A View from the Top is a Q & A series exclusively available on CNBC Pro . Alex Sherman will regularly speak with a new business leader about decision-making, investing and industry news. This has not been a good year for people whose livelihoods depend on mergers & acquisitions. Second-quarter deal activity in the U.S. dropped a whopping 90% from a year earlier to just $75 billion in total volume. Global dealmaking is at its lowest levels since the financial crisis. Don't expect a second-half bounce back, says Morgan Stanley Global Head of M & A Robert Kindler. He explains why a combination of virus uncertainty, high valuations, and regulatory challenges set up a cocktail for few large deals in the remainder of 2020. Still, companies will eventually return to dealmaking with a vengeance, Kindler says, because it's the only way to generate significant earnings growth. He also explains why the largest technology companies, such as Amazon, shouldn't be broken up, and he reveals the deal he most wished happened that didn't go through. Here's the full Q & A: (This interview has been lightly edited for length and clarity.) Alex Sherman, CNBC: What are CEOs and board members talking about right now? Is it the election? Is it getting everyone back to work? Projections around a vaccine? What is it that they're discussing? Rob Kindler, Morgan Stanley Vice Chairman and Global Head of M & A: Everything has been about liquidity and operations. The boardroom and CEOs at every company I know have been, first and foremost, talking about how you operate during a pandemic and how the world may change post-pandemic. And then, what is our liquidity? And part of liquidity isn't just the companies that have had significant issues. It's broader. Interest rates are at historic lows. So companies -- even investment grade companies -- have been issuing huge amounts of debt. So, it's adjusting to this very low interest rate environment. Look where the 10-year treasury is now. Well under 1%. So the focus is operations, longer-term strategy, liquidity, and taking advantage of doing financings in a low-interest rate environment. It hasn't been on M & A. At some point, the focus will shift to M & A, because it has to. But for right now, there's still too much uncertainty. You were on CNBC recently , and you said briefly that M & A is a bigger strategic imperative now than it's ever been. Can you briefly explain why? There are several factors there. Every company and every investor is looking for earnings growth. That's what every investor is looking for. That drives value, that drives multiple. Over the past several years, if you look at how earnings have increased, just take the S & P 500, a lot of that earnings increase has been from cost cutting and margin improvement. That played out. It still has a place, but it played out considerably. So, you're no longer going to get earnings growth from that. It's been done. Another factor from the investor perspective is that stock repurchases are really not viewed as a strategy. They're actually not viewed as something most investors want, generally. It doesn't mean that they don't have a place. Repurchases make sense if you have excess capital. But if you're an investor now, you'd much rather a company buy something, get the synergies, and increase earnings. If you're an investor and you're getting all this cash returned to you, what are you going to do with it? You'd probably look for something to invest in. So, and this was really led by BlackRock a few years ago saying to the world, 'enough with repurchases.' Instead, that money should be spent investing in capital and M & A. If you're a CEO now, you're faced overall with a low growth environment. Price increases are not realistic. You've got low growth, low interest rates, low inflation. You can't cut costs anymore. There's never been more of a time when doing deals is going to be critical. At some point the floodgates are going to open for M & A. But I actually am of the view that it's going to take some time to get there. When the deal boom will begin Meaning -- it won't be in the second half of the year? I don't think so. Certainly not for big deals. The reasons are: first, valuations are high in the market, so it's hard to do a cash deal. Certainly you could see stock deals like the Analog Devices deal or the Aon deal. Second, there are too many regulatory constraints. The thought that a large tech company or a large pharma company is going to do a transformational deal in the regulatory and political environment we're in is going to be very challenging. If you take a combination of a difficult regulatory environment, high valuations, and continued uncertainty with respect to the virus and the election -- not with regulatory but maybe with tax policy -- you take all of that, and I just can't see near term there being a lot of M & A. Will it ultimately come back? It has to come back. It's always come back -- and for even more compelling reasons this time than in the past. On the regulatory front, do you have a viewpoint on the differences between what a Donald Trump regulatory environment looks like versus a Joe Biden regulatory environment? I think CEOs believe that it really doesn't matter, because Trump has been very populist in looking at M & A, and also quite unpredictable. On the other hand, his administration did approve Sprint and T-Mobile, which almost certainly wouldn't have been approved under a Democratic administration. A democrat would probably be more populist and more predictable. But overall, it's not a big difference. It's going to be challenging whatever happens. So what's going to happen is if you're someone looking to sell an asset, and there's any regulatory taint, you're more likely to go with a private equity buyer than a strategic. Even if the antitrust risks aren't real, meaning ultimately whatever issues there are can ultimately be resolved, it still will take over a year to get to closing. So I think it favors private equity in the near term. Grading media deals One of your main areas of expertise is in media and telecommunications. There have been a number of those deals in the past decade that haven't worked out. You've seen significant value destruction from the size of the combined companies at deal announcement versus years later. So, two questions: why do we keep seeing them, and two, what does this mean for the future of media consolidation? For every deal, you have to look at what would have happened to both companies had they not done the deal. So you can't just look at a deal in isolation. But, it's a very fair point that some very notable large deals didn't work out. AT & T's acquisition of DirecTV has resulted in a huge loss of value. AT & T wasn't in that business. They weren't consolidating a business they were in. The Sinclair acquisition of the regional sports channels ended up being a huge down draft of the stock very quickly. We were advising someone else looking at the RSNs and couldn't get anywhere near the value they paid. That was predictable. On DirecTV, I think that was predictable too. So what I'm saying is just because we've had some big media deals that haven't worked doesn't necessarily mean all media deals won't work. But those two are good examples. Another example is the Meredith acquisition of Time Inc. We were on the sellside there with Time Inc. It was a good deal for Time Inc. because it was an all-cash deal, but now, people are questioning, did it make sense for Meredith to double down on print? A fourth example is Discovery's acquisition of Scripps Networks . Scripps was a fantastic company built by Ken Lowe, who was one of the great visionaries in media. But did it make sense for Discovery? It wasn't providing any diversification, and it was a fully distributed set of cable networks. You could look at those deals and say media deals never work out, but I actually think my takeaway is that smart media deals do work out. What's a good example of a recent deal you think is smart? And how do define smart? It will prove over time that Viacom and CBS together are much better off than had they stayed separate. Those are complimentary businesses. They should never have been broken apart. By the way, this doesn't have anything to do with the competitive position of a combined ViacomCBS. It has everything to do with was each company better off together. I don't think that there's any doubt that they are. A hugely successful media deal is when Comcast bought NBCUniversal . I think many people are skeptical there's any synergy at all between content and distribution. But I don't think Comcast viewed it as that. They were just thought NBCUniversal was a great, hugely undervalued asset. And they were right! They've driven huge value from it. I think the Disney-Fox deal , it's probably too early to say -- Disney stock has gone way down, but that is likely due to the pandemic. I actually think that was a smart deal. Fox has tremendous content, and there are actual synergies consolidating the studios. The Time Warner deal with AT & T was a brilliant deal from the Time Warner side. From the AT & T side, I think it was viewed as buying a very good and stable business that would enable them to preserve their dividend. In other words, I think they felt they were buying themselves a better business than just cellular and satellite TV, with DirecTV. So, I don't think media deals are necessarily bad deals. But I do think there have been a lot of bad media deals. As you look back now at deals that haven't worked, are there certain themes or trends that you've noticed that are signals to you that a deal is destined to fail? In all of the examples that we've talked about, I was surprised you couldn't see it coming. In Meredith-Time, when we represented Time, everyone knew the challenges at the time. Do you really double down on the synergies when there's no long-term growth in print? With Sinclair and the RSNs, those businesses have been troubled assets for a long time. It's not that they don't have value, but everyone -- I mean everyone -- in the business understood that there were very significant issues there, particularly related to unresolved carriage deals. On DirecTV, at the time, no one understood what the possible reason was for AT & T to do that deal. You mentioned Meredith and Time. I've got to ask you this. I realize you are hired to do a job, which is to get the best deal for your client. But given that you mentioned you knew, or at least thought that deal would end up being a disaster, is there anything you can do for the employees at Time, structurally, in a deal like that? Because you've got to be thinking, this isn't going to end well for anyone. It comes down to how a deal is structured. When you're selling a company and the deal is all stock, then you care a lot about what the new company is going to look like. But when you're selling for cash, like with Meredith and Time, you don't care. You care about the price. That's your job. Will Big Tech be broken up? Some of the biggest U.S. technology companies are scheduled to testify in front of the House Judiciary Committee about potentially having too much power over the economy in this country. Plus you've got those giant media deals we talked about. Is it possible that what we're about to see here over the next couple of years is actually an era of massive divestitures, before we hit another round of massive consolidation? None of these companies are like the old steel or railroad companies that were broken up. Their businesses are not monopolies that came through acquisitions. These are companies that have grown organically. No one had ever heard of them when they first started out. I don't see the reason why you would break them up. What are you going to spin out, Instagram? YouTube? It doesn't make any sense. I don't think we're going to see breakups of these large companies. I don't buy it. But is it healthy for the economy to have these massive companies? Isn't the argument that they shut out innovation because they're so dominant? Look, I'm an M & A guy, so my views on my policy may be tainted or not that relevant, but I think companies like Amazon have been absolutely terrific for the economy and for the consumer. What would we have done during this pandemic if we didn't have companies like Amazon? I just can't imagine that people don't think that these are fantastic things that all of these huge companies have brought. There are always issues when you get bigger, and those should be addressed. You can't have privacy issues or price-fixing issues. And there are laws to address that. But do I think these companies have not served the consumer? Of course they have. I think it's been one of the great things that's happened to the consumer. Just look at prices of things. So I don't buy any of that stuff. I'm sure that Amazon's overall market share if you take the entire world of delivery, even with their mammoth size, is way under 50%. You have Walmart , Wayfair , Target , delivery companies, every e-commerce company, it goes on and on. So I don't buy any of that breakup stuff. Banking during quarantine Even if you don't think M & A is ready for a big comeback, you have a pipeline. Are there certain sectors that seem more ripe for consolidation than others? I don't think it's going to be sector-driven. If you look over the last three, four, five years -- if you look at the mix of industries involved in M & A, it's going to be substantially the same as it has been. You're not going to see very large deals in any sector any time soon. There will be some, but few, for the reasons I explained. But I don't think there are any sector-specific reasons for why one sector versus another should be busier. It's just valuation. Noble Energy was a rumored target for a long time. It was just a matter of valuation. Let's talk about the job of an M & A banker. How has your job changed during the quarantine? Obviously on the deal front, it's been a lot slower. But we're part of the coverage team. As all of these companies have been addressing big issues like liquidity, we're a part of that team. Some people are doing PIPEs, some people are doing financings. Our M & A bankers are part of the Morgan Stanley coverage team. Everyone has been quite busy even though there have been fewer deals. And we're getting ready for when it does open, even if it's six months from now. So we're still constantly putting ideas in front of clients. If you think about it, CEOs have been dealing with survival. And those that aren't in trouble are dealing with issues around what the world is going to look like after this is over. So, you don't think about M & A when you're worried about survival or liquidity or operating during a pandemic. It will turn to M & A. Right now it's on liquidity and strategy. And we've done a few significant deals too. But the world of business has changed forever. I hear a lot of people say that -- but why? Why won't we just return to something that looked like a pre-pandemic world once everyone is vaccinated and coronavirus fades into the background? I don't know how it's going to change, but so many things have already been learned. Do you really need to travel? Do you really need to be in the office? It's changed. So industry will change around that. I don't know exactly how. A lot of these things --- video conferencing, for example -- were already here and were set to be more prevalent three years from now anyway. It's just accelerated. Investing opportunities during M & A You've been an M & A banker for 20 years. Before that, you were an M & A lawyer. There is an entire cottage industry around M & A investing. From your standpoint, as someone charged with getting deals completed, is M & A investing helpful to get deals done, and are there certain strategies that you feel are actually smarter than others? Well, there's different kinds of events that people look at when making investments, and they've got different levels of success. There's traditional arbitrage. Right now, there aren't a lot of deals that you can do arbitrage around. One example is the hostile bid for Corelogic . That's an event. There are all kinds of things to assess in that bid. How likely is it that the company is going to get sold? Well, you can see from where it's trading that people view it as a high likelihood, because it's trading over the bid price. But then, there's the question of who is it going to get sold to, and are there regulatory issues around that which could derail a deal? So, it's fairly complex. There are a lot of variables -- is it going to get sold, when is it going to get sold, what is the price it's going to get sold for, and when is it going to close? So, that's traditional arbitrage. You can do traditional arbitrage around fairly small deals, like the Chevron-Noble deal , which is a stock-for-stock deal. There, you're making a bet on if someone is going to come in and make an over-the-top bid, which, by the way, I know nothing about, but just in way of an example, can you play both stocks -- is there a way of making money by investing in both stocks? That, again, is traditional arbitrage. A second strategy is around activist situations where there's no actual hostile bid. There, they just make a bet on what's going to happen. There isn't a lot of activism going on right now. There hasn't been a big wave of activism. The market has recovered fairly quickly, although it hasn't recovered in all industries. Then there are announced deals where you're trying to upset whether the deal happens. That strategy is very challenging. You don't know exactly why anyone is doing it. I can't really think of any recent examples where it's worked. An example where it didn't work is when Bristol Myers Squibb made their bid for Celgene and Starboard came in with a very small stake and tried to stop the deal. It's pretty hard to invest around that, because what are you really betting? Are you betting Bristol Myers' stock is going to go up without the deal? Are you betting Celgene's stock is going to go down without the deal? Are you betting that there's going to be an increase in price? It's complex. At the end of the day, those campaigns, at least in the U.S., rarely succeed. An example where it sort of succeeded was when Qualcomm tried to buy NXP. Elliott took a position in NXP . Elliott got Qualcomm to raise its bid for NXP. But if you had bet on that, you would have lost big, because ultimately the deal never happened. So that's another area that relates to M & A. So, there's classic arbitrage, activist-driven arbitrage, and deal-breakup arbitrage. Those are all classic forms of investing around M & A. What's very difficult is to invest in companies that you think are going to be takeover targets when nothing has ever happened. Perhaps I'm asking this because it relates to me personally, but do you feel like media intervention in deal negotiations -- by which I mean, when the media breaks a story on a deal that hasn't been completed, causing the stocks of the companies involved to go up or down -- do you feel that hinders deals from getting done? Or, as a deal adviser, given your 20 years of doing this, do you think that short-term stock reactions usually don't affect whether or not a deal gets done? Couple of things. When you're advising companies doing significant stock-for-stock deals, historically, the acquirer's stock goes down considerably. So if a deal leaks, or even if it's announced, we advise boards not to look at that. All kinds of people are covering shorts, and there's the arbitrage community betting on what's going to happen, so we just tell people to ignore near-term trading in a stock. A good example of that is when Cigna bought Express Scripts . When Cigna announced the acquisition, its stock went down a lot. But it fully recovered and then some after all of the near-term trading and churn for people that bet all sides of the equation. It's very complicated. People are covering shorts on Cigna, covering shorts on Express, making bets on other companies in the sector as to how it's all going to play out. They're exiting the stock because they're sector investors, but they think there may be a follow-on deal, so they want to get liquid and invest in something else. At the end of the day, deals either make strategic sense or they don't. That deal made a lot of strategic sense, and so the stock more than recovered. The best deal that got away Let's end with something fun. Is there a particular deal that you worked on over the past 20 years that didn't get done that you feel would have transformed U.S. business if it had gotten done? Looking back, when Anheuser-Busch was subject to the hostile bid from InBev , their best defense was to merge with Grupo Modelo, and have Modelo's management take over. It would have been a very good defense to InBev, and it would have been a spectacular deal for the Anheuser-Busch shareholders. They would have had all those fantastic Modelo brands, world class management -- not to say InBev isn't a great company, but I always felt that had that happened, it would have been a much better deal for all involved. That was 2008 -- you're testing my memory here. How would that deal have been structured? Anheuser-Busch had owned 49% of Modelo, a publicly-traded company based in Mexico. Modelo was run by Carlos Fernandez, a very highly respected manager. Anheuser-Busch had some good people but no one who was a visionary. And so the idea would have been that essentially Anheuser-Busch would have bought in the rest of Modelo for Anheuser-Busch stock. So it would have been a much bigger company. And it would have been too big for InBev to take over, so that was the defense. There was a book about this called "Dethroning The King " that talks about all of this -- and where I'm prominently featured in. But yeah, that's a deal I thought should have happened. Disclosure: Comcast owns NBCUniversal, parent company of CNBC.
