- Publications (selected)
Corporate Finance Advisory
Corporate Finance Advisory Publications
No recent development has influenced firms’ strategic and financial decision-making as profoundly as the surge in shareholder activism following the global financial crisis. From a few activist funds managing less than a total of $12 billion in 2003, the activist asset class has ballooned to more than $112 billion in assets under management for activist hedge funds. This report highlights why shareholder activism is likely to keep growing, explains the changing tactics of activists and responses of targeted firms, and provides perspectives and recommendations on how to balance short-term activist pressures with the desire to create shareholder value in the long term.
Management teams increasingly use investor communication to differentiate themselves from competitors. This report focuses on one aspect of investor communication: capital structure related communication. This type of communication is important because in today’s low cost of debt environment many investors expect firms to optimize their balance sheets. Capital structure communication may impact valuation directly since investors and analysts carefully gauge these guidelines to infer firms’ decisions going forward.
The current yield on the World Government Bond Index is a paltry 1.2% while the median reported hurdle rate of S&P 100 companies is a staggering 18%! This report explains the weak links between interest rates, cost of capital, hurdle rates and capital allocation. In particular, the report details how recent cost of capital variations through the cycle have been small, but corporate hurdle rates remain high. The notion that higher ROICs, achieved through higher hurdle rates, are uniformly beneficial is misplaced. In today’s environment, excessively high hurdle rates can be counterproductive by leading to less growth and/or a riskier profile.
There has been a dramatic change in the economics of hedging over the last few years: issuing in EUR was a little over 100bps more expensive (than issuing in USD) in 2011, whereas it is about 100bps less expensive than issuing in USD today. In other words, a global U.S. firm can lower its risk and at the same time improve its EPS by issuing EUR debt. This report discusses how firms can reduce risk and save money by taking advantage of today’s unique debt market opportunity.
Despite economic, capital market, and corporate finance conditions being ripe for M&A, acquisition volumes have remained at levels typically seen only in less favorable periods. This report suggests an aggregate U.S. strategic M&A deficit of approximately $2 trillion during the post-crisis period and predicts an increase in U.S. strategic M&A volume to about $1.5 trillion in 2014, roughly double the realized level in 2013. Through 2014 Q1, we appear on pace to achieve this forecast. The significant pent-up demand for strategic M&A may explain why acquirer market reactions have been uniquely positive and why management teams are less reluctant to use more complex acquisition tactics to achieve their strategic objectives.
Shareholder distributions have continued to increase worldwide in 2013, driven by both rising dividends and buybacks. Some of the distribution trends we observe today challenge the conventional wisdom about dividends and buybacks. This report highlights the “new conventional wisdom” on issues such as whether growth and technology firms pay dividends, the efficiency of share repurchases and the impact rising rates may have on shareholder distributions. The report further discusses how the evolving distribution landscape may impact capital allocation decisions.
Global banking regulation has burgeoned in the aftermath of the financial crisis. The higher capital and liquidity requirements will increase the cost to banks of providing revolvers. This, in turn, might have consequences for firms whose liquidity needs lead them to rely on revolvers provided by banks. This report provides a brief description of the new banking regulations, explains the channels through which they could impact banks and non-banks, and discusses the corporate finance implications to non-bank corporations.
Over the last two decades there has been a massive migration of blue chip companies towards lower credit ratings. Out of the 169 S&P 500 firms that were also rated 20 years ago, 58% now have a lower rating, whereas only 28% have a higher rating. This trend is particularly pronounced for highly rated companies: twenty years ago, 25% of these firms were AA- or higher whereas today fewer than 10% of these firms are AA- or higher. Although firms today are generally lower rated and less focused on preserving the highest credit ratings, investment grade ratings still remain in favor among the world’s largest and most established enterprises. This report lays out the evidence of this migration and then explores the factors driving it, including the availability and affordability of credit, cost of capital considerations, and investor pressures.
Stock price performance often leads to passionate discussions at the Board level. To some extent, stock returns are affected by macro events that are beyond the control of senior decision makers. Executives can, however, differentiate themselves through their preparations for and responses to such events. The strong rebound in equity markets over the last few years has divided companies into leaders and laggards. Analyzing the characteristics of each group provides key insights to decision makers regarding strategic, operational and financial policy. This report discusses the most successful strategies of recent years and highlights the ones expected to persist in the future and others that may abate or even reverse.
Foreign exchange rates often make large and persistent moves. As a recent example, the bold fiscal and monetary actions Japan has implemented since December 2012 have resulted in an over 20% depreciation of the Japanese yen (JPY) versus the U.S. dollar (USD) in six months. Equity investors believe that this depreciation will help Japan’s export-oriented firms: since the initial announcement of Japan’s potential shift in policy in November 2012, the Nikkei has surged 35% in USD terms and outperformed the S&P 500 and other major equity indices worldwide. This report discusses the corporate finance implications of paradigm shifts in foreign exchange rates and offers a multipronged action plan to capitalize on a strong USD.
Many decision makers are concerned about a potential spike in interest rates given that they have been at historic lows for several months. Our experience suggests that consensus expectations may not be useful to help executives consider strategic decisions. Future rates are likely to be lower than expectations, as they have been for the last three years, or materially higher, as is often the case following interest rate troughs. As a result, decision makers should prepare for both the “low for long” and “abrupt spike” scenarios rather than focusing on interest rate forecasts, which will invariably be between these two bookends. This report discusses the implications of a potential jump in interest rates in their latest report by examining 13 rate increases following interest rate troughs since 1962.
Recent activist campaigns underscore an increased attention to capital distribution strategies. Many Boards of Directors struggle with this decision due to divergent views on the best use of “excess” cash. Companies question whether they should keep excess cash on hand for growth opportunities or downside protection, or whether they should return it to shareholders. And if a company distributes the cash to shareholders, should it favor dividends or buybacks? This report explains how macro views shape the optimal capital distribution strategy.
For decades, conventional wisdom about M&A transactions has been that acquiring firms often experience neutral to slightly negative market reactions when they announce large M&A transactions. This conventional wisdom does not apply anymore. Today, investors embrace large, synergistic transactions in an unprecedented manner. This report explains the drivers and board level implications of this new trend and discusses the prospects for a rebound in M&A activity next year.
The new currency environment presents significant challenges to corporate decision-makers. Foreign exchange rates are more volatile and harder to predict, and diversification offers limited value as correlations between currencies have increased. As large global firms realize a growing part of their sales from non-domestic markets, currency fluctuations will now also have a greater impact on firm values. As a result, investors are more focused on the FX topic and equity analysts ask more FX-related questions on earnings calls.
The report provides a roadmap for senior decision-makers on how to continue to grow internationally while avoiding the most common pitfalls of a more volatile currency world.
Conforming to peer best practices is common in strategic and financial decisions, particularly during crisis times. This year, however, an increasing number of senior decision-makers are embracing divergent thinking. This report highlights creative corporate finance actions that drive value for shareholders in today’s challenging environment. Whether through creative M&A or financial policy paradigm shifts, no tool has gone unused to create shareholder value. Investors have applauded announcements that create stronger and more focused industry leaders, unlock hidden value, deliver more cash to shareholders, and cater to specific investor bases.
This report explains the factors that have led several major firms to announce and implement a structural shift to the way they manage their defined benefit pension plans. As these pension de-risking announcements have been well received by shareholders and creditors alike, more senior decision-makers are evaluating whether such an approach could make sense for their firms. The drivers for this structural shift include pension specific regulatory changes, as well as broader capital market factors such as the availability of cheap debt, and the desire to harness risk and enhance the appeal to equity investors.
With low leverage, depressed valuations, record low cost of investment grade debt and large and visible cash balances, investors of all types—from small retail investors to large activist funds—are hungry for yield. Shareholder distributions have rebounded from 2008 lows and the trend is expected to continue as investor appetite for yield, combined with record high corporate earnings and the belated desire to compensate for the small increases during the crisis, are leading many firms to consider larger shareholder distributions in 2012. Our conversations with senior managers lead us to believe that few decisions frustrate them more than whether and how to return excess capital. In this new report, J.P. Morgan’s Corporate Finance Advisory addresses the questions at the forefront of distribution policy decision-making and illustrates the most noticeable trends in today’s environment.
In today’s global economy, attractive growth opportunities are often not found in the home jurisdiction. As a result, many domestic and multinational companies have expanded, and are expected to continue to expand, their foreign operations. While foreign investments can offer attractive returns, senior decision-makers are confronted with significant challenges in assessing their prospective risk. One key question is: Should companies use different hurdle rates when contemplating an investment in another jurisdiction? In a new report, “Time to Rethink Hurdle Rates: Understanding political risk premia in a new financial environment,” J.P. Morgan’s Corporate Finance Advisory team helps clients focus on these issues.
Many decision-makers have focused on the negative news related to the U.S. consumer. This focus has driven firms to reduce investments and to continue emphasizing fortress balance sheets. In this report, we highlight the strengthening positive side of the consumer story. Consumer leverage is now lower than in the pre-crisis years, and catalysts that have been overlooked suggest the possibility of a near-term re-emergence of the US consumer. The key takeaway of this report is that firms should make sure to preserve optionality and be prepared to take advantage of a possible strong consumer re-emergence.
Over the last ten years, and increasingly since the beginning of the 2007-2009 financial crisis, firms have built historically strong balance sheets with high cash balances and less leverage. While many firms are reluctant to employ their financial flexibility in the face of ongoing economic uncertainty, some firms have decisively taken advantage of the current environment. They have done so by executing transformational M&A transactions, refocusing through spin-offs, taking advantage of today’s financing markets, and materially increasing their shareholder distributions. In today’s environment, investors have responded positively to firms that shifted from defense to offense; consequently, boards and senior decision-makers should consider offensive moves on their merits and avoid being forced to initiate or announce these strategies under public activist pressure.
This report analyzes the impact of recent market moves on Defined Benefit pension plans and lays out actions for plan sponsors. Many firms currently have sizable Defined Benefit pension plans, many of which have been underfunded for the last three years. With the simultaneous drop in discount rates and equity values recently, this problem is larger today than it was at the beginning of the year. We estimate the current aggregate funded status for the largest pension plans to be at its worst level in over a decade. At the same time, many firms currently enjoy great access to capital markets at very attractive pricing. Firms can therefore access the capital markets to make voluntary contributions and lock in positive EPS and NPV benefits in a credit-neutral manner.
Growth expectations, valuation multiples, and PEG (forward P/E to long-term earnings growth) ratios for tech firms have declined dramatically over the last 10 years. The PEG ratios for large-cap tech firms are now lower than PEG ratios in many other sectors. In addition, large-cap tech firms have significantly less leverage and shareholder distributions than consumer and industrial firms with similar growth characteristics. Simple assumptions about cash repatriation and buyback premiums suggest that more aggressive financial policies may create value in the maturing tech sector. However, tech firms should proceed with caution as their underlying business risk is materially higher than “comparable” consumer and industrial firms.
The capital markets environment was robust earlier this spring but the aftermath of a severe financial crisis has left consumers and governments weaker and on a slow road to recovery. While we do not know if this disparity is a precursor to another asset bubble, or even another crisis, we recommend that senior decision makers prepare for this possibility. By understanding the differences between 2007 and spring 2011, and by taking advantage of today’s relatively benign capital markets conditions, firms can proactively manage these risks. The key takeaways of this report are: (i) today’s capital markets are reminiscent of the spring 2007 capital markets; (ii) corporate balance sheets are stronger than they were pre-crisis; (iii) the U.S. consumer and OECD governments have little monetary and political flexibility left to manage a new crisis; (iv) in light of the uncertain existing economic and political environment, the cost of financial insurance and liquidity seems low, resulting in implications for capital allocation, M&A, financing, risk management and shareholder distributions decisions.
Declining growth prospects, record levels of cash and financial flexibility, and robust capital markets are driving firms to reevaluate their strategic alternatives. After a significant decline during the financial crisis, global M&A volume surged by more than 20% last year and is expected to approach 2006 levels this year. In this report, we discuss the characteristics of the new M&A wave, including the limited role of private equity, the reemergence of strategic acquisitions, and the surprisingly similar deal size and premiums compared to pre-crisis acquisitions. We also explore the market’s perception of recent acquisition announcements. Interestingly, we find that many recent acquisitions have not only led to higher stock prices for the targets, but also for the acquirers. For acquirers, the well-received acquisitions tend to: (i) fit the acquirer’s strategy and existing assets (“like for like acquisitions”), demonstrating clear synergies; (ii) expand the acquirer’s product or geographical reach; (iii) put excess (or offshore) cash to work; and (iv) opportunistically use the acquirer’s financial flexibility.
The legislation that lowered personal taxes on qualifying dividends and long-term capital gains to 15% in 2003 is scheduled to expire at the end of 2010. In the absence of an extension of this law, the dividend tax rates for upper income taxpayers could revert to an ordinary income tax rate of up to 39.6%. In light of the uncertainty surrounding future dividend tax rates, we discuss how higher dividend taxes may affect firm value as well as strategic corporate finance decisions. While we continue to favor fortress balance sheets, we highlight how higher equity distribution taxes may tilt the scale in favor of debt relative to equity.
In this report, we show how Corporate America has de-levered, cut capital expenditures, extended maturities, and built up liquidity. Meanwhile, this has occurred at a time when the cost of debt has reached low levels that we have not seen in years. Senior decision-makers can benefit from this environment by raising cheap capital to build a war chest and protect against the time when capital becomes more expensive again. Alternatively, if firms believe a low cost of capital will persist, they can lower their hurdle rates to take advantage of today’s strategic opportunities. We believe that a strategy of inaction may lead to competitive disadvantages and potentially the loss of market share as competitors take advantage of this new environment.
This report addresses a question that we are increasingly hearing from clients in today's volatile environment: "Has my cost of equity changed since last summer?" Equity financing constitutes over 80% of the total market capitalization for a typical non-financial S&P 500 firm. As such, the market risk premium is a significant component of a firm’s cost of capital. Given the potential implications of a change in the risk premium, we address in this report i) the various ways to estimate the risk premium, ii) how the risk premium has changed since last summer, and iii) the managerial implications from a capital allocation, valuation, and financing decision perspective.