THE KEN MOELIS INTERVIEW!
Moelis: I continue to believe corporations around the world at struggling with a very low growth environment. The reason you have such large scale mergers happen is, people are trying to cut costs out. A lot of these mergers are centred around cost synergies. And in order to get cost to be meaningful, you usually end up merging with a substantial company. A company pretty close to your own size so that that cost reductions are meaningful and that is why you saw so many large transactions last year.
Doshi: These are record numbers for large transactions. You have spoken of this deflation trend being the M&A trend. Is that what explains the inversion trend as well?
Moelis: Most people of my generation who are running companies have always thought inflation was going to be their problem. And, for the first time in a long time, they are dealing with deflation. What happens in deflation, you have to take every cost out, you have to deleverage, you have to get your cost down. So, the first thing you get down is your sales and general administration (SGNA), then you get down your cost to goods sold and the last line item of cost to be taken out is taxes. So, when people look at inversions, the reason inversions are showing up today is companies have to get every cost out and taxes are a cost.
Doshi: Before I come to inversions, how successful, in your experience, have deals that are focused on reducing costs been?
Moelis: That is hard to say. Believe me, every one of these transactions in which costs has an element, has a strategic element. You no longer see people merging outside of their sector. The conglomeration that used to go on in the 1990’s, I call it growth at any cost. The 1990’s were a decade where M&A was all about growth – growth at any cost. I mean if you think back, the finality of that might have been the Time Warner AOL merger in which there was growth, but no cost synergy.
I do think the cost synegestic merger is a much lower risk merger. And the market is telling you that. The market is saying more often than I have ever seen, the acquirer stock in the last year or two years, has gone up when they announce a merger. Now, 20 years prior to that, it almost never happened.
Doshi: I am going to focus on healthcare, because that is also where you are doing the marquee deal of this year. It is a tax inversion. Inversions have not got very good press in the recent past, I know you do not talk specific to a particular deal, but I do want you to tell me if you think this trend of companies moving their headquarters outside the United States of America, is here to stay.
Moelis: I am not going to speak to a specific deal. I can never speak about our clients, but what I will say is I think a corporation has every right to look at every cost it could possibly look at and put their company in the best place to deliver value to shareholders. So, people choose cities to work in, they choose their real estate to work in. And I think they have a right to, if they can choose a tax jurisdiction that is more flexible. It is not only rate by the way. There is flexibility in some of these tax jurisdictions to move cash around the world. And I do think that if the US wants to maintain the corporate activity in the United States, they should take action by law and reduce the tax rates of US corporations.
We have too high a tax rate. It is obvious, and there is very simple way to stop inversions. Lower the corporate tax rate.
Doshi: So, I am guessing then, that you do not view very favourably the actions taken by the White House to try and block or limit tax inversions and in fact, it is now become a debate point or a talking point in the elections as well.
Moelis: There is almost no way to stop things by decree. There is a famous king who once tried to stop the waves from coming in and they kept coming, but there is no way to stop corporations from seeking out ways to maximise the activities they are going to do. By the way, the employees benefit. When a corporation lowers its tax rate, or finds a more optimal place to do business, everybody benefits. They are able to make goods cheaper. So, the right thing to do, there is one right thing to do. The United States has to get together and figure out a way to make it attractive. We used to be the beacon of capitalism for the world and we must figure out a way to make sure that it is the best place to business in the world and we should.
Doshi: Hillary Clinton said, in one of her election speeches that she has a detailed and targeted plan to immediately put a stop to inversions and place an exit tax on corporations. Now, so much of this could just be campaign speaking. But, if that were to come about, that would deliver body blow to the M&A business in the US.
Moelis: It would deliver body blow to free markets in the US. Look what we are talking about. We are talking about a presidential candidate talking about putting a cage around United States corporations and locking it and putting an exit tax. Is this the United States? This is not what I think of as free markets. And free markets is the driving force that made the United States what it is today. So, these, I hope are campaign slogans because this is not the country that is the most innovative and aggressive at creating value in corporate world that I remember.
Doshi: We have had an awful beginning to the year. Global markets have been down across the board. What is you outlook for M&A in 2016, especially given how nervous equity markets seem to be.
Moelis: Interestingly, the amount of conversations that I believe are going on right now, regarding M&A spin-offs, corporate structuring, things we are involved in, are as large as they have ever been. There has been no diminution in the amount of conversations as people try to figure out how to move their businesses foward.
Now, that is not to say that if the markets continue with the volatility that we saw last week we are 500 point swings in the DOW Jones average in a day. It was really 1,000, I think it went up and down 500 points. If you have that kind of volatility, will that affect the ability to structure transactions, yes obviously. But, as of now, I believe everybody is still very much on their front foot trying to figure out how can I use M&A to improve my business.
Doshi: And is it still the hunt for lowering costs or are you now seeing companies a little worried about the reduced demand across the world and looking at deals that help the topline more than anything else?
Moelis: That goes hand in hand. Topline is very difficult. There are not many sectors in the world right now that have pricing power, that have growth. One of things people are very much underestimating has been the lack of growth out of the US economy. There is a lot of focus on China. When they miss by a point on their GDP, the US has missed by a point for couple of years and that is a large point of growth in the global economy, given the size of the US economy. So, again, when you say reduce costs, they are putting businesses together that improve the topline, but growth is still very hard to come by and you are going to see, this is what I talk about on deflation, you are going to see pricing power continue to be very difficult.
Doshi: If you were to forecast trends that would dominate M&A in the years to come, what would they be? It could be country trend, it could be cost strategies as you spoke of. Any hint of what the future holds for us or is too volatile to say right now?
Moelis: I get the asked what sector and the interesting part is I believe is the deflationary is going to cross all sectors. It is driven by technology. What Amazon is doing to retail, what Uber is doing to logistics, what Airbnb is doing to the lodging industry, what fracking has done to oil. And interestingly, fracking is not a new technology, it is not a new oil field, it was a new technology that drove down the price. So, what technology is doing to the ability of people to get more value, I am talking about the consumer, the consumer is able to see price transparency, selection and dictate much more to the producer. And that is going on across all industries and so this M&A is not a sector M&A, it is actually just a theme based around deflation and low revenue growth.
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