(Bloomberg) -- With the mergers business in a deep freeze after a decade-long boom, the matchmakers who broker corporate marriages are piling into a new line of work.
Sensing this shift, one senior dealmaker at an advisory boutique in London rushed to print new business cards, changing his title from “M&A Adviser” to “M&A + Restructuring.” He’s not alone: bankers at a dozen different firms say they’ve mostly stopped chasing megadeals for now. Instead, they’re spending their time advising both old and new clients on shoring up balance sheets, raising capital and preventing looming cash crunches.
Policy makers worldwide are fighting the economic devastation of the coronavirus, and it’s all hands on deck to keep corporate engines from seizing up. That’s spurred dealmakers to increasingly turn their focus to keeping their clients alive, seeing opportunity in nursing them back to health.
There’s been a “sharp increase” in talks over “immediate liquidity needs, cash preservation and meeting covenant requirements,” said Martin Gudgeon, head of European restructuring and special situations at PJT Partners Inc. “If the situation continues to worsen, we can expect to see situations develop into full-blown debt restructurings and we may see an increase in potential insolvencies.”
This month, companies worldwide have tapped lenders for roughly $180 billion of fresh cash to weather the virus turmoil, drawing down backup credit lines that typically lie unused and raising new short-term facilities.
Golden Age Ending
Bankers are coping with the sudden end of a golden age of mergers that accompanied the longest bull run for stocks in history. Globally, $18 trillion of M&A deals were announced over the past five years alone, and activity has climbed for a decade since the global financial crisis, according to data compiled by Bloomberg.
Some of the biggest transactions of all time came during these boom years, including Anheuser-Busch InBev NV’s purchase of SABMiller Plc and AT&T Inc.’s takeover of Time Warner Inc., both valued at more than $100 billion including debt. That work has now quickly dried up, with the volume of deals through March so far set to make this the slowest quarter since the first three months of 2014, the data show.
Lazard Ltd. has “amplified” collaboration between its mergers and restructuring teams, said Cyrus Kapadia, chief executive officer of its U.K. investment banking business. Many M&A bankers at Wall Street titans such as Citigroup Inc. and Morgan Stanley have also shifted the bulk of their energies to advising key corporate clients on financing and managing their banks’ exposure to fragile companies, people with knowledge of the matter said.
Advisory firms are leaning on sector bankers to pitch for this new business, while others are moving junior bankers to restructuring projects. Most of the meetings are done by video conference, with the associated technological glitches and unpredictable interruptions that those interactions entail. Representatives for the banks declined to comment.
They’re particularly focusing their time on the airlines, carmakers and oil and gas companies most in need of a life raft to make it through the storm. Rothschild is assisting the U.K. government on measures to bolster carriers such as Virgin Atlantic Airways Ltd., people with knowledge of the matter have said.
Offshore drilling firm Valaris Plc is working with Goldman Sachs Group Inc. and PJT to help find a fix for the hole in its balance sheet left by plunging oil prices, Bloomberg News reported this week. Rival rig operator Seadrill Ltd. rehired longtime adviser Houlihan Lokey Inc. for fresh negotiations with lenders, according to people familiar with the matter.
Challenges include weighing how much more credit risk to take on companies that have been especially hard-hit by the economic crash, especially in tourism-related industries where demand evaporated overnight. German tour operator TUI AG is seeking state aid is in talks with its lenders as well as state-owned bank KfW.
While the nerdier world of fixing balance sheets may not guarantee the high-profile rainmaker headlines and big-ticket fees that come with a successful takeover, it does secure a steadier stream of revenue from retainer payments and longer-term advisory roles. Those can also translate into M&A mandates later on, from distressed asset sales to consolidation when markets stabilize.
As the investment banking business evolves, the edge now may lie with boutique firms like Rothschild, PJT and Houlihan Lokey. They’ve already been running sizable restructuring franchises, a niche the biggest Wall Street banks have sometimes overlooked while chasing monster M&A mandates.
History shows how this restructuring work can lead to more deals down the line. Moelis & Co. gained a foothold in the Middle East when it advised on debt workouts for the Dubai World conglomerate and state-owned developer Nakheel PJSC totalling nearly $50 billion. That led it to set up a full-fledged operation in the region, eventually landing landmark deals including a role on Saudi Aramco’s mega-IPO.
For investment bankers pitching deals, with every crisis comes an opportunity.
“While the feeling is that normal M&A could see a drop, there may be distressed M&A coming out of this crisis,” said PJT’s Gudgeon.
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