Is M&A back?

0:06Pushkin. It's a new dawn for Wall Street. There's a new presidential administration, and with it comes a new regime of regulators. And mergers are back, or possibly not. This is Unhedged, the markets and finance podcast from the Financial Times in Pushkin. I am Rob Armstrong, coming to you from unhedged world headquarters in beautiful and chilly New York City. And I am joined by James Fontanella Khan, the FT's U.S. Deals editor. Hi, Rob. Man, it's been a long time since we had anything resembling a merger Monday. You're a Deals reporter. Have you just been like sitting at your desk waiting for the phone to ring for two years?

0:59No, that's obviously not true. We're a small team, so there's always plenty to do for us, but it has been a wild week. There's been a lot of deals going on, that's for sure. Yes. And a lot of people have exactly the same question that you have. Are we going to see a wave of deal making? Are animal spirits back? Yes. Is this kind of Reagan era madness? Let's start by talking about the individual deals we have seen, and then we can go into to the question of what is driving this apparent inflection point for deal activity. Omnicom Interpublic, like the two biggest ad firms - In America. In America coming together.

1:43What do you make of that? So that's a great example. A deal which probably should have happened a while ago. These guys are dealing essentially with the rise of AI and how a lot of their clients are now using AI to do their own marketing campaigns. So they come together, they can essentially cut a ton of costs. But it's not just AI, is it? It's the competition from tech that's been happening for years now that the ad market is increasingly controlled. Absolutely. That was the first wave. All that advertising has been concentrated on essentially two platforms or three. And so they've lost an app, but AI has made it even harder because the actual clients they run the campaigns for don't really need them because they can go online.

2:30Whip up something. Yeah, really quick. It's interesting. I remember, this was probably 15 years ago, I was talking to the CFO at one of these huge global advertising firms. And I said, what's your basic strategy? And he said, we get a big client and we just buy every other ad firm that serves that client. You get a Coca-Cola or a Ford account or whoever, and you just make sure that whoever is making ads for them, you buy that company. So you basically surround the client so you become impossible to fire. You see why we've had a very progressive antitrust environment of late? Because that is precisely the kind of stuff that is wrong.

3:05Yeah, exactly. I'd call that anti-competitive. Yeah. Now, I will emphasize that this was at least 15 years ago that I had this conversation. It was probably off the record. And if I've released anything secret, I apologize deeply to the advertising industry. So anyway, they're doing it. Yeah. It's a$13 billion deal. It's an all stock deal, which is interesting because it reduces the risk. Right. And it'll be interesting to see actually if it does get approved by the regulators. We'll move to the regulatory environment in a second. Now, we've also had a deal in paper. We have. I don't know if it's exactly paper.

3:40Packaging. Okay. Another industry that's under pressure. I mean, that industry is always, it's just a hard industry. It's a commodity industry. Absolutely. It's difficult. So that's a big deal. That was a$7 billion deal. And then we had a private equity firm selling a insurance brokerage business for another $13,$14 billion. Let me check my data here. Yes. $13 and a half. Again, that's kind of, in one day, we had$35 billion worth of deals. There were other smaller ones. and yeah, there's a sign that kind of people are keen to do stuff. Yes. Well, there is one deal announced this week that is kind of ironic in this environment, which is the possibility of Walgreens.

4:23It wasn't announced, it hasn't happened yet, but there's a possibility of Walgreens. They're in advanced talks. Advanced talks. Now, the reason Walgreens needs to go private is because they did a really big deal years ago and it turned out to be really stupid, right? They bought Alliance Boots, a European pharmacy chain, and it's been a disaster from day one. So that is a deal that is undoing, maybe undoing the damage from an M &A mistake. A hundred percent. But there's also, this is an industry, like retail has been in trouble for a while. Yes. And just kind of that as a broader topic. I mean, at some point, Walgreens was worth a hundred billion dollars.

5:00Yes. I remember when it was like a go-go stock. Absolutely. And then about a couple of years ago, they were looking to go private at a$50 billion valuation. And now they might be going private at an$8 billion valuation. Sycamore, the private equity firm that is trying to do this deal, you know when they come into a situation, it's the beginning of the end for any company that they take over. They bought staples. Yes. And it's just like they manage the decline of an asset. And yeah, I think the similar situation could happen at CVS. That's another deal that is very like something will have to happen.

5:35People are just not going to these retailers. Also in New York City, of course, there is two drugstores on every block. So something has to happen to change things. Very true. I want to turn our attention to the political environment. A lot of people are saying that what we are seeing here is the end of one regulatory regime in the beginning of another. Lena Kahn, famously, what should I say, muscular antitrust regulator at the FTC. She's on her way out. The Trump administration is on the way in. How big a deal is this change in regimes? So it's not just Lena Kahn. There's also Jonathan Cantor at the DOJ as head of the antitrust there.

6:27The two of them have been probably the most revolutionary trust busters America has seen probably since in more than 100 years. 100 years, yeah. Just to give you a sense of Lena Kahn's vision. So historically, it was all about keeping prices down. So if a merger happened, but prices remain unchanged, the regulator is happy. In the case of the platforms and where Lina Khan comes in and her whole analysis of Amazon in particular when she was still a student at Yale, it's not only about the prices. It's also about the impact that this company, in this case Amazon or this new combined company, has on the labor market, the impact it has on other smaller firms, on the impact it will have on innovation.

7:17So if you have one dominant company and you're trying to sell your goods on that platform, because it's the only platform where you can sell your goods, it means that you're exerting too much pressure on the small company. Yes. And you can potentially drive them out of business. I think it might be a slight exaggeration, but I feel like for Khan, competition is a good in itself. A hundred percent. She's a true capitalist. And I always laugh when they try to depict her as a socialist. Socialism is about the state - Centralization of decision making. Exactly. She's all about, let's splinter it up.

7:56I want to have a ton of Amazons. I want to have a ton of Googles. I want to have a ton of whatever. Let them compete and may the best company win. And she says that will keep both prices down, but it will also give a chance for a new generation of innovators to come in. it will give workers greater power to command a higher salary. Because if I go into a marketplace where there's 10 employers, I can try to get the highest salary. If there's only one employer, I'm kind of screwed because I can only take that one job. What you were describing earlier about the advertising companies like buying out the smaller guys so that there would be no competitors is precisely the kind of attitude that she...

8:42What she's trying to avoid. Yes. Yeah. Interesting. Now, let me ask you, so is that... Is that over? Is that over? I mean, she had her shot, she took her shot, and now it's laissez-faire version of things coming back under the Trump administration. There's a couple of considerations there. One, let's just look at who Trump has nominated at the DOJ and at the FTC. At the DOJ, you have Gail Slater, who is a protege of J.D. Vance. And where does J.D. Vance stand on antitrust? Well, if you go back and listen to his speech when he gets nominated VP, he talks about the party is over for Wall Street.

9:28And he talks about precisely tackling kind of oligopolies, like vested interests. And famously, J.D. Vance said the only person he kind of respects in the Biden administration is Lena Kahn for the work she has done to try to create a competitive landscape. So it's a nationalism. He espouses a nationalism that is ill at ease with big business. A hundred percent. And he's all about the little man on the street. Of course. And so, for example, the area where they share Lena Kahn's view is on making sure that the labor market isn't stifled because there's no competing employer. And J.D. Vance famously a politician from the Rust Belt.

10:16Absolutely. Where jobs got sucked away by the kind of globalization of the American industrial base. So you can see. I think Lena Khan is very happy that Gail Slater is at the head of the DOJ's antitrust division. But who's going to be at the FTC? So at the FTC, there's a guy called Andrew Ferguson. We know he prepared his memo and it's all about rolling back everything that Lena Khan has done. It's very, very clear. Right. He portrays her as anti-business, the kind of stuff that a lot of my sources on Wall Street would agree with. But on the flip side, he's also talking about going after big tech.

10:54Maybe differently from Lina Khan, who was challenging big tech on its kind of monopoly power, he's more focused on, and a lot of the right in general in America, the populist right in America is focused about how the platforms are censoring center right, right wing. Prices. Exactly. So these are the social networks. Think about Meta, think about. Google, whoever, disinformation, all of these points. Although I will say, as someone who uses Twitter, I'm not seeing a lot of right-wing voices being silenced on that particular platform. I would agree with you on that. But anyway, for our purposes, there's a different strain here.

11:36There's the kind of anti-monopoly strain, and then there is a cultural strain. And I'll go a little further. based on the conversations I've had with people in kind of Trump's inner circle, I think there's going to be a lot of deals in certain sectors. What I've been told is if a deal happens and it benefits America, we will let it go through. My example of a deal that is not happening but could happen in a kind of Trump world is you can see Chevron and Exxon getting together. Are we breaking news here? No, we're not. When I do break that, I'm retiring. But I could see that coming together because Trump would think this is a national champion that can compete with the Saudi Aramkas of the world.

12:22So anything that is good for America will be approved. Anything that is not good for America, according to Trump's view of the world, would be stopped. So I think it might be harder, for example, to see some foreign companies. Well, we have an example of this that crosses the two administrations. Yes. The Nippon steel buying U.S. steel. Blocked by Biden, Trump has said we're not going to let that happen. It's still not dead, dead, dead. Dead, dead, dead. But it looks pretty dead. It just seems like a good deal for America. Here is a larger foreign entity that wants to basically put capital to work in America at a company that frankly is a bit wobbly.

13:08that would be good for America. I think I've said on the show before, I think the reason they're blocking it is because it happens to be called US steel. If it was called Fontanelle con steel, the deal would have gone through. And I would be a Richard Math. I tend to agree with you. All deals are complicated and there's always an element of job cuts that comes with it. I'm always a bit skeptical when the solution to a problem is M &A. Yes. Usually the little man never wins. The executives do. And I'm not trying to be a populist here, but it's kind of, there's a lot of evidence to back that up.

13:45That said, I agree. This deal seemed one where you have a Japanese buyer who does want to invest in the plants that would keep the plants open. And if the deal doesn't happen, actually, you might see further closures. And again, the politics of it was staggering. So again, I think what will not go away in M &A is the politicization of M &A. That's a good point. Now, so we have some uncertainty about how things are going to play out because of the different shades of ideology we see in the Trump administration now. Let's flip the conversation a little bit on its head. What are the industries that politics aside, in your view, are ripe for deals?

14:32So one sector that you saw, I think the day after Trump got elected, you saw a lot of the stocks of these companies like popping. It's the banking sector. Yeah, the smaller banks. The smaller banks were up 20%. And that was partly because of expected deregulation, especially on kind of capital requirements and whatnot. The truth is there's a ton of banks in the US. Consolidation makes sense. And I would argue, as someone who has covered banks a lot, that it would actually increase competition. What we have now is basically three banks, Wells Fargo, Bank of America, and J.P. Morgan, which are way bigger than everything else.

15:13We can have an argument of whether Citibank should be in that bucket or U.S. Bank Corp. should be in that bucket. But this is a business that thrives on scale and where a handful of banks are way bigger than everybody else. And it's not a very even playing field. So if smaller banks got bigger, you might see a more competitive environment that was friendly for consumers. A hundred percent. But as you know, because you've covered this industry, there's a lot of buyers. There's not a lot of sellers. Everybody wants to be a buyer. Nobody wants to be a seller. And why do sellers don't want to sell?

15:44Because if you're the CEO of that bank, you have a pretty cushy life. Oh, it's good. It's glorious. And so if you sell, you're out of a job. You're out of a job. Even if you get a good package, you're not the big man down at the country club anymore. when you're not the CEO. You're not going to have that level of respect from your local community. So you have to, and so when big deals do happen in regional banking, it's kind of an amazing, somebody has to let the other person be CEO. So that's an area that's ripe for it. I want to talk about media though too. Media, it's an industry that's been transformed.

16:16Absolutely. A lot of companies aren't as profitable as they once were. And we're talking about legacy media here. Yeah, legacy media here, absolutely. Could we see deals in that space? Well, just today we've seen Warner Brothers announcing essentially streamlining its businesses. Essentially the first step to splitting it out properly. Story that we reported a few weeks back ahead of everybody else. Yes. So that is they have a cable business, which is a connectivity business. And then they have kind of content assets. Am I getting that right? And earlier, just before Warner Brothers, you had Comcast doing something similar, essentially splitting the linear business and the broadband business, or as some people say, the good co and the shit co.

17:00And I think we're going to see more of that. I wouldn't necessarily say that you need more consolidation in media. I think you need a reorganization, a restructuring of the industry. Let's just talk about streaming though. It seems like there's this proliferation of streaming platforms. In my house, there is Disney, there is HBO, there is Netflix, and there is Amazon Prime and there's Apple TV. Tell me about it. Is this too much? My list goes on. Your list goes on. Netflix is nicely profitable and growing more so. And winning. But the others, it's a little more touch and go. So again, you have a situation where it's clearly unsustainable, both for the consumer as well as for the companies because the cost of the content has gone.

17:49It has been so expensive. And you start having, at whatever it is, $11.99 a month each or$15 or$8 or whatever it is. You have five of these things because you got your favorite show. They're on five different channels. So one thing is you might see more joint ventures there. So not traditional M &A. Because again, the regulators, whether it's Lena Khan or it will be the new generation, they probably will not be very pro media consolidation. Yes. I just watched a Paramount Plus show. on Amazon Prime. There you go. So I think you'll see more of that. Yeah. That's interesting. But maybe not outright M &A.

18:27And then the other sector, you mentioned Walgreens earlier. I think retail is deeply troubled. We've seen a lot of it happen already. Exactly. But that's, again, a great case study of a lot of deals were blocked in the Obama era amongst retailers. And I think to some extent, the regulators completely underestimated the impact that Amazon has had on retailers across sectors, from fashion brands to pharmacies, to record stores, bookstores. It's funny, I was in the UK last week and I was at a Waterstones. And then I realize that Waterstones, Barnes and Nobles, and Foils, which was one of my favorite bookstores, were all the same company.

19:18They have consolidated, finally. But maybe it's too late. Yeah. Back in the day, they were talking about deals in that industry and the authorities discouraged it. Yeah, absolutely. You know who was a great borders shareholder? Who? Bill Ackman. Oh, that guy. Remember him? Whatever happened to that guy? Well, he's actually doing pretty well. His man won the election. And back in the dark ages, he was talking about financing a borders bid for Barnes and Noble. I don't think anything came of it. History. History. There's no more borders these days. Listeners, if you have predictions for which industries will or should consolidate, you can send them to unhedged at FT.com.

20:02James and I will be back with Long and Short. Listeners, welcome back. This is Long and Short. that portion of the show where we go long things we like and we go short things that we do not like. James, do you have a long or a short for us? I'm going to go long on something. I'm not sure I like it, but I think it's got legs. And I don't know if you saw the latest images of George Meloni and Elon Musk in, I think it was in Paris. Yes. And I mean, these guys. Sparks. It's not the first time. It's not the second. the looks. Yes. You're a deal reporter and you are anticipating a merger. There's a merger between George Maloney and Elon Musk.

20:49They'll always have Paris. They'll always have Paris. Go long. I'm also long. I'm going long used clothing. We're journalists. I think you're into this too. Absolutely. JFK. We both like to dress well, but we are operating on a modest budget. Indeed. And I'm a big believer. I'm wearing a jacket today from eBay. I go to, you know, I go to the thrift stores with my daughter. I'm big on the real real. The real real is brilliant. It's, you know, it's environmentally sustainable. It's economically sensible. Sometimes you have some hits and misses, but the secondhand clothes are where it's at. Listeners, we'll be back in your feed next Tuesday.

21:31And until then, stay sharp out there. Unhedged is produced by Jake Harper and edited by Bryant Erstat. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong thanks for listening

22:20now they might be going private at an$8 million second war the equity firm that is trying to do this video