Porzio shared his thoughts on a variety of topics including Yellen’s remarks, charges by some that the central bank is due for overhaul and even offering a preview of new Intralinks research on the subject of “What makes an attractive (acquisition) target?”
WooTrader: What was your overall impression of what you heard from Janet Yellen Friday?
Porzio: It was pretty status quo. In other words, nothing much unexpected.
Thursday (before the speech) I met with a client who is a senior banker. The term ‘uncertainty’ came up again and again. He said the possibility of a rate hike isn’t the problem because everyone has an eventual rate hike built in. What clients don’t like is all the uncertainty.
If the Fed had said, “We’re doing a rate hike in September unless something drastic happens,” people would be OK with it. A quarter point here or there isn’t going to change whether a deal gets done.
What are M&A dealmakers looking for from the Fed besides whether there will be a rate hike?
Dealmakers want to know where the global economy is headed. For example, we note that gross domestic product slipped but corporate profits are up.
I think some of those things are being evaluated by people looking to do deals now and asking “Where is the economy headed? What are rates going to do to affect that? Or are rates really just a reaction to a slower growth environment?”
Did Yellen make a case for a rate hike?
Yeah. I think there was an indication that the Fed believes employment has reached the right level. Inflation and price stability is where it should be to raise rates. Those underlying factors are why you would raise rates to give people confidence.
Everything I’m interpreting here tells me rates are going up. Whether it’s September or December it will be sometime soon but nothing earthshaking or that people have not been expecting.
I’ll be honest. There will some fringe deals, mega LBOs that a ¼ rate move could affect, but this is a small percentage of deals.
Some economists say the Fed is due for an overhaul. What are your thoughts?
I think the Fed is starting to listen to the opposition about how, frankly, they’re been caught flatfooted before. My opinion is they are not turning a blind eye to this.
Can they be nimbler? The uncertainty being generated is the biggest problem and I think that needs to be looked at. I also think because the Fed has been under so much heat it has to realize it has to be in tune more with the market, as opposed to operating in a black box.
As much as they need to focus on and have a model built on a couple of key indicators, these are highly trained intelligent economists looking at pretty much everything.
Finally, what are some of the key things investors should look for that helps shape M&A activity?
We’re going to be coming out with research shortly on, “What makes an attractive target?” What elements make a company look like it should or could get bought?
Some factors are industry dependent like the price of oil. These things don’t affect just the energy industry but also other areas of manufacturing that rely on energy.
Factors I call macro – political – socio - economic can build up in the mindset of getting a deal done on both the buy and sell side. At the end of the day, however, it’s really about strategic needs, value and opportunity.
Companies that are highly leveraged and have a need to refinance in what could become an increasing rate environment might want to look at monetizing through a merger or sale.
For still others, the inability to grow organically can be a factor, especially if people are paying good prices right now.