JPMorgan Chase & Co. (JPM) Earnings Call Transcript & Summary

Good afternoon, everybody. It's afternoon, Australian time. My name is Simon Segal. I'd like to welcome you all to this webinar being presented by Mergermarket and Datasite. Briefly, our backgrounds. I'm the consulting editor to Dealreporter. I've done television work on Sky Business on deals. And I would -- and I'm going to be hosting the event, this webinar. As a start, I'm going to ask each of our panelists to introduce themselves. We've got Simon Feiglin, Kam Jamshidi, Peter Turner, Desmond Chua, Nick Brown, Manoj Jampala. They're going to introduce themselves. And ahead of that, I'd really like to thank them all for participating. And yes, so over to Simon.

Thanks, Simon. Again, my name is Simon Feiglin. I'm a partner with The Riverside Company. We are a global mid-market private equity fund with 15 offices in 4 continents across the globe. We have been active in Australia for over a decade now. We focus on investing in growing companies, typically with enterprise values between about $25 million and $150 million.

Kam?

Simon. My name is Kam Jamshidi. I'm a partner with the law firm Herbert Smith Freehills. I'm based here in Melbourne, Australia, specializing in M&A, public M&A and private equity.

Thank you. Peter?

Good afternoon, all. Peter Turner. I'm an M&A partner at KPMG. I lead the corporate finance business in Australia. KPMG's M&A business is a global mid-market-focused M&A and capital advisory business.

Thank you. Desmond?

Hi, all. I'm Desmond. And I oversee the Datasite business in APAC. We are a growth-stage SaaS company that provides technology solutions to the M&A community, many of which are on the call, and hopes to streamline the process and secure that outcomes.

Thanks, Desmond. Nick?

Hi, Simon, thank you. And good afternoon, everybody. My name is Nick Brown. I'm a Managing Director at UBS here in Sydney, where I've been for over 15 years. I currently co-head our mergers and acquisitions business for Australasia, and I was previously co-head of our industrials coverage business for the region.

Thank you. And the final panelist is Manoj.

Thank you, Simon. My name is Manoj Jampala. I'm an Executive Director at JPMorgan Australia. I've been with JP over 14 years now, and I cover M&A across the region. My background is in industrials and metals and mining as well.

Thank you. So what we're going to do is during the webinar, there will be 3 polling questions that are going to appear on the screen. And the audience can submit their views, and hopefully, everybody can vote and partake. Any questions for the speakers, please point to the -- there will be a box below the screen at the end of the session. I'm going to start off by giving a brief overview of what's happened with M&A activity in the region. It's been -- I don't need to reiterate. It's been hugely significant, certainly first half, not because of the consequences of corona. Datasite and Mergermarket's data reflects a 54% decline in M&A activity from -- in the first quarter. It went down to -- in USD 5.5 billion. April, it fell 89% in terms of value. As you can see on the graph, it's then started recovering in May. And in June, we have seen the trend continue with a drop in deals of 29% but an increase in value terms to USD 5.4 billion. So this is -- that's on the -- talking to the data. I think from what we can see, it's significant. Coincidently, today, there was a rival bid for an ASX-listed company, Cardinal Resources, that comes on top of a rival bid for Infigen last week or 2 weeks ago. That says a lot more than the figures. That M&A is certainly alive. M&A activity in Australia is still alive. To have rival bids, competing bids for -- in such uncertain times, very few would be able to anticipate that. And I think that's an excitement in the bases around, and that will presumably be reflected in our discussion. So as a start, I think let's put up the first vote on the polling question. The question is, what is your outlook for M&A in ANZ now and going forward? There are 3 options. Is it positive, negative or neutral? And I'll be reading up the results shortly. [Voting]

I'm waiting for the results. I think we can continue. I haven't got the results just yet, but I don't want to delay it further. When they're coming -- when they -- they are here. So I'm going to have to read them out. I can't see it. It's 50% positive, 25% negative, 25% neutral. Those are the results. I don't know who's -- if anyone's surprised or not, but that's what we're going to ask the panelists now. They'll comment during the time on that. If we could get on -- the first section is going to be taking a discussion on the sectorial and market trend. And I'm asking the panelists what they're currently seeing in the markets for the rest of this year, perhaps into next year. And I'm going to start off with Peter, who -- these are what -- in terms of growth in distressed situations, how -- what's your read on the 2-track market at this stage?

Yes. Thanks. Thanks, Simon. So clearly, there's plenty of bankers and advisers on the webinar with those kind of polling results with a positive outlook. So look, I think I'd probably support that. After a bit of a stall in the market with the initial wave and the anxiety that they caused, there has been quite a pickup in M&A activity in the marketplace that we're seeing, probably seeing it in 2 quite clearly distinct tracks. So there is a distressed view and a growth view. The distressed view is starting to come through, but it really has gone quite slowly, really on the back of a lot of the government support that exists in the marketplace at the moment. So we're expecting to see more activity on the distressed side but has been reasonably subdued more around the balance sheet, building balance sheets and some protection. Where there's been a lot more activity is on the growth side. So a lot of corporates and financial investors, having now got a better view on where the market potentially goes, have been quite active in pursuing a growth sale, M&A mandates. So the activity has risen and positive at the moment as we see it at the moment in time.

Kam, what are you seeing in terms of private equity, following through what Peter was observing?

Yes. It's interesting, Simon, when you think about sort of the phases we've gone through since COVID started, it's really 3 phases. People have been focusing on shoring up their trading position, first and foremost, then shoring up their balance sheet. And I think the third phase is going to be looking at new opportunities. Now what's interesting on the private equity front, I think they've moved through that cycle much quicker than a lot of the corporates. And in fact, we sort of run those 3 phases simultaneously. The Financial Times says that about 16% of the first half M&A activity was -- involved a private equity buyer. And that's sort of the highest level we've seen since 2007. Certainly, in the Australian market, we've also seen, I think, the private equity buyers are represented in terms of the buyer pool. And that's been a really positive feature. And I should say it was a feature at the very outset in March, they were willing providers of capital, which I think indicates that they were willing to look through the pandemic by capital support. I know we've got Simon from Riverside, and it would be really interesting to hear his perspective as a sponsor what's driving that willingness to participate, notwithstanding the turbulence.

Well, Simon, maybe you'd like to take that opportunity, please?

Yes, sure. And I appreciate that. Look, I think there's an important distinction between what we're seeing now versus what we saw coming out of the global financial crisis. In both scenarios, we had situations where private equity firms were relatively cashed up. But coming out of the global financial crisis, there was a lot of pressure on sponsors to not deploy that capital. Investors -- our investors were generally pretty nervous about where the world is going. And I think for a lot of private equity firms, it's been a while before that since we had seen a downturn, and I think people were a bit nervous about how to invest in that scenario. Obviously, COVID is different and unique, and this current situation is unique. But from an economic perspective, I think we learned from the last downturn that actually this is a great time to invest. You want to invest when the market's down. You want to invest when there are opportunities, where there seems to be there's only upside from here. And I think that most investors have taken that view and not only had -- our most sponsors sort of have permission to invest from their investors, but in fact, are encouraged to do so. And so as a result, we never left the market. We've always stayed active as an asset class, always stayed active in the market. And I think that, that has paid off in terms of the activity we're seeing to date. I agree with the comments that Pete made earlier. I think the turnaround world, the restructuring in the world, probably a bit slower. But the growth opportunities where they exist, there's still a lot of enthusiasm for those, probably somewhat tempered by travel restrictions. But in general, I think we're all anxious to find those good companies, go visit them and potentially invest in them.

Fascinating. One aspect that we haven't focused on up till now was the inbound and outbound travel restrictions, foreign investment implications. So for Manoj, you might have some -- to share what you're seeing in terms of foreign investments relating to these travel restrictions and in what phases they may or may not be going through.

Sure. Look, I think from a global perspective, there's no doubt cross-border M&A is down. It's down around 40% from similar time period to last year. But that's very much in line with global M&A volumes, which is down a similar 40%. So there's no real distinct impact on cross-border. I think for Australia, we are very much an inbound market. If you go back over the last decade, 50% of M&A volumes is inbound into Australia. It's probably a little bit more domestic at the moment at around that 60% domestic M&A. But I think from a trend perspective, Australia will continue to remain a very attractive destination for foreign buyers and foreign companies. I think that's driven by a number of factors. Obviously, very strong rule of law. The economy from a relative perspective is -- has continued to do well. And the exchange rate remains quite constructive for investment as well. So I think those thematics will continue to bear fruit. I think the travel restrictions, it's an interesting point. Clearly, there was some pullback from M&A in general during COVID, and it still remains a little bit depressed today. I think for those bidders that have no people in the country, clearly, it will remain a challenge. But I think where we sit, the many strategic sponsors and the like, many natural bidders of companies do have offices out here. And if you're in country, there's nothing really stopping you from doing the work and enabling you to do M&A. So look, I think as a whole, cross-border remains a little bit lower than what we've seen in previous years but very much in line with broader M&A volumes as well. So we'd expect it to remain a meaningful share of volumes going forward.

It's all very well talking about M&A continuing and volume movements. But Nick, how on earth does one value M&A transactions in this type of environment? Would you like to go through a few of the ways one can do that and the broader trends that could be reflecting in terms of valuations?

No, happy to, Simon. And look, I mean I think in sort of addressing sort of that specific question and also the broader question around where to on M&A, I always find it instructive to sort of think through why -- what happened over the last couple of months and then how will that be resolved in both the general and the specific. And as far as both the valuation piece and also just general optimism around M&A, I think we came into the year incredibly positive around both what we expected to see on the M&A side of things and the valuation outlook. The market clearly hit pause. And I used the word pause rather than stopped deliberately. And I think there were sort of 5 reasons for that: firstly, as has been touched on before, the corporate operational focus; secondly, difficulty and uncertainty in businesses forecasting, both themselves and also targets, which is clearly a key input into what you would pay for around -- pay for a business; thirdly, bridging valuations in uncertain times and different expectations between the buy side and the sell side; fourthly, which goes to capacity to pay and valuation is just funding and clearly, differences in availability of funding from where they were 12 months ago; and the fifth point, which we'll touch on later, is getting diligence done in this environment. I think over the last 3 months, we've actually seen solutions emerge for each of those topics. I mean clearly, operational focus, which was the first one, will remain a key focus of corporates. But their focus is not only on getting through their operational difficulties now, but actually, what their operation is going to look like in 2, 3 and 5 years' time. On the forecasting side of things, which is clearly a critical input into getting your head around does a prospective transaction makes sense, I mean, businesses are struggling to forecast their own businesses, let alone targets as we're seeing in the number of companies who are taking away guidance statements. But in the processes that we are running, we don't view things, firstly, it's -- even more so than regular week-on-week, month-on-month trading updates; and secondly, a lot of scenario planning and testing and provision of those forecasts through to purchases. And then that then links into the valuation piece, where what we are seeing again is the reemergence of creating structures to potentially be bridged bid-ask spreads. So things like contingent consideration that would only be payable in certain circumstances. And we've seen that in both the Healius transaction and also the potential BGH transaction we've done with Village. And then finally, on the funding side of things, again, we're seeing a strong corporate appetite for funding, reflective of supporting -- support from equity markets. On the private equity side of things, leverage was probably a bit harder into March, April, May than it had been previously. But again, we've seen positive signs on that end of the spectrum more, which I think is conducive for more M&A into the next 12 to 18 months.

Wow, that's a lot to digest, isn't it? Desmond, maybe you can be more specific with the data that you're seeing, the regional data versus in a global context as well as make a few observations on the developments in the ECM market, which we haven't really touched up to now.

Yes, sure. Most happy to. I mean a lot of the panelists have already mentioned and summarized a lot of the key happenings in the last few months. And I think one interesting aspect when the pandemic was that was happening between -- sometime between March to May, we saw that huge pivot towards the ECM market due to, as some of the panelists have mentioned, that pause on M&A market because they need to continuously seek financing or alternative financing solutions for their clients in distress. But I think right now, as we have observed is the sort of the [ uncoiling ] of the M&A market at the current moment. And interestingly, I mean, just looking at our statistics, we have seen an increase of about 20% year-on-year for the next 3 months. Basically, the number of quotes we sent out in the month of June has increased by 20%. And as Peter has alluded to earlier, I mean, distressed deals have increased by about 10% from June up to -- up through to -- or rather from February up to June. And also, we have seen increase in quote estimates from sectors like the TMT sector, mining sector and most recently, the oil and gas sectors. So all that pointing to is a really healthy trend. But on the flip side, preparation period or the time it takes for a project from the time it launches to a time the bidder is invited, that has increased by about 50%, signaling that it's taking a longer time for buyers to come onboard to the table. And deal completion times, also that has stretched out way further due to delays in due diligence and also process issues, for instance, where you have government offices that remain closed. So with all that, I think the general direction of M&A is pointing up, is trending upwards as the host suggests. But I think we all have to adapt with the need to look into new technologies, new business models or strategies to support the business.

All right. Thank you. Thanks, everybody, for those observations. Unfortunately, we've got to move on. Otherwise, we could go back and forth and discuss that. I'm going back to the results to our questions about the M&A outlook. 50% reported that they were positive about it. And the rest were evenly split between neutral and negative. So now I'm interested if anybody's surprised. Nick, does that surprise you at all?

Look, I mean I think given this audience, I'd be disappointed if it was more negative on that than that. But I think it's very consistent with what we are expecting to see, which is people are getting through the crisis. And then they're very quickly turning towards how can they exit the crisis and use this as an opportunity to both reshape their own portfolios and also to drive their next stages of growth over 3 to 5 years, consistent with what corporates do coming out of the GFC.

Okay. And Simon, what are you -- how would you understand that?

Yes, probably similarly. I think to be fair, though, sort of playing on what Desmond said a moment ago, the fact that deals are taking longer to get done, the fact that there's still a great deal of uncertainty, I think we're positive now, but there's also potential sort of issues out there as government support starts to wind back. Is this a second wave that we're in now? And is it going to be worse than the first wave? And all of those things, as they play out, could change this very quickly. So it's -- I think we are positive now, but it's -- I think it's a -- I would say it's a lukewarm positive.

Okay. Just before we go on to the second poll, just wanted to remind the audience that they can post questions for the Q&A session after the webinar. Feel free. Please do so. The second question we're asking is which type of activity and transaction is likely to dominate over the next 12 months? There's a big choice here. It's asset or purchase sales, mergers, audit, bankruptcy, loan syndication, fundraising, IPO or licensing. I won't read those results out now. I'll continue, and we'll read them out at the end of this section, which goes into a sectorial look at what's been happening and what's likely to unfold in the M&A space for Australia and New Zealand. The sectors we're looking at are TMT, health care, mining, industrials, tourisms, where activity has been and where it would be for the rest of the year. And Manoj, what would you be thinking more specifically in terms of the TMT and mining for the year?

Sure, sure. So different industries, obviously, but they share one thing in common in that, if anything, the crisis that we're currently in has almost supercharged their share prices and supercharged the valuations of both those sectors, albeit for slightly different reasons. I think firstly on TMT, and again, this is a global phenomenon, it's the biggest M&A by volume globally, predominantly driven out of North America. And I think that trend will continue for one, and it touches on the earlier question that I was responding to around undertaking diligence and that impact cross-border at TMT. It's probably one of the few sectors that probably doesn't need physical boots on the ground in that a lot of the diligence, particularly for pure tech, can be done online, and it's all effectively virtual anyway. So I think that's obviously an added bonus. But clearly, some of those broader megatrends that have been talked about for a number of years now, I think the current pandemic has actually crystallized that and brought that forward. And that's flowed through to valuations and share prices and bullishness, and that ultimately translates into M&A as well. So I think we would definitely expect that to continue over the coming months and years. I think mining, it's important. We're in Australia. It's our biggest industry, the biggest exports to talk about mining. And I think it's quite constructive. For mining currently, again -- and the main one to focus, I think, from an M&A perspective is clearly gold. It is an excellent time to be a gold miner, particularly an Australian gold miner, with the gold dollar prices at historic highs. And I think a lot of the M&A in mining has been driven by gold, top 4 or 5 gold miners in Australia: Newcrest, Northern Star, Evolution and Saracen. They've all done material M&A over the last 12 to 18 months. And clearly, with where margins are at and valuations are at and equity markets clearly constructive to M&A in the gold space, there's opportunity there. And I think if we think about mining M&A, we would expect gold to play a major part of that.

Thanks, Manoj. Kam, would you like to put that in a general context for us in terms of beyond TMT and mining, where you see activity will be generated, M&A activity?

Yes. It's interesting, Simon. We're just working through our public M&A report, which will be out in a month or so. And the data suggests for the first half of the year, there's been 15 public M&A deals. And the majority of those -- or the largest component of those has been in the resources sector. And as Manoj rightly points out, it's been in the gold sector. So you're supported by the stats there, Manoj, and tech is sort of the second component of those 15 deals. So I think in terms of what we'll see going forward, I think there are 3 themes that are going to dictate which industries are focused on. There will be a split between impacted and not impacted industries. And where we've got impacted industries, I think private equity will continue to play a part. But I think we'll also start to see mergers emerge as those impacted businesses look to consolidate, rightsize their cost base and really sort of hunker down to survive the pandemic. I think we might start seeing divestments come back into the frame as companies are focusing on core businesses and where they really need to apply their attention. And the third theme I think we'll see is where there's been industries where there are changes in the business model. And a really good example is the retail sector, where the online retailers are doing very, very well. And traditional retail, it's been a bit of a mixed bag. Questions might start to emerge as to whether M&A is a path to supplement the traditional offering and be able to access those new operational models. So I think they are sort of the 3 key themes that will dictate which industries are focused on from an M&A perspective.

Thanks, Kam. It's striking that industrials, health care and tourism, they haven't really been discussed up till now. Nick, do you sense there'll be much activity there?

Simon, happy to jump in on that. And yes, we do. And look, each of them are sort of -- have slightly different drivers. So I can go through some perspectives on each. On industrials, and clearly, that's a very sort of broad sector in Australia. But I sort of -- I loosely divide industrials into sort of the more defensive names who -- so call it transport companies, packaging companies, that kind of thing, who have performed very, very stably over the last 3 or so months as you'd expect. And then on the other side of things, some of the more cyclical industrials who also may have had shutdown-type exposure, who clearly have to, first and foremost, look at their own operations and then their balance sheets. And we've seen raisings in those areas and expect to see raisings to continue as these industrial companies look at sort of what are they going to do going forward. I think Kam's point before around divestments and portfolio is a good one. We're seeing companies very actively look at what is their cost of capital in this new world, which assets or businesses are core and optimizing their returns on capital and which other assets, particularly in a low rate environment, could be potentially divested. And a really good example of that is we're seeing industrial companies and other companies generally looking at exiting their property portfolios, taking advantage of the current low interest rates. Likewise, we're seeing global industrial conglomerates looking at divesting their operations outside their home markets as a more appropriate use of their capital. And so that's something we expect to continue. The other big sort of megatrend that's going to keep growing in the industrial space is supply chain optimization. And that's been -- the importance of the supply chain has been really proven out over the last sort of 3 or 4 months as the Woolies and the Coles of the world had to effectively look to completely change their mode of doing business to supply Australia. And we're going to see winners and losers in that space on the industrial side of things. And then I think linked against that and linked against the true cost of capital and more capital to deploy, we're going to see real targeted growth from these companies looking to position themselves. So industrials, we're optimistic about. Tourism is clearly a space that's been hit around probably as hard as any over the last 3 months through COVID and through the shutdown. So that space has been very much let's just set the business up so we can operate through a shutdown, be it 3, 6, 9, 12 months and a lot of scenario planning and first wave of balance sheet raisings. And depending on second waves and that kind of thing, there's a good chance we'll also see more capital raisings in the space. I think we have to get through that before we see much M&A other than sort of the stress-type staff and flight to quality. Health care is clearly at the other end of the sector -- the other end of the spectrum with what's been happening, and it remains a very active space for consolidation and for acquisition by private equity. And as a result, it's not surprising, but there are -- there have been -- are a couple of live transactions going on in the space involving both listed and private equity assets.

Which is exactly what I was going to ask Simon about. It's been striking to us as journalists and just in terms of media coverage. Healius, Metlifecare, Village Roadshow, [ Barner ], they've all involved private equity. The bulk of activity at that end of -- at the higher-value spectrum of mergers seems to be from private equity. What are you -- I mean what would your perspective be, Simon?

Yes. Look, I think there's -- you sort of need to split private equity into a couple of different buckets. I think the thematics that my fellow panelists have been talking about today, I think, are all true. And from a private equity perspective as well, when you're dealing with larger listed companies or larger companies in general, where again, all the thematics that people talk about, these are very much sort of operational strategic thematics that are driving people's decisions about is M&A an avenue to take advantage of, an opportunity that offers an opportunity. And certainly, in private equity, we're looking to facilitate that. But it's also worth noting where we play at the lower end of the mid-market, there's often a whole other component that comes into play here that has nothing to do with operations or strategy. The owners of the businesses that we're looking to invest in, that we're partnering with, are mostly families or individuals. And so there's a whole sort of personal element to it, whether it's a diversification element or just natural age, those sort of things that continue to happen in any circumstance. And so that still drives opportunity in our space in many segments. So somewhat less sector-specific where we play, although that being said, there's no doubt that there's still a lot more activity in tech, health care, business services, et cetera, where businesses generally are a bit more resilient and growth of private investors like us still tend to be much more interesting.

And Peter, from -- we -- again, we probably haven't really focused at the smaller end of the market. I mean what would your observations be?