Why the slowdown in Wall Street deals?

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0:32Markets just don't feel quite as exuberant as they did a few months ago. Oil is still stuck at a high level. Election nerves are in the air. The AI trade is wobbling and bond yields are off their highs. What does all this mean for Wall Street's dealmakers? Is the M &A boom over? This is Unhedged, the markets and finance podcast from the Financial Times. I'm Rob Armstrong, coming to you from the backup studio at Unhedged World Headquarters in New York City. And I am joined by the dynamic duo, James Fontanella-Khan, the U.S. finance editor and longtime M &A mastermind here at the Financial Times.

1:15And his longtime partner in crime, Arash Masoudi, global markets editor, who's doing a flying visit from London. Gentlemen, hello. Hello. Hello. James, why don't you start off? There's been some big deals this year, starting with Warner Paramount. Was I right to describe this as a boom year? Have we had a boom? I think the answer is yes, in part. The first half was crazy. We saw some huge deals. I'm thinking about global infrastructure partners and EQT doing a$33 billion take private of AES. You'll see a theme here. There's like Devon Energy and Koterra did have a$60 billion all-stop deal. Then we also broke the kind of NextEra, Dominion deal.

2:03The link here is generally like AI data centers. So kind of slightly more boring deals, if I have to be honest. But they're underpinning the current kind of economy. If it's$30 billion, it's not boring, JFK. That amount of money makes anything interesting, I would say. When Ollie Barnes and I broke the Dominion Next Air deal, that was like, felt great. But then Arash and the team in London kind of had this hot tip, which we confirmed, which was like that AstraZeneca was going to buy Bristol Myers. This was going to be like crazy deal. And we kind of probably by breaking the story a little too early, we killed it.

2:39But that kind of gave you a sense. some of the people involved in the transaction were not happy and they remind us about us spoiling the party but we were just doing our jobs yeah no and maybe we did also some service to investors there we saved them some money but the point is we're seeing a bit of a change in the mood the exuberance that we saw at the beginning of the year seems to have dissipated a bit why i think it's not uncommon to see a slowdown in an election as we get closer to that election which is going to be in november for our listeners outside of the u.s and people want to get a sense of like are there going to be some changes on the antitrust side of things it's just going to be a bit messier and so people are waiting like man let's wait maybe a couple of months till we announce our deal it feels like the ipo market's in flux too i know it's a slight change of topic but the two are related, the M &A and the IPO markets.

3:33If you think about what is traditionally investment banking, there's kind of two sides of the, not the trading side, but the investment bank side. One is the issuance of debt and the DCM, which stands for debt capital markets. And then our world is very much the issuance of equity and M &A. And it's sort of like the smart people do DCM and the kind of jocks do this side. So you guys are jocks. Absolutely. Proudly. This is a former professional footballer. Can't add charming though. Yes, exactly. Exactly. You can sell equity and you can do that, but you do not get to touch the debt. But if you look at the markets, they're up.

4:06I mean, you're always told, oh, the markets are up. The IPO markets are open. So we have what are supposed to be some of the most defining genre-killing companies in history sitting private. And some of them do want to list, and they aren't listing. So maybe this whole thing was a little bit of a... And I mean, that is a broader trend of companies kind of staying private for longer. Yeah. But we were expecting a bunch of IPOs, and they ain't happening. Has AI been the big change? Is it casting a longer shadow over activity in general? I think the big change, and this is my kind of thesis on society and the economy, is that there's just so much freaking money in the system.

4:45There's these venture funds. There's just these walls of capital, sovereigns. And they have nowhere to deploy it, and these private companies are getting more than their fair share of it. And so they're just like, well, I've got this endless wall of capital available to me. Why do I want to go deal with retail investors or public markets or have to be accountable to a bunch of SEC things? So I think if you look at a company like Stripe, which is a payments business, I think they're pretty open about the fact that they ideally would never have to list because it's annoying. Fair enough. But there's a big difference between the capital needs of a Stripe, which are probably resolvable with private sources.

5:19if you're open AI, your need for capital is basically infinite. And it's retail investors who have the infinite money. Yeah. That's part of the situation. I guess they're just concerned about when people are going to be able to see exactly what's happening behind the hood. I mean, there was a major IPO this year, which was SpaceX. I mean, the company was valued at$1.25 trillion until Elon decided it should be$1.75 trillion, and they executed it without any problem. I mean, this speaks to a big, I mean, the largest ever deal in history would be the combination of SpaceX and Tesla. That combination would be$3.6 trillion.

5:57They announced they're studying a merger. So if you just look at that, I mean, the largest M &A deal was$4 trillion or$5 trillion of deals. I mean, that deal alone is$3.6 trillion. That's just Elon Musk rearranging papers on his desk, though, isn't it? Does it even count as an M &A deal when it's those two companies? It's complicated. I mean, a lot of he's kind of contributed to the kind of big numbers this year and over the last couple of years because then he had the kind of... SpaceX. Twitter. Yeah. So he's combined... To your point though, he's combining a lot of his companies in ways that are...

6:29Is they not traditional M &A? And I think that's like what we're seeing right now driven by AI is unconventional M &A. And you've seen these tech companies that for the longest time, they could not do deals because of antitrust concerns. Now they're saying, screw that. We're just like buying the people and not the company. And it's kind of, it's jarring. It's just for sums which are crazy, like in the billions of dollars. And it is kind of crazy to go from just two years ago where you had some semblance of a pretty serious antitrust enforcement regime in the U.S. government to literally nothing.

7:03It's a free for all. And I think the people who helped create that environment of making sure the government basically could not do any regulation, even if you thought it went too far, are pretty happy with their bets on this president. I'm sure. And they are making billions. And I think my kind of, again, my thesis is that money will be deployed to reinforce the system they want to create in America. And that is also changing the economy. It's bigger than markets and finance. But I think a small group of people are changing the way our society functions. And we can't do enough to document that in the FT.

7:31Correct. So when the election is passed and some of that uncertainty is gone, do you feel like there's big deals waiting in the wings? Or is it going to be more the situation Arash described where the private money is flowing, you don't really need public markets, either IPOs, mergers or whatever? My gut feeling to the point that there's so much money in the system, this is not ending anytime soon. Yes. We've been predicting the end of this kind of crazy run for the longest time. Sure, there might be a slowdown. Things are going to get... And that doesn't mean that kind of people, real people are going to suffer, are not going to suffer.

8:12I think we need to detach what happens in this kind of crazy world of like mega money and the rest of us. Where we live in reality. And so I think we're going to continue to your question. I think we're going to continue seeing gigantic numbers. Yes. That doesn't translate in this is a healthy economy. Right. And so the two things - And interest rates are obviously not going down. Correct. So that means all the private equity kind of models are just broken. Commercial real estate and the real estate sector, they're in bad shape. Yes. So there are parts of this ecosystem. Ironically, the private equity community would be one of the biggest cheerleaders for the Trump administration.

8:48And they've been kind of the most harmed by it. Yes. Because they needed rates to go down. And they got a tariff war. They got a bad war that the US is kind of stuck in. They got oil up. They're not getting the things they wanted at a macro level. But they're going to have to unload their portfolio companies eventually. Or put it in another continuation fund. There was a great story in Bloomberg recently about Goldman and Evercore pitching a forever continuation fund, so you never have to ever exit. I mean, the financial engineering in that industry is reaching scales that, you know, if we had to sit a man on the street and explain to him what private equity was in 2000 versus what it is today, I don't think we could do that in a...

9:26Well, I think for the sake of listeners, we should explain a little bit. So the core issue you're talking about, Arash, is that the private equity model as we knew it up until 2020 or 2021, say, depended on low rates. Now rates are high. The companies these private equity companies own haven't reached the valuations that maybe were hoped. They're more expensive to finance now. And so the private equity sponsors are sort of stuck with them. I mean, before they were operating on free money. Now you've got to actually be smart. Yeah, it's difficult. That would be a source of deals, M &A deals, selling those companies to other companies.

10:06And that's kind of stuck for now. Exactly. And the firms that are kind of doing well in that industry pivoted and they now call themselves private capital firms because private equity is just a small part of what they do. Do you want to explain how that kind of has changed the game? That has changed the game because essentially the sexy thing to do now in this industry is to own an insurer and take insurance capital and kind of do a mini Buffett and put that capital work. And Apollo is kind of king of that game. And then effectively what they have tried to do is just make large loans now. They're not even trying to do the private equity deals.

10:36Although they bought EasyJet in the UK, which was a big story. That was a six billion pound takeover. But this year they've lent hundreds of billions of dollars to companies. And that's their primary bread and butter now. And that fits with the change in the rate environment we've seen. It's maybe more attractive to make loans in the current environment than it is to try to leverage a company up to the hilt and try to sell it for a higher multiple you bought it for. And cut costs. I think that model actually, we'll see a lot of smaller private equity firms just disappear. Yeah. Because why are you giving your money to somebody?

11:07You're not relevant. I want to turn from the present moment to the past here. We haven't mentioned it yet, but we have to mention that today is JFK's last day at the FT. This is a big moment. And he has been partnering with you, Arash, in reporting on corporate dealmaking now for how long? Over 10 years? Yeah. 21 at the FT, 12 with Arash. Let's kind of take the longer view. What's changed over those 10 years? What are the kind of, first of all, what's changed in the business over those 10 years? And second of all, what are the kind of big lessons that you guys have learned about being corporate finance reporters, M &A reporters, deal reporters, really?

11:55I'll take a step back. When we started reporting deals together, we were a much smaller team and often we were getting beaten. It was very painful. We were fighting. When you say beaten, you mean by other news? Yeah, by either the Wall Street Journal, Bloomberg were either better source or better resource. Yes. And I think what Arash and I did successfully over the years is build a system. And it was by tackling the more complex stories, which kind of turned and following the private money more than the public companies. And today, I think a lot of people would admit that we are definitely very competitive with the same guys that used to be bullying us back in the day.

12:38And in that optic, we kind of, again, focused on private capital to the point we followed those smaller private equity firms, which are now like alternative asset managers like Blackstone and Apollo. And the other thing that I've noticed, like initially, one of your best sources maybe were bankers. What I've personally noticed is like the rise of the superstar lawyer, like these guys play themselves like LeBron. And they've become in their own right kind of larger than life characters that are, I mean, they were always like very important lawyers, don't get me wrong, but the money going around for these guys, the talent war for top lawyers is unrivaled.

13:20And that - I'll give you an example. I was with the head of a European bank and I asked him, hey, tell me how much your top guys are making. And he goes one to three million euros. And I said, I literally don't speak to a lawyer who makes less than double that. And that's just the new normal. The lawyers are the kings of the market and they surpass the bankers. The bankers were at the top of the hill. I mean, I think this post-2008 regulation and stuff really did - A hundred percent. Really did change the game for banks. And the banks are now just warehouse commodity providers of services. It's funny because years ago, you would talk to M &A lawyers and they would be quite bitter sometimes.

13:58We are the ones who are structuring the deals. We understand the mechanics here. And then this guy with a lot of hair product in a good suit is coming along and he's the star of the deal. He's the one getting profiled in the papers, not those of us who are in the trenches. But now it really seems like the shoe is on the other foot. 100%. Now, the key to the success of careers, like guys like James and I, are there is this small handful of, let's say, globally less than 100 bankers that genuinely are the kings of what they do, kings and queens. Because there are some women, very few, but they are.

14:34And if you have the trust and the sort of ability to connect with those guys and gals, you can really unlock some incredible information. But that's not 99 % of the banking industry. That is a tiny, that's not even 99.9 % of the banking industry. And that's the other big trend. I mean, the Goldman's, I mean, Goldman is still the top of the crop. But a lot of the larger banks lost a ton of talent that went on to build their own boutiques. And now a lot of those boutiques are wholesale names, and they're doing a lot of the deals. But we had a piece in the FT recently that some of those boutiques are struggling, at least as public companies.

15:11Their stocks have not been doing great. Do you think the big Wall Street banks are making a bit of a comeback versus the boutiques? Or how would you describe the situation? Rob, let's pretend you're an investor. Yes. Hey, Rob, I got a great deal for you. Come buy shares in my company. I spend 60 % to 70 % of my operating costs on paying my staff. Exactly. And the moment, hey, Rob, by the way, if I try to give them a pay cut, they're all going to leave. So I'm running a talent business where I have to hand them all the money I make. You should buy shares in my company. It sounds like a company that shouldn't be public.

15:41Exactly. The problem is that they shouldn't be public rather than they're not good at what they do. Yeah. Yeah. But, you know, this has kind of been even longer than the time you've been in it. I mean, I remember being in this business when Goldman Sachs first went public. And people were like, was this a good idea? The partnership model had served Goldman so well for so long, but the big partners all wanted to cash in at a great moment in markets. I guess one of my big lessons from this period is, I guess, things change. And if you don't evolve, you do die. and i really maybe i wouldn't have like not fully appreciated that but now like looking back like it really is evolve or die and i think the firms that don't evolve i mean remember kirkland and ellis is this now giant killing uh law firm yes and they would sit us down 10 years ago and tell us we're gonna destroy cravath and wachtell and we're like no like what are you talking about that's like those are the most established like american law firms that run the show and they're like we're gonna just use money and we're gonna break the culture of all law firms.

16:43And 10 years later, they did. Every partnership in Wall Street is dead now. It is all like eat what you kill. They're so successful that they don't even want to share how much money per partner they're making. Well, we've talked about the present and the past. Let's finish up by talking about the future. Give me a thought or a prediction about what the next couple of years are going to bring in corporate deal-making? I think the investment banking industry will shrink by the number of personnel. Huh. Why is that? Because of AI. And like I said, the commodity service just doesn't have a... And so the cost structures inside these banks will compress because they just don't need all these people.

17:29JFK? So I'll start with, I'm not sure I agree with that. I think actually, I think this is true for any industry where it's talent based actually can be propelled by AI. And so you can grow in different directions. And I think, I was thinking more about the law firms because a lot of people think the law firms are going to be heavily impacted by AI. I think human capital in these industries is still very valuable. But aside from that, my big prediction is M &A is going to keep on rocketing over the next decade. even if we have a slump somewhere i think the numbers are just going to keep on growing is that for the reasons that arash pointed out there's just so much money at the top of the system so much savings that just gets funneled which doesn't mean there won't be a crisis in between i just want to be clear about that like we've sustained i mean we've lived through covid we've lived through multiple wars and we kept on going so like the resilience of this world which again and does not reflect the real economy is incredibly strong.

18:33Stick with us, listeners. We'll be right back with Long and Short.

18:41Listeners, welcome back. This is Long and Short, that portion of the show where we go long things we like and short things we don't like. Arash Masoudi, are you long or short something today? I'm short the Middle East. I think what Trump has broke there with the war in Iran is going to get way worse and is spiraled out of control in ways that they cannot put back in the bottle, in the box or whatever the expression is now. This week was supposed to be the FII, the Future Investment Initiative, or whatever they call it, the Saudi Davos in the desert. And I think you see Saudi Arabia now looking as weak as it's ever looked before.

19:17And that's just one domino of this kind of tragic war. JFK, after that dreary pronouncement by your partner, give us something to be more cheerful about. On my way out, I'm going to say that I'm long on the FT's corporate finance coverage. And it's great today, but it's going to get even greater once I'm out of here. I'll go long, James Fontanella-Khan, Arash, and I, and the Unhedged team, and the rest of the FT know you're going to do great at AC Milan. and we just can't wait to hear about it. Thank you so much. Listeners, we'll be back as normal Tuesday with Katie. She's over on The Political Fix this week talking about the aggressively boring UK budget.

20:03If you want to hear that for some reason, you can listen to it Friday.

20:19State Fair food is getting smaller and pricier. We'll have room for fried cookies. Okay, you never overspend on food. What's your deal? What's his deal? He went to Metro and got$450 in value on the new Samsung Galaxy A37 5G for free. And no activation fees. Free phone? Oh, sign me up. Get that more for your money feeling. Only on Metro by T-Mobile. Bring your number and activate$40 period plan. $450 based on device discount waived activation fee. Not available if with Metro or T-Mobile in the past 180 days. Decisions made in Washington can affect your portfolio every day. But what policy changes should investors be watching?

20:57Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. Listen at schwab.com slash Washington Wise.