NEW YORK -- Although merger and acquisition activity has slowed worldwide this year amid uncertainties over U.S. President Donald Trump and other factors, Gregg Lemkau, co-head of Goldman Sachs' Investment Banking Division, is optimistic for a recovery toward the end of the year.
In an interview with The Nikkei, Lemkau also predicted more acquisitions by Chinese technology titans Alibaba Group Holding and Tencent Holdings, and discussed factors that could impact a company's decision to pursue a deal. Edited excerpts follow.
Q: What is your outlook for merger and acquisition activity?
A: We'd expect to see a repatriation of overseas cash into the U.S. as part of any tax reform, and that should drive M&A activity. As it relates to M&A from an antitrust standpoint, not all of the positions within the Federal Trade Commission or in the Department of Justice that are going to review these deals are fully staffed. So no one clearly knows what the regulatory landscape will look like.
And so part of the slowdown we have seen this year is due to [companies] saying, "Let's see what happens with the regulatory landscape. Let's see what happens with tax reform." But given the lack of progress to date, it's now actually gotten to the point where people are going to say, "You know what, I'm not waiting anymore ... I'm just going to go back and do my business, and if Washington fixes things, it'll be better. If they don't, I'm going to keep moving."
My expectation is that in the fourth quarter of this year, as we come out of the summer, you'll see a pickup in activity among companies that had been waiting to see legislative reform and deregulation, but just decide they are going to get back to business.
Q: The European Central Bank and the U.S. Federal Reserve are both expected to tighten monetary policy. Do you think this could impact M&A activity?
A: The credit markets are still unbelievably attractive. While the Fed has been signaling that they're going to raise rates and has begun that process, I expect it will be a slow process.
Regardless, interest rates are still near historic lows, and even with one or two or three hikes from the Fed, they will still be at a relative low point over the long term. So while people are cognizant that rates are likely to increase over time, no one seems to be rushing to beat a hike in the markets.
Q: How about concerns that U.S. equities are overpriced?
A: Investors need to find places to put money and to drive returns. When the interest rates are so low, the equity markets, even at increased valuations, still look relatively attractive. So I think there's an element of the push for relative return that's been driving more capital to the equity markets. While the equity markets appear fully valued, there continues to be upside as long as growth returns across a lot of the key global economies.
Q: Meanwhile, Chinese acquisitions of foreign companies have slowed.
A: China initially made a big wave of outbound investment into Africa and Australia. In 2015 and 2016, we saw a big pickup in China outbound M&A into Europe and into the U.S. That has since slowed dramatically, most likely for two reasons. First and foremost, a deliberate slowdown by China, centrally driven, looking to put stricter control on some of the capital leaving the country. Second is the overall geopolitical landscape. There seems to be a wave of nationalism and protectionism going on globally.
In the current political environment, deals involving a large foreign company buying a crown jewel asset in the U.S., or vice versa, are going to be harder to get done. It's not impossible, but companies are taking pause.
I do think you'll see a return to more steady levels of China outbound M&A over time. The companies in China are so big and are trying to compete at a global level, so I think they need to find avenues for growth. Some of the biggest technology companies globally are based in China -- like Alibaba and Tencent. Those companies have similar global ambitions to Amazon and Google, and so I expect them to look to do M&A outside of their core markets.
Q: Many Japanese companies are concerned about the costs of overseas acquisitions. What are you thoughts on this?
A: If you look at the nine or 10 years post-financial crisis, most of the largest companies globally have gotten their own houses in order, for lack of a better phrase. They've fixed their cost structure; they've cleaned up their balance sheet; they've right-sized whatever they need to right-size. There's not a great deal more that can be done on an organic basis to drive growth. And so outbound M&A is important for any country, but for Japan in particular.
Now, there is a challenge around M&A. No. 1, you've got to pay the right price, and make sure you can get a return for your shareholders, and No. 2 and more importantly, is you've got to actually execute and integrate.
Through negotiation and advisers and tactics, you'll ultimately get the valuation right or you won't do the deal. But ensuring you can actually execute and integrate is probably the most important challenge.
Interviewed by Nikkei staff writer Akira Yamashita.