Too Big to Fail?

By: subSPAC

EXECUTIVE SUMMARY

• Investment Banks and Advisory firms have thrived over the past two years as the rapid pace of dealmaking induced by the post-pandemic era led to significant profits.
• New York City-based Perella Weinberg Partners took advantage of the free-flowing capital market conditions by closing some of the biggest M&A deals over the last decade and choosing to list on public markets through a SPAC.
• With all the talk of an economic slowdown going into 2023, Investment Banks are cautious heading into next year, focusing on preserving cash and switching to ancillary advisory services rather than staying on the hunt for big deals.

DETAIL

Happy Sunday, Friends! 

Investment Banks and Advisory firms have thrived over the past two years as the rapid pace of dealmaking induced by the post-pandemic era led to significant profits. New York City-based Perella Weinberg Partners took advantage of the free-flowing capital market conditions by closing some of the biggest M&A deals over the last decade and choosing to list on public markets through a SPAC. With all the talk of an economic slowdown going into 2023, Investment Banks are cautious heading into next year, focusing on preserving cash and switching to ancillary advisory services rather than staying on the hunt for big deals. Can Perella Weinberg continue to deliver value to shareholders in the face of a significant slowdown across dealmaking? 

Diversified Dealmaking  

The post-covid boom in 2020 and 2021 gave rise to significant dealmaking across many industries. Megacorps flush with cash rushed to take advantage of discounted valuations early in 2020, while new-age tech firms looking to consolidate market share opted for mergers through late 2020 and most of 2021. Low-Interest Rates, Cheap Access to Capital, and Strong Consumer Confidence prompted far more deals that were significantly more valuable.

Global Mergers & Acquisitions (M&A) reached $5.1 trillion in value, the highest level is seen since 2015 and the most number of transactions since 2017. Investment Banks and Advisory Firms such as New York City-based Perella Weinberg Partners (PWP) saw big payouts and looked to take advantage of the sentiment by going public through a SPAC deal. While not entirely a household name in the US, PWP is nonetheless a powerhouse, providing advisory services across M&A, Capital Solutions, Financial Restructuring, and Liability Management. 

The company, founded in 2006, has over 600 employees across five countries delivering services to over 1,000 clients, including corporates, family offices, governments, and special committees of the board of directors. The firm is well diversified, specializing in six key verticals, which include consumer & retail, energy, financial, healthcare, industrial, and technology.

PWP has been instrumental in bringing some of the biggest transactions over the last decade to life, such as medical device maker Medtronic’s $42.9 billion acquisition of Covidien, AT&T’s $108.7 billion acquisition of Time Warner, and Linde & Praxair’s $65 billion merger which created the largest industrial gas company by market share. Part of the reason for the company’s success over the past decade is the easy financial conditions induced by the Federal Reserve, but with the macroeconomic backdrop gradually worsening, PWP could see a significant slowdown in its activities over the next twelve to eighteen months. 

Switching Gears 

The global M&A market is expected to see a significant slowdown over the next year as companies look to cut costs, preserve cash and extend their runways to stay alive. This is in stark contrast to the growth-at-all-costs mentality that many employed during 2021, which saw big tech & other organizations expand through rapid acquisitions.

Markets are being hit with a perfect storm of inflation, recession, and higher unemployment, coupled with higher transaction costs and financing rates, which is causing many firms to reconsider existing transactions and put off new activity altogether. All of this suggests that both the velocity and size of M&A activity will significantly fall compared to the highs seen over the past two years, leading to lower deal fees. Despite the recent slowdown across the industry, PWP has been able to close a significant chunk of the previously announced monumental mergers. 

Prominent transactions that have closed over the past year include the $22 Billion Entertainment mega-merger Involving Discovery and WarnerMedia, Medtech firm Baxter’s Acquisition of Hillrom, which created a $15 Billion Behemoth, and German Residential Developer Vonovia, who agreed to acquire rival Deutsche Wohnen in a massive $25 billion deal. Looking ahead, PWP may look to switch its deal focus from large M&A transactions to mostly restructuring work such as asset sales and liability management.

The company has previously navigated downturns by capitalizing on distressed companies, such as iHeart Media’s $20 Billion restructuring, Concordia Resource’s $4 billion recapitalization, and California Resource Corp’s liability management. While this is expected to generate lower revenues compared to 2021, the company can still focus on increasing its clientele, which will play a significant role when market conditions eventually improve. 

Financials and Valuation 

PWP is now seeing a significant impact on its top and bottom line from the market slowdown. For the first nine months of 2022, the company generated $448.35 million in revenues, down 25% from the preceding comparable period, where revenues had come in at $602.74 million. This company attributed the decline in revenues to tough comparables since the slowdown across M&A activity in most industry groups led to the decrease in both the number of deals that were closed as well as the average fee size per client.

However, there were some positives, including favorable tailwinds across its capital solutions advisory business, where the company sees more demand for its liability management services. The revenue slowdown also impacted the bottom line, with the company posting a $9.1 million net loss, compared to a profit of $22 million in 2021. 

PWP maintains a strong balance sheet, with over $281.7 million in cash and no debt, which should enable it to continue delivering value to shareholders through buybacks and dividends. The company is paying a quarterly dividend of 7 cents (dividend yield of 2.82%) and has also bought back close to 8.71 million shares (8% of all shares outstanding) through agreements and open market purchases, which has played a role in stabilizing its stock in recent months.

If PWP continues to rake up losses, it may look to preserve capital rather than stay with its current distribution policy, driving down the stock further. The length and severity of the slowdown across capital markets will really play a role in how much value is created/destroyed over the next few years. 

Bottom Line 

Despite the significant slowdown in global M&A activity, Perella Weinberg Partners is well diversified, both sectionally and thematically, to make money from a recession through its liability management and capital management solutions. The company has also been looking to deliver excess returns to shareholders through buybacks and dividends, which should help stabilize shares in the medium term. However, investors will need to wait and see to what extent the slowdown will impact the firm and if it continues to maintain its dividend policy even as its liquidity position worsens over time. 

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Originally Posted December 4, 2022 – Too Big to Fail?