FABER: WHERE IS M&A 2009 SHAPING UP AS THE WORST YEAR FOR DEALS SINCE 2003 ALTHOUGH THE CAPITAL MARKETS AS I HAVE REPORTER MORE OR LESS CONSTANTLY OVER THE LAST FEW WEEKS DOING VERY WELL SO WHERE ARE THE DEALS WHO BETTER TO ASK THEN DOUG BRAUNSTEIN WHO RUNS INVESTMENT BANKING JP MORGAN DOUG THANKS FOR COMING ON
BRAUNSTEIN: PLEASURE TO BE HERE
FABER: YOU KNOW AT THIS POINT IN THE YEAR A LOT OF PEOPLE WHO I SPEAK TO WHO ARE IN YOUR BUSINESS ANTICIPATED WE MIGHT START TO SEE M&A PICKUP STOCK PRICES HAVE STABILIZED THERE IS SOME SENSE THERE'S A RECOVERY LOOMING AT THE VERY LEAST AND YET A TOTAL DIRTH OF DEALS HERE'S ANOTHER MONTH WHERE VIRTUALLY NOTHING ANNOUNCED WHAT'S GOING ON
BRAUNSTEIN: SO WELL YOU STEP BACK AND THE AGGREGATE VOLUME THIS YEAR DAVID IS DOWN ALMOST 45% FROM WHERE IT WAS AT THIS TIME LAST YEAR AND THE NUMBER OF DEALS ARE DOWN MORE THAN 50% AND SO WHAT'S GOING ON REALLY IS WE'RE IN A PERIOD SIMILAR TO WHERE WE'VE BEEN IN A M&A STANDPOINT WE'RE IN A RECESSION AND THE DISCONNECT BETWEEN BUYERS AND SELLERS IN TERMS OF PRICING IS KEEPING ACTIVITY AT A VERY VERY LOW LEVEL
FABER: WHAT ABOUT THAT DISCONNECT THERE ARE SOME WHO THOUGHT THAT WOULD SOMEHOW BE RESOLVED AT THIS POINT EITHER SELLERS WOULD ADJUST TO THE NEW REALITY OR PERHAPS BUYERS WOULD BE WILLING TO STEP UP WHY HAS IT NOT HAPPENED AND WHAT WILL IT TAKE FOR IT TO HAPPEN
BRAUNSTEIN: AS A PRACTICAL MATTER AGAIN SOME OF THE ACTIVITY THAT'S HAPPENED THIS YEAR--YEAR-TO-DATE HAVE BEEN AT VERY HIGH PREMIUM LEVELS SO THAT THE AVERAGE PREMIUM FOR A US PUBLIC COMPANY THAT'S BEEN BOUGHT FOR THE FIRST FIVE MONTHS OF THIS YEAR IS ALMOST 45%
FABER: BIG NUMBER
BRAUNSTEIN: THAT'S THE LARGEST PREMIUM ON AVERAGE SINCE 1995
FABER: WOW
BRAUNSTEIN: AND SO WHAT'S HAPPENING IS SELLERS TO THE EXTENT THEY WANT TO SELL ARE SAYING GIVE ME A PRICE THAT REFLECTS MY VALUE FROM LAST YEAR AND BUYERS ARE BASICALLY SAYING TO THE EXTENT THEY FEEL THEY NEED TO ACT ARE SAYING I AM PREPARED TO DO THAT BUT THE VAST MAJORITY OF BUYERS QUITE FRANKLY ARE SITTING ON THE SIDELINES AND WAITING
FABER: AND WHY ARE THEY WAITING IS IT FEAR OF WHAT THEY SEE IN THEIR OWN BUSINESS CAUSE THEY DON'T NECESSARILY BELOW THAT THINGS HAVE TURNED
BRAUNSTEIN: NO THE WAITING IS FOR THREE REASONS THE FIRST ONE IS I THINK THERE ARE A NUMBER OF BUYERS WHO ARE SAYING I'M NOT SURE WHERE THE FUNDAMENTALS IN THE ECONOMY ARE GOING AND THE PRATICAL REALITY IS IF THE ECONOMY REMAINS SLOW VALUATIONS ARE GOING TO COME DOWN AND SO THE SELLERS ARE GOING TO COME MY WAY THEY'RE WAITING FOR THE CAPITULATION TRADE THE OTHER REASON I THINK IS IF THEY ARE WRONG AND THE ECONOMY MOVES THEIR STOCK PRICES ARE GOING TO MOVE AND THEIR RELATIVE ABILITY TO FINANCE THEIR AFFORDABILITY TO USE THEIR OWN CURRENCY IS GOING TO GO UP AND THEN I THINK THE THIRD THING QUITE FRANKLY IS UNCERTAINTY CAUSES PEOPLE TO BE INWARDLY FOCUSED AND WORRY ABOUT FIXING THEIR OWN BUSINESSES AND SO I THINK A LOT OF FOLKS ARE SPENDING TIME ON THAT
FABER: SO GIVE ME YOUR PREDICTIONS I WON'T HOLD YOU TO THEM ARE WE TALKING 3, 6 MONTHS AT WHAT POINT DO YOU THINK THE THREE FACTORS YOU JUST DISCUSSED ARE GOING TO BE RESOLVED AND WE MIGHT GET BACK TO A RELATIVELY ROBUST M&A CYCLE
BRAUNSTEIN: WELL YOU KNOW IN FAIRNESS I THINK THERE ARE A NUMBER OF US IN THE INDUSTRY WHO THOUGHT WE WOULD START TO SEE A LEVEL OF ACTIVITY PICK UP IN THE SUMMER OF THIS YEAR
FABER: RIGHT NOW
BRAUNSTEIN: AND THE FACT OF THE MATTER IS THAT IT HASN'T IN PART BECAUSE I THINK THE WORLD STILL REMAINS REASONABLY UNCERTAIN SO I STILL THINK WE ARE GOING TO NEED TO SEE A THIRD QUARTER AND A FOURTH QUARTER GDP NUMBER THAT GIVES PEOPLE THE CONFIDENCE WE'RE TURNING THE CORNER HERE AND UNTIL WE SEE THAT AND IF WE DON'T SEE THAT I THINK YOU'RE GOING TO CONTINUE TO SEE M&A QUITE FRANKLY TO BE SLOW FOR A NUMBER OF QUARTERS
FABER: YEP ONE AREA THAT HASN'T BEEN SLOW OF COURSE IS THE CAPITAL MARKETS
BRAUNSTEIN: RIGHT
FABER: ON FIRE IN TERMS OF THE ABILITY TO RAISE FINANCES YOU WERE INVOLVED IN THE MERCK-SHEARING DEAL AND THE PFIZER-WYETH DEAL CORRECT
BRAUNSTEIN: YES SIR
FABER: BOTH PFIZER AND MERCK ABLE TO ACCESS THE CAPITAL MARKETS UNTIL THEIR HEARTS CONTENT IS THAT GOING TO CONTINUE AND GIVE ME SOME CHARACTERIZATION ON WHAT YOU'VE SEEN GIVEN YOUR MANY YEARS ON WALL STREET
BRAUNSTEIN: WELL YOU KNOW THE ONE THINK THAT I THINK IS REQUIRED FOR M&A TO COME BACK A HEALTHY SET OF CAPITAL MARKETS AND THE REALITY IS THAT WE'VE GOT THAT TODAY IF YOU LOOK AT HOW MUCH CAPITAL WAS RAISED IN THE PEAK IN 2006 AND 2007 THE SECOND QUARTER OF THIS YEAR WE'RE RUNNING AT LEVELS IN THE DEBT AND THE EQUITY MARKETS THAT RESEMBLE THAT PEAK PERIOD IN FACT THE MONTH OF MAY THERE WAS MORE EQUITY RAISED IN THE UNITED STATES THAN ANY OTHER MONTH IN HISTORY
FABER: IS THAT A SURPRISE TO YOU I MEAN MAN IT'S HARD TO IMAGINE IN JANUARY THAT WOULD BE THE CASE IN MAY
BRAUNSTEIN: YEAH I THINK WHAT'S HAPPENING RIGHT NOW THAT THE INSTITUTIONAL INVESTORS ARE PROVIDING PEOPLE CAPITAL TO BASICALLY INSURE THAT THEY WILL BE A SURVIVOR THAT THEY WILL MAKE IT FROM HERE TO THERE AND THE FACT OF THE MATTER IS IT'S BEEN A VERY GOOD MARKET TO HAVE INVESTORS BASICALLY BUY AT LOWS WITH THE BELIEF THEY'RE GOING TO HELP FUND THESE COMPANIES THROUGH THE CYCLE
FABER: RIGHT NOW THE 06 PERIOD THAT YOU MENTIONED THE HEIGHT OF THINGS THERE WERE PLENTY OF COMPANIES GETTING CREDIT THAT THEY PROBABLY DIDN'T DESERVE
BRAUNSTEIN: YEAH
FABER: ARE THINGS GETTING A LITTLE AHEAD OF THEMSELVES EVEN HERE WHEN IT COMES TO THE HIGH YIELD SIDE OF THINGS
BRAUNSTEIN: YOU KNOW IN FAIRNESS DAVID I THINK THE TERMS AND CONDITIONS HAVE CHANGED WHILE THE VOLUMES ARE VERY SIMILAR THE TERMS AND CONDITIONS PRICING HAS CHANGED THE TENOR OF DEBT HAS CHANGED IT SHORTENED MATERIALLY
FABER: LOTS OF COVENANTS NOW
BRAUNSTEIN: WELL AT LEAST SOME COVENANTS OR LOTS OF COVENANTS
FABER: AT LEAST SOME YEAH
BRAUNSTEIN: AND AS A PRACTICAL MATTER PEOPLE ARE MOVING TO THE EQUITY MARKETS SO THEY ARE DELEVERING AS OPPOSED TO LEVERING UP IF YOU LOOK INTERESTINGLY THE MONTH OF MAY WAS THE SECOND BEST YIELD MONTH IN HISTORY BUT THE CHARACTER WAS VERY DIFFERENT IN 2006 IT WAS ACQUISITION FINANCING IN 2009 ITS REFINANCING
FABER: LIKE TO HAVE SOME OF THOSE DEALS BACK WOULDN'T YOU
BRAUNSTEIN: AH PROBABLY
FABER: '06.. LET'S TALK A BIT ABOUT FINANCIAL SPONSORS AS YOU SAID THE FINANCING THAT TOOK PLACE IN 06 AND YOU AND I DID AN INTERVIEW BACK IN 07 SUMMER OF 07 RIGHT WHEN THINGS WERE JUST ABOUT TO END WHERE DOES THAT STAND IS THE FINANCIAL SPONSOR GOING TO BE ABLE TO GET FINANCING FOR A FAIRLY LARGE DEAL ANY TIME IN THE NEAR FUTURE OR IS THAT SORT OF WAY OUT
BRAUNSTEIN: THE LEVEL OF ACTIVITY IN 2006/2007 FINANCIAL SPONSORS IN THE US REPRESENTED ALMOST A THIRD OF THE M&A MARKETPLACE GLOBALLY A QUARTER OF THE M&A MARKETPLACE THEY ARE DOWN BACK IN THE SINGLE DIGITS AND IF YOU LOOK OVER HISTORY THAT'S WHERE FINANCIAL SPONSORS HAVE BEEN 5-10% OF THE MARKET
FABER: SO THAT WAS A TOTAL ABIRATION REFLECTIVE OF KIND OF PROBLEMS IN THE SYSTEM ULTIMATELY WE LEARNED
BRAUNSTEIN: I'D SAY ULTIMATELY WHAT IT REFLECTED WAS RISK NOT BEING PRICED APPROPRIATELY AND I THINK WE'RE BACK IN A MARKET WHERE RISK IS BEING PRICED APPROPRIATELY FINANCIAL SPONSORS ARE GOING TO BE AN IMPOPRTANT COMPONENT OF THE MARKET BUT IT REALLY WILL BE STRATEGICS THAT DRIVE THE MARKET WHICH IS WHAT THEY'VE DONE FOR 17 OF THE LAST 20 YEARS
FABER: DOUG THANKS FOR COMING IN
BRAUNSTEIN: DAVID THANKS FOR HAVING ME AND CONGRATULATIONS ON YOUR BOOK
FABER: THANK YOU
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