Piper Jaffray’s deal to buy Wall Street-based Sandler O’Neill and Partners for $485 million in cash and stock is a big bet on continuation of a still-good mergers-and-acquisition market deep into the 10-year economic recovery.
But the historic-length recovery, according to the most recent indicators last week, is starting to fray at least at the edges.
The Piper-Sandler marriage announced July 9 gives Piper larger-than-market exposure to financial-services deals. Sandler O’Neill over the decade has advised more deals in banking and finance than any money changer on Wall Street, including titans such as Morgan Stanley and J.P. Morgan.
“I told a friend of mine that could be another sign we’re at the top of the market,” said Chairman Paul Purcell of Milwaukee-based Baird, the employee-owned, full-service investment house. “Then he said, ‘You’ve been saying something like that for three years.’ ”
Indeed, a lot of smart people have predicted a slowdown to recession in financial markets for at least three years. That would have happened if the past were precedent. But that’s not been the case in this, the longest economic recovery since World War II, starting in 2009.
“It is important to remember that M&A markets are supported by confidence,” said Bruce Engler, head of the mergers business at the Faegre Baker Daniels law firm. “If the U.S. economy stumbles, due to Federal Reserve policies or trade spats or the global slowdown catching up with us or whatever, that would affect confidence. And the M&A market would likely slow down.
“For now, based on current conditions and expectations, I see sunny skies ahead for M&A in 2019.”
The U.S. economy should chug along at 2% to 3% growth this year, according to many economic forecasters, better than Europe and most other western industrial countries. After a short swoon late last year, the stock market has revived to record levels. And, after an earnings boom in 2018, following the Trump tax cuts of 2017, corporate earnings are coming in at so-so levels.
Corporations also are propping their stock prices with record stock buybacks thanks to years of building retained earnings and the bounty from the tax cuts. In fact, the Thomson Reuters list of 10 biggest Minnesota mergers and acquisitions announced during the first half of 2019 includes stock buybacks by U.S. Bancorp, Best Buy and Bridgewater Bancshares. That’s not exactly M&A in the traditional sense.
A few Minnesota deals of note announced in the first half:
• TCF Financial announced it is selling itself to the larger Chemical Financial of Detroit for about $3.5 billion. The merged company will take the TCF name. Headquarters: Detroit.
• 3M Co. is acquiring Acelity of Texas, a health care equipment firm, in a deal valued at $6.7 billion.
• Toro, one of the best-performing Minnesota-based stocks, has acquired the Charles Machine Works of Oklahoma, the maker of Ditch Witch equipment for $700 million.
The U.S. merger business actually peaked in terms of number of deals and value in 2014 and 2015; more than 10,500 announced deals in each year and total value crossing $2 trillion in 2015, according to Dealogic, which tracks the mergers market.
The U.S. M&A market slipped from 10,200 transactions valued at $1.4 trillion in 2017 to 8,212 deals last year. However, total transaction value rose to $1.74 trillion thanks to an increase in multibillion-dollar deals, according to Bloomberg Law.
In Minnesota, according to Dealogic, the pace of deals in which Minnesota firms were the target slowed from 174 to 134 from 2017 to 2018. The value of those deals last year was $22.7 billion, down from $24.3 billion in 2017.
The deal market upticked during the first half of 2019. If the trend continues, there should be more transactions completed this year than last nationally in Minnesota.
Economists watch M&A activity, particularly so-called Main Street “middle market” deals of less than $1 billion, the majority of deals, to gauge business sentiment about the future.
“In the broader M&A market, if you just look at dollar volume, you would think we are blowing the doors off this year,” said Engler referring to the massive $90 billion United Technologies/Raytheon deal announced earlier this year. “The middle-market deal count overall is good so far in 2019. More specifically, the second quarter was a significant uptick from the first quarter, and June was especially impressive. That upward trend makes me very optimistic about the rest of 2019.”
But, as the financial markets saying goes, past performance is no guarantee of future performance.
Purcell, of Baird, who has been wrong for three years about the end — or at least a break — in the bull market, believes we should make it through this year in good economic shape, as long as we don’t get hit by an unforeseen international calamity. Potential trade wars with China and other agitated partners are another wild card.
“The United States is still the best game in town,” Purcell said of the global economy. “The stock market is not cheap, but it’s not outrageously high as it was in 1999.”
The question is, will the economy keep busy enough to keep the fee-generating investment bankers busy.
An active M&A market indicates that sellers believe they’ll get good prices and buyers confident that they can take acquired companies further thanks to a still-upticking economy and their management prowess.