Fogel & Partners Quarterly: A long time ago in a galaxy far, far away…

Well it almost feels like that, doesn’t it? That is, when the financial markets in Sweden last enjoyed a fertile and flourishing period of strong growth and high activity: IPOs, M&A, sparkling deal-making, multi-billion buyouts… It was during the latter part of the 2000’s when the previous boom years were gradually followed by a continuously less buoyant feeling in the market, with ominous reports of a looming crash, which duly arrived when Lehman went belly up in the autumn of 2008 and the whole global finance sector more or less shuddered to a complete halt. A grim and austere empire took control, so also in Sweden (even if the Swedish banking community was better prepared compared to its foreign peers, much thanks to lessons learnt in 1990 and the immediate years). And according to a comprehensive survey that Fogel & Partners recently conducted involving about 30 prominent investment bankers, we all are still waiting for the return of the Jedi.

About to pass the Lehman trauma?
Five long years after the 2008 crash, the business in general and the finance sector in particular – from investment bankers to advisers, from IPO hungry PEs to equally eager stock exchange representatives – are still suffering, more or less and in their own individual ways, from mild to severe Lehman-itis. But maybe the patient is finally getting better. Not well enough to be back at work full-time, mind you, but not bedridden any more.

We asked a cross-section key players of the Swedish investment community of their feeling for, among other things, the level of activity; the flow of transactions; the interest to yet again try and sell companies to the once so share-loving public; current financing trends (debt versus equity), etc. We also asked them to bring their crystal balls with them and look into next year.

The clear impression you get from their answers is that the whole market is still in a waiting mode; kind of vacillating and dithering, for fear of yet another banking backlash or political crisis. Many prepare for a turn to the better, but the climate is still less hospitable than previously expected. It seems like many analysts and experts talk of a more permanent turn, but very few – if any – have actually seen it; a bit like the Loch Ness monster…

But the big difference to the previous deadlock is that most players are preparing themselves for better times. The bankers want to start initiating lucrative M&A and IPO processes; the PEs want to restock their portfolios with newer investments and at the same time flog the old dogs still hanging about; the big corporates hope to continue their ongoing consolidation by scooping up smaller competitors and complementary businesses, as well as spinning off non-core assets; and the stock exchange, well, they simply want people to know that they still exist, some kilometers from the financial district, next to the ferries taking tourists to Finland and the Baltics. And no, “IPO”, does not stand for “Investigation Permanently Ongoing”.

Yes, the level of activity has gone up. Slightly, ever so slightly. But in the right direction. Many believe in an increase in M&A activities next year, but with a big difference: they will be looking much less like its ancient predecessors; they will be slimmer, less time constrained, and perhaps financially sounder in body and mind.

Already now, we see a change of working methods. The potential deals are more now conducted as bilateral discussions between two parties, rather than broad, often expensive auction processes. And the buyers are holding the baton, putting pressure on the sellers. The spending levels of the good ol’ times are not back, and money-conscious speculators do not want to waste money on due diligence if you do not know if you will get the object of your desire. Especially the PEs are showing restraint here. Nowadays, the corporates are therefore dominating this field, fueled by cash rich balance sheets and management confidence through years of strategic homework, proven by a whole line of major cross-border acquisitions done in the last couple of months, including of course the landmark Microsoft-Nokia deal.

Even here some of the Swedish Large Cap companies have got their checkbooks out again, including Atlas Copco’s SEK 10b offer for UK-based Edwards Group, SCA’s SEK 9b offer for Hong Kong-based Vinda, and SKF’s SEK 8b offer for US-based Kaydon. Cross-borders are here to stay, according to our survey. Also, financing is not an issue in itself, it seems. Rather a question of finding the optimal, bespoke solution; bonds, equity, preferential shares, hybrid yield instruments…

In general, the processes likewise take a longer time, simply because sellers and buyers cannot agree on a fair price. The sellers face the risk of exposing its objects for sale too long on the market and thereby turning them involuntarily into damaged goods. Therefore the list of wannabees grows longer – and older. Many hours of work are still spent around Stureplan on processes that seem doomed from day one.

IPO gates about to re-open?
So what about IPOs, then? Well, taking portfolio companies or non-core corporate divisions public in Sweden is now almost as obsolete as the Ericsson mobile phones. Apart from the odd transfer from one list to another and a few small cap listings like Byggmax, MQ Holding, CDON Group, Finnveden and Transmode, there have not been a real sizable IPO since Rezidor went public. And that was in June 2006. Some of our distinguished panelists take a fairly dim view on the prospect of any new IPOs in Stockholm in the near future. Less than ten in 2014 is a fair average estimate, but some even drop as far as a handful. There are many reasons for not wanting to go through an IPO process. An IPO has come out as the least attractive way for a PE to monetise a portfolio company. Some players follow dual tracks for finding suitable buyers, but, sad to say, trade sales or simply passing the buckets to other buyouts are more rewarding from a valuation perspective. The difference in valuation of privately held and public companies certainly is one explanation to the low listing activity. Also, many complain about the increasingly more difficult regulatory framework for listed companies. CEO’s rather captain private held enterprises and focus their precious time on running businesses without being openly harassed in media about their compensation packages. Why bother, really?

What we need now are some really interesting bellwether listings of companies that could raise the interest among both potential institutional owners and individual shareholders. A wish listing for NASDAQ OMX Stockholm could, for instance, include a Klarna, With the right valuation (read: a substantial discount, followed by a surge of the price in the aftermarket), that could in turn open up the gates again.

With a general sentiment saying that things are slowly starting to move, but in a somewhat convoluted way, all hands are needed on deck in good time, in order to make the process – whether it is an M&A, an IPO or any other kind of transaction activity – work, and work well. Historically, communications advisors join the process late, normally close to the actual announcement. Too close, you might argue. This time, sound and timely communications advice is vital at an early stage, in order to have enough time to convince the agnostics out there.

So to all sponsors, advisers, bankers and other stakeholders out there: judging from the answers from our illustrious panel, we might have reason to believe that the future could look bright again. Maybe not enough to wear shades yet, but perhaps the darkest days are finally over. Let us plan for that. And wait for the return of the Jedi.

May the force be with you.