The Economist - UK (2022-04-16)

58 Business TheEconomistApril16th 2022

Hybriddealmaking

Screening transactions

I

t was once thought that investment

bankers,  like  sharks,  needed  to  keep  on

the move to survive. Then pandemic lock­

downs  put  paid  to  their  perpetual  motion

between headquarters, airports and meet­

ings.  Greasing  the  wheels  of  mergers  and

acquisitions (m&a) took a backseat to cor­

porate concerns about survival. Deals were

scrapped  or  put  on  hold  and  bankers  fo­

cused  on  clients  that  they  knew  already.

Virtual  dealmaking  became  the  norm.  As

in­person interaction returns, will the new

ways of working persist?

Video  conferencing  has  led  to  unex­

pected benefits for companies and their in­

vestment  bankers.  When  travel  restric­

tions grounded Wall Street’s jet­setters, ne­

gotiating  multi­billion­dollar  deals  on

Zoom  made  firms  more  productive  and

cheaper  to  run.  Bankers  swapped  busi­

ness­class  lounges  for  virtual  calls  from

their  designer  kitchens.  Suddenly,  with

more free time, they could contact twice as

many  potential  bidders  for  their  clients,

increasing the odds of a suitable match. 

The  hyper­efficiency  has  been  wel­

comed. In an earnings call in 2020, execu­

tives  at  Citigroup  remarked  on  the  ease

with which client visits that once required

months  of  careful  planning  could  be

scheduled  in  days  in  the  virtual  environ­

ment. Moelis, a boutique firm, slashed its

spending on travel from $10m each quarter

to a fraction of that amount. As restrictions

are lifting, some in­person meetings have

returned  but  the  punishing  travel  sched­

ules  have  not.  A  recent  poll  by  Deloitte,  a

consultancy, shows that more than half of

companies  and  private­equity  investors

now expect to manage m&ain a predomi­

nantly virtual environment (see chart).

The  pandemic  also  turbocharged  the

adoption  of  technology.  Increased  use  of

big  data  and  analytics  hastened  the  auto­

mation  of  grunt  work  normally  delegated

to  junior  bankers.  Acquirers  also  got  cre­

ative  with  due  diligence.  Virtual  tours  be­

came  commonplace  for  inspecting  far­

flung  sites  including  mines,  factories,

ports  and  warehouses.  Goldman  Sachs

among  others  flew  drones  over  the  facili­

ties  of  companies  to  capture  high­quality

photosortoproduceslickvideos.Lawyers

andothersusedartificialintelligence to

siftthroughthousandsofcompanydocu­

ments,spottingredflagsina fractionof

thetimeit wouldtakehumans.

Cultural shiftsborne out ofthepan­

demicpromptedevendeepersoul­search­

ing.Asthecorporateworldembracedflex­

ible workingarrangements,manybanks

usheredinhybridschedules—somewhat

reluctantly—for their staff. Firms raised

salaries, paid out bumper bonuses and

moreinanattempttostopyoung,disgrun­

tledstafffromleavingtheindustry(seeFi­

nance and economics section). Jefferies

boughtthemPelotonexercisebikesandCi­

tiofferedthemjobsinMálaga,a Spanish

coastalcity,whileJPMorganChaseobliged

themtotakeatleastthreeweeksoffa year.

For those accustomed to the industry’s

hard­nosedculture,it wasperplexing.

A frenzyin 2021 putthiskinder,gentler

modelofdealmakingtothetest.Private­

equitybuyoutsandspecial­purposeacqui­

sitioncompaniesdrovethevalueofglobal

m&a to a record $5.9trn. Annual fees

earned by dealmakers surged by nearly

50%tomorethan$48bnin2021,account­

ingfornearlya thirdofinvestment­bank­

ingincome,upfroma quarterin2020,ac­

cording to Refinitiv, a data firm. 

The boom exposed the limits of virtual

schmoozing.  Even  with  drones  carrying

out  critical  due  diligence,  polling  by  De­

loitte suggests that the inability to travel or

meet  management  teams  in  person  was

more  likely  to  trigger  cancellations.  Most

respondents (78%) abandoned at least one

deal  in  2020  while  nearly  half  (46%)

quashed three or more. For young recruits,

automation  of  arduous  tasks  did  little  to

cure  burnout.  A  survey  of  13  analysts  in

2021 at Goldman Sachs laid bare their gru­

elling  working  conditions:  95­hour  weeks

and an average of five hours of sleep a night

meant mental health suffered. 

Digitisation  has  raised  thornier  ques­

tions  about  dealmaking.  A  growing  reli­

ance  on  technology  suggests  that  huge

swathes  of  them&a value  chain  can  be

automated.  Meanwhile  the  availability  of

big data erodes the information advantage

that  banks  once  had.  Can  executives  run

the  process  without  retaining  expensive

bankers?  Apple  acquired  Beats  in  2014

without the help of banks, as did Facebook

when  it  bought  WhatsApp  the  same  year.

Spotify and Slack both went public, in 2018

and  2019  respectively,  without  involving

underwriters.

Few firms have the resources to manage

the process internally and much of the in­

vestment­banking workload, at least in the

senior  ranks,  is  contingent  on  old­school

relationship­building. But even as face­to­

face meetingsresume the digital transfor­

mation meanstheold days of m&aare not

coming back.n

The unforeseen advantages of virtual negotiations

Muted enthusiasm

“How do you expect to manage the following

M&A deal elements over the next 12 months?”

% responding*, Aug-Sep 2021

Source:Deloitte

*1,00 US corporate and

private-equity executives

Integration

Target screening

Target identification

Restructuring

Divestiture

Due diligence

Transaction execution

100806040200

Virtual Hybrid In-person

You have to get up early to beat the stay-at-home dealmakers