms in a variety of sectors, primarily by making it more onerous to complete deals as regulators review the competitive implications of proposed transactions. Hurdle rates for mergers will be higher and deal break fees greater than they would have been prior to the Executive Order. Firms whose business models have previously relied on external growth may pivot to organic growth initiatives to boost profits. The cutoff rate for possible capital spending projects may actually decline from current thresholds.
  • Second, merger arbitrage investors may see the timing, odds of success, and spreads in their trades shift significantly. Merger arbitrage spreads have declined but are now likely to widen. The amount of time between the announcement of a $5+ billion deal and its completion has been relatively stable at around 7 months for the past several years. A more interventionist FTC will hinder merger activity. Announced deals may face additional uncertainty, take longer to execute, and be assessed as generally less likely to succeed, which could result in wider merger arb spreads.

Passive or index investors could also be affected by the new era of antitrust given the companies in the S&P 500 that are most likely to be subject to scrutiny are also the largest constituents in major equity benchmarks.President Biden’s executive order, proposed legislation, and pending lawsuits specifically target “Big Tech” (AAPL, AMZN, FB, and GOOGL).

These four firms have a current aggregate equity cap of $7 trillion and comprise 17% of the S&P 500 equity cap and 28% of the Russell 1000 Growth benchmark...

... and Goldman notes that in an increasingly concentrated market, risks to the trajectory of sales growth and profitability of these companies represent risks for the broader market. However, a sum-of-the-parts valuation could be higher or lower than the original company’s valuation and would impact the stock market accordingly if a full break-up were undertaken. In addition to the largest companies, the FTC’s stricter regulatory posture could also indirectly weigh on potential M&A targets.

Goldman concludes by listing its tactical research team’s basket of likely M&A candidates screens for companies that its analysts deem to have at least a 15% likelihood of being acquired. The basket sharply outperformed as the economy reopened, corporate balance sheets improved, and M&A activity picked up. However, since March of this year, the basket has underperformed the market by 7 pp and trades at a valuation discount of 20% vs. the S&P 500.

The list of basket constituents is shown below.

Kostin's bottom line is rather obvious: "More regulatory scrutiny could represent a persistent overhang to potential M&A targets, particularly in industries with high market concentration. On the other hand, if strategic buyers take a step back from M&A, it could create an opportunity for private equity firms: alternatives have $3.3 trillion in dry powder."

Tyler Durden Sun, 07/18/2021 - 20:00

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Survey Shows Declining Concerns Among Americans About COVID-19

Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat"…

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Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat" to the health of the US population - a sharp decline from a high of 67% in July 2020.

(SARMDY/Shutterstock)

What's more, the Pew Research Center survey conducted from Feb. 7 to Feb. 11 showed that just 10% of Americans are concerned that they will  catch the disease and require hospitalization.

"This data represents a low ebb of public concern about the virus that reached its height in the summer and fall of 2020, when as many as two-thirds of Americans viewed COVID-19 as a major threat to public health," reads the report, which was published March 7.

According to the survey, half of the participants understand the significance of researchers and healthcare providers in understanding and treating long COVID - however 27% of participants consider this issue less important, while 22% of Americans are unaware of long COVID.

What's more, while Democrats were far more worried than Republicans in the past, that gap has narrowed significantly.

"In the pandemic’s first year, Democrats were routinely about 40 points more likely than Republicans to view the coronavirus as a major threat to the health of the U.S. population. This gap has waned as overall levels of concern have fallen," reads the report.

More via the Epoch Times;

The survey found that three in ten Democrats under 50 have received an updated COVID-19 vaccine, compared with 66 percent of Democrats ages 65 and older.

Moreover, 66 percent of Democrats ages 65 and older have received the updated COVID-19 vaccine, while only 24 percent of Republicans ages 65 and older have done so.

“This 42-point partisan gap is much wider now than at other points since the start of the outbreak. For instance, in August 2021, 93 percent of older Democrats and 78 percent of older Republicans said they had received all the shots needed to be fully vaccinated (a 15-point gap),” it noted.

COVID-19 No Longer an Emergency

The U.S. Centers for Disease Control and Prevention (CDC) recently issued its updated recommendations for the virus, which no longer require people to stay home for five days after testing positive for COVID-19.

The updated guidance recommends that people who contracted a respiratory virus stay home, and they can resume normal activities when their symptoms improve overall and their fever subsides for 24 hours without medication.

“We still must use the commonsense solutions we know work to protect ourselves and others from serious illness from respiratory viruses, this includes vaccination, treatment, and staying home when we get sick,” CDC director Dr. Mandy Cohen said in a statement.

The CDC said that while the virus remains a threat, it is now less likely to cause severe illness because of widespread immunity and improved tools to prevent and treat the disease.

Importantly, states and countries that have already adjusted recommended isolation times have not seen increased hospitalizations or deaths related to COVID-19,” it stated.

The federal government suspended its free at-home COVID-19 test program on March 8, according to a website set up by the government, following a decrease in COVID-19-related hospitalizations.

According to the CDC, hospitalization rates for COVID-19 and influenza diseases remain “elevated” but are decreasing in some parts of the United States.

Tyler Durden Sun, 03/10/2024 - 22:45

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Rand Paul Teases Senate GOP Leader Run – Musk Says “I Would Support”

Rand Paul Teases Senate GOP Leader Run – Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump…

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Rand Paul Teases Senate GOP Leader Run - Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump into the race to become the next Senate GOP leader, and Elon Musk was quick to support the idea. Republicans must find a successor for periodically malfunctioning Mitch McConnell, who recently announced he'll step down in November, though intending to keep his Senate seat until his term ends in January 2027, when he'd be within weeks of turning 86. 

So far, the announced field consists of two quintessential establishment types: John Cornyn of Texas and John Thune of South Dakota. While John Barrasso's name had been thrown around as one of "The Three Johns" considered top contenders, the Wyoming senator on Tuesday said he'll instead seek the number two slot as party whip. 

Paul used X to tease his potential bid for the position which -- if the GOP takes back the upper chamber in November -- could graduate from Minority Leader to Majority Leader. He started by telling his 5.1 million followers he'd had lots of people asking him about his interest in running...

...then followed up with a poll in which he predictably annihilated Cornyn and Thune, taking a 96% share as of Friday night, with the other two below 2% each. 

Elon Musk was quick to back the idea of Paul as GOP leader, while daring Cornyn and Thune to follow Paul's lead by throwing their names out for consideration by the Twitter-verse X-verse. 

Paul has been a stalwart opponent of security-state mass surveillance, foreign interventionism -- to include shoveling billions of dollars into the proxy war in Ukraine -- and out-of-control spending in general. He demonstrated the latter passion on the Senate floor this week as he ridiculed the latest kick-the-can spending package:   

In February, Paul used Senate rules to force his colleagues into a grueling Super Bowl weekend of votes, as he worked to derail a $95 billion foreign aid bill. "I think we should stay here as long as it takes,” said Paul. “If it takes a week or a month, I’ll force them to stay here to discuss why they think the border of Ukraine is more important than the US border.”

Don't expect a Majority Leader Paul to ditch the filibuster -- he's been a hardy user of the legislative delay tactic. In 2013, he spoke for 13 hours to fight the nomination of John Brennan as CIA director. In 2015, he orated for 10-and-a-half-hours to oppose extension of the Patriot Act

Rand Paul amid his 10 1/2 hour filibuster in 2015

Among the general public, Paul is probably best known as Capitol Hill's chief tormentor of Dr. Anthony Fauci, who was director of the National Institute of Allergy and Infectious Disease during the Covid-19 pandemic. Paul says the evidence indicates the virus emerged from China's Wuhan Institute of Virology. He's accused Fauci and other members of the US government public health apparatus of evading questions about their funding of the Chinese lab's "gain of function" research, which takes natural viruses and morphs them into something more dangerous. Paul has pointedly said that Fauci committed perjury in congressional hearings and that he belongs in jail "without question."   

Musk is neither the only nor the first noteworthy figure to back Paul for party leader. Just hours after McConnell announced his upcoming step-down from leadership, independent 2024 presidential candidate Robert F. Kennedy, Jr voiced his support: 

In a testament to the extent to which the establishment recoils at the libertarian-minded Paul, mainstream media outlets -- which have been quick to report on other developments in the majority leader race -- pretended not to notice that Paul had signaled his interest in the job. More than 24 hours after Paul's test-the-waters tweet-fest began, not a single major outlet had brought it to the attention of their audience. 

That may be his strongest endorsement yet. 

Tyler Durden Sun, 03/10/2024 - 20:25

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The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While “Waiting” For Deporation, Asylum

The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While "Waiting" For Deporation, Asylum

Over the past several…

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The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While "Waiting" For Deporation, Asylum

Over the past several months we've pointed out that there has  been zero job creation for native-born workers since the summer of 2018...

... and that since Joe Biden was sworn into office, most of the post-pandemic job gains the administration continuously brags about have gone foreign-born (read immigrants, mostly illegal ones) workers.

And while the left might find this data almost as verboten as FBI crime statistics - as it directly supports the so-called "great replacement theory" we're not supposed to discuss - it also coincides with record numbers of illegal crossings into the United States under Biden.

In short, the Biden administration opened the floodgates, 10 million illegal immigrants poured into the country, and most of the post-pandemic "jobs recovery" went to foreign-born workers, of which illegal immigrants represent the largest chunk.

Asylum seekers from Venezuela await work permits on June 28, 2023 (via the Chicago Tribune)

'But Tyler, illegal immigrants can't possibly work in the United States whilst awaiting their asylum hearings,' one might hear from the peanut gallery. On the contrary: ever since Biden reversed a key aspect of Trump's labor policies, all illegal immigrants - even those awaiting deportation proceedings - have been given carte blanche to work while awaiting said proceedings for up to five years...

... something which even Elon Musk was shocked to learn.

Which leads us to another question: recall that the primary concern for the Biden admin for much of 2022 and 2023 was soaring prices, i.e., relentless inflation in general, and rising wages in particular, which in turn prompted even Goldman to admit two years ago that the diabolical wage-price spiral had been unleashed in the US (diabolical, because nothing absent a major economic shock, read recession or depression, can short-circuit it once it is in place).

Well, there is one other thing that can break the wage-price spiral loop: a flood of ultra-cheap illegal immigrant workers. But don't take our word for it: here is Fed Chair Jerome Powell himself during his February 60 Minutes interview:

PELLEY: Why was immigration important?

POWELL: Because, you know, immigrants come in, and they tend to work at a rate that is at or above that for non-immigrants. Immigrants who come to the country tend to be in the workforce at a slightly higher level than native Americans do. But that's largely because of the age difference. They tend to skew younger.

PELLEY: Why is immigration so important to the economy?

POWELL: Well, first of all, immigration policy is not the Fed's job. The immigration policy of the United States is really important and really much under discussion right now, and that's none of our business. We don't set immigration policy. We don't comment on it.

I will say, over time, though, the U.S. economy has benefited from immigration. And, frankly, just in the last, year a big part of the story of the labor market coming back into better balance is immigration returning to levels that were more typical of the pre-pandemic era.

PELLEY: The country needed the workers.

POWELL: It did. And so, that's what's been happening.

Translation: Immigrants work hard, and Americans are lazy. But much more importantly, since illegal immigrants will work for any pay, and since Biden's Department of Homeland Security, via its Citizenship and Immigration Services Agency, has made it so illegal immigrants can work in the US perfectly legally for up to 5 years (if not more), one can argue that the flood of illegals through the southern border has been the primary reason why inflation - or rather mostly wage inflation, that all too critical component of the wage-price spiral  - has moderated in in the past year, when the US labor market suddenly found itself flooded with millions of perfectly eligible workers, who just also happen to be illegal immigrants and thus have zero wage bargaining options.

None of this is to suggest that the relentless flood of immigrants into the US is not also driven by voting and census concerns - something Elon Musk has been pounding the table on in recent weeks, and has gone so far to call it "the biggest corruption of American democracy in the 21st century", but in retrospect, one can also argue that the only modest success the Biden admin has had in the past year - namely bringing inflation down from a torrid 9% annual rate to "only" 3% - has also been due to the millions of illegals he's imported into the country.

We would be remiss if we didn't also note that this so often carries catastrophic short-term consequences for the social fabric of the country (the Laken Riley fiasco being only the latest example), not to mention the far more dire long-term consequences for the future of the US - chief among them the trillions of dollars in debt the US will need to incur to pay for all those new illegal immigrants Democrat voters and low-paid workers. This is on top of the labor revolution that will kick in once AI leads to mass layoffs among high-paying, white-collar jobs, after which all those newly laid off native-born workers hoping to trade down to lower paying (if available) jobs will discover that hardened criminals from Honduras or Guatemala have already taken them, all thanks to Joe Biden.

Tyler Durden Sun, 03/10/2024 - 19:15

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