RUNNING FROM THE BULL

From July 7 to 14 each year, the Fiesta of San Fermin kicks off in Pamplona, Spain. Every morning during that time at around 8am, bulls are released into the streets and crazies from around the world try to outrun these 1,500 pound beasts without being gored. Many companies throughout the world, feeling pressure to hit profit and growth targets in a rough market environment, may feel like they have been running from angry bulls as of late. As a result, many companies have actively looked for mergers or acquisitions. Diversification is happening across industry and country, as players look for deals throughout the world. Too much capital, elevated levels of private equity money and corporations with strong balance sheets, frothy stock prices and access to very cheap long-term debt (lowest in 10Y) are driving the M&A boom. In fact, the last time things were anywhere near this favorable for M&A activity was in the 1980's and long-term yields were about 2x current levels. Even more interesting, back then there were only 5 private equity firms with money to invest of more than $1B, compared to 115 such firms today. Things are so hot in fact that the value of transactions this year has already broken the $2T level and is more than 70% above last year's pace at this time. So too, the banking industry is feeling the effects of these and other significant changes. Driven by heavy deposit and loan competition, technological advancements, tight margins, a crushing regulatory environment, credit deterioration and an inverted yield curve, banks are jumping into M&A in droves. In particular, banks that have become dependent on construction lending and are now facing a slowdown are finding M&A to be a good alternative to sustain growth and profitability. The industry in general is finding that low cost deposits are harder and harder to come by, pushing even more bankers to get into the act. In short, bankers are realizing that making money is becoming more difficult, so mergers provide an attractive alternative to organic growth and sustained profitability. Should organic growth continue to slow and these pressures remain, the more bankers will consider acquiring or merging with a competitor down the road. Many banks have also ramped up stock buybacks in an effort to counter such challenges. As equity investors get nervous about the industry, bank equity values have softened as of late. That, combined with high levels of excess capital, has pushed many banks to launch or renew stock buyback programs. In fact, these programs are so prevalent that 100% of the top 10 banks in the country (and hundreds of independent banks as well) have either announced or are in process of an equity repurchase. Whether buybacks or acquisitions will turn out to be a sound long-term strategy remains to be seen, but bankers have clearly shown up dressed and ready to run. Our advice is to keep your mind sharp and your eyes focused straight ahead because in this race when you mess with the bull it is very easy to get the horns.