Markets Buoyant, Merger Activity Picks Up

What may have been the most auspicious deal of late was not the biggest or the most groundbreaking of mergers. It was just one that took a little gumption.

In September, Applied Materials, a California maker of semiconductor manufacturing equipment, agreed to acquire its rival, Tokyo Electron, in a deal valued at more than $9 billion.

As an all-stock, cross-border deal, it was the kind of tricky merger that telegraphed executives’ confidence and an appetite to make even slightly risky deals.

“It was when the light bulb went on,” a senior deal maker said.

Are the animal spirits finally returning to the corporate world?

In the United States, they appear to be. While global deal-making was basically flat for a fourth consecutive year, annual volume in the United States was up 11 percent in 2013 compared with the previous year, according to Thomson Reuters.

Companies from New York to San Francisco announced more than $1 trillion worth of deals during the year, the most since the financial crisis. That led the United States to account for 43 percent of all deals worldwide, the biggest proportion since 2001.

What’s more, activity picked up over the final two quarters, with volumes rising sharply from the first six months of the year.

“There’s a feeling of a more stable backdrop that executives think will be with us for the foreseeable quarters,” said Blair W. Effron, co-founder of Centerview Partners, an independent investment bank. “I didn’t have a sense of that at the end of 2012 or 2011.”

And with markets buoyant thanks to relative stability in Washington and around the globe, as well as moderate growth from corporations, the bankers and lawyers that advise companies on mergers and acquisitions are more optimistic than they have been in years.

“From a macroeconomic perspective, we have a stronger economy, we have Congress behaving more responsibly, and we have all appearances of stability at the Fed,” said Scott A. Barshay, head of the corporate department at Cravath, Swaine & Moore, one of the top law firms on Wall Street. “C.E.O.’s can look forward and say, ‘I don’t see any near-term economic bumps.’ ”

This stability is leading executives and directors to return to the business of plotting transformative deals that might take months or even years to execute, and even longer to pay dividends.

“Boards are thinking about their goals not just tactically in a one-year 2014 increment, but more strategically for the longer term,” Mr. Effron said. “Companies are looking further down the field.”

Centerview worked on three of the biggest deals of the year, advising H. J. Heinz on its $23 billion sale to 3G Capital and Berkshire Hathaway, General Electric on its sale of the remainder of NBCUniversal to Comcast for $16.7 billion, and Silver Lake Partners on its role in the buyout of Dell for $24.9 billion.

Other boutique investment banks like Centerview continued to secure advisory roles on the biggest deals of the year. LionTree Advisors, a small firm focusing on media deals, advised Liberty Global on its $16 billion deal for Virgin Media, while Moelis & Company advised Omnicom on its $35.1 billion merger with Publicis, which was advised by Rothschild.

Even the largest deal of the year â€" Verizon Communication’s $130 billion purchase from Vodafone of the stake in Verizon Wireless it did not already own â€" had upstarts among the big banks like Goldman Sachs and JPMorgan Chase. Both Guggenheim Securities and Paul J. Taubman, the former Morgan Stanley banker who helped strike the original deal, advised Verizon.

Yet the big banks continued to advise on most deals, and collect the most fees. Goldman, followed by JPMorgan, led advisers in deals by volume both in the United States and worldwide last year. The two banks also collected the most fees for their work, earning an estimated $1.5 billion and $1.3 billion for their advisory roles, according to Dealogic.

The Verizon deal with Vodafone, one of the largest transactions ever, had been expected for years. But with interest rates low because of the Federal Reserve’s sustained stimulus program, Verizon was finally compelled to act before rates began creeping up. (That advantage was underscored when Verizon sold a record $49 billion of investment-grade corporate debt at once to help pay for the acquisition.)

“This era of low interest rates has encouraged companies to consolidate and clean up some structural inefficiencies,” said Michael Carr, head of Goldman Sachs’s mergers and acquisitions group in Americas.

Still, while many factors encouraged merger activity, one phenomenon that once drove deals â€" activist investors â€" became something of a depressant. Activists were once feared for their ability to shake up company, spurring it to make deals with competitors or test the market for a sale.

To some degree that was still the case. Activists occasionally prodded smaller companies to sell themselves, and in other cases encouraged big conglomerates to dispose of noncore units. Nelson Peltz, for example, pushed for a big spinoff at DuPont.

“Activism has been a positive influence on some companies, making them more introspective,” said Chris Ventresca, co-head of global mergers and acquisitions at JPMorgan. “Companies are realizing that if they don’t look at what is core and noncore, someone will do it for them.”

But by and large, activists focused more on capital allocation than on deals. Moreover, many advisers said that executives now feared that spending money on a deal rather than returning it to shareholders would invite activist scrutiny.

“Companies that have activists in their stock generally do not do acquisitions,” Mr. Barshay of Cravath said. “The activists are completely focused on returning capital to shareholders.”

Regardless, United States companies forged ahead with deals, and were often rewarded when they did. Another factor that emboldened companies to make more deals is that for the most part, the markets rewarded deals that immediately added to earnings. According to Goldman Sachs, in about two-thirds of the deals in 2013, the buyer’s stock price increased on average more than 5 percent on a sustained basis.

“It’s giving people confidence that despite the scrutiny of activist investors, companies can really add value through M.&A.,” Mr. Carr of Goldman said.

Looking ahead to 2014, deal makers say companies could be prompted to make deals for a number of reasons.

One is that with stock markets riding high, companies will probably feel pressure to demonstrate sustained growth to validate their share prices.

“The pressure is building for companies to justify their trading multiples,” Mr. Ventresca of JPMorgan said. “It will be hard to deliver that organically, so you have to look for inorganic growth.”

Certain sectors could also set off rounds of megadeals.

Last year, many companies in the telecommunications industry made deals. Besides the Verizon and Vodafone megadeal, SoftBank took control of Sprint in a $21.6 billion deal, and T-Mobile and MetroPCS announced a multibillion-dollar reverse merger.

While some telecommunications activity could continue, with Sprint reportedly looking at a bid for T-Mobile, 2014 could have a spate of cable television deals. Charter Communications, backed by John C. Malone’s Liberty Media, is preparing to make an offer for Time Warner Cable. But Comcast, the nation’s largest cable operator, is considering a spoiler bid.

If either deal happens, it could kick off a wave of consolidation of both cable operators and cable networks, which could look to gain negotiating power by increasing their scale.

“All year we’ve had strong equity markets, cheap debt and ho-hum M.&A.,” Mr. Barshay said. “That usually doesn’t happen and it is finally starting to change. We’re seeing it in a spate of recent deals and we’re seeing it in the pipeline.”

A Stock Exchange Expands Its Global Reach

The face of the global stock market used to be the classically proportioned exchange building on Wall Street.

In the future, it may well be a squat suburban office building in Lenexa, Kan., outside Kansas City, where BATS Global Markets is based.

While the New York Stock Exchange has recently been swallowed up by the InterContinental Exchange, a company that gets most of its revenue from trading derivatives, BATS, which was founded in 2005, has been doubling down on plain-vanilla stock trading and global expansion. That steady business has quietly moved it closer to the top of the list of the largest stock exchange operators in the world in terms of the value of shares traded.

In the coming months, BATS is set to complete its merger with another upstart company, Direct Edge, in a deal that will turn it into what will most likely be the biggest stock exchange company in the United States (at least on some trading days).

In Europe, BATS is already the largest exchange after a rapid, and mostly overlooked, ascent that now has it hosting trading in nearly all the big economies on the Continent. As it continues to push in those existing markets, it is looking to take on other parts of the globe, including Canada and Japan.

Everywhere it goes, BATS is aiming to serve as an evangelist for the American way of trading, focusing on low costs, competition and high-speed trading.

In the rest of the world, older exchanges and some established trading firms have pointed to the recent market crashes and problems that have occurred in the United States as evidence of flaws in the American model. But BATS is winning over enough traders and banks to keep the expansion going.

Paul Squires, the head of trading at AXA Investment Management in London, said that initially he was skeptical of BATS and the changes it brought to Europe, including the opening it provided for the much-maligned high-speed trading sector.

Over time, though, Mr. Squires said that the company had been more responsive to his questions and concerns than the old exchanges ever were. He has also found BATS to be half or less of the cost of the big exchanges.

“We’ve overcome that psychological, initial judgment,” Mr. Squires said. “Now it doesn’t bother me at all if there is an Americanization of our markets.”

BATS has been taking advantage of the difficult conditions prevailing in the stock world, where daily trading volumes have been falling for a long time, along with the fees that exchanges are able to charge. That has made it a difficult business for historic companies with staff and infrastructure built up during an earlier era.

BATS has a relatively small staff of about 170 people and a basic technology that can be exported anywhere. It has succeeded with this formula despite the company’s most embarrassing moment, when it had to call off its own initial public offering in 2012 because its software went haywire.

The company’s latest big campaign was in Spain, one of the last European countries to open its doors to alternative trading platforms. Over the last year BATS Chi-X, as it is known in Europe, has gone from about 4 percent of all trading in Spain, to almost 20 percent in some points in December. That is about where it is for the Continent as a whole, in the value of shares traded. The next biggest exchange operator in Europe is the London Stock Exchange, which also owns the main Italian exchange and has had a market share about a percentage point lower than BATS Chi-X in recent months.

In the United States, BATS and Direct Edge together hosted a little around 10 percent of all trading in the last month, compared with the New York Stock Exchange, which had a little under 22 percent on its three exchanges.

BATS began in Spain, as in most other places, by bringing in the big global banks that wanted a cheaper and more seamless way to trade stocks across national boundaries. Citigroup, Bank of America and Credit Suisse are among the banks that have ownership stakes in the privately held BATS.

Now, though, the exchange is pressing hard to woo local brokers.

The chief executive of BATS’s European operation, Mark Hemsley, recently hosted an event at a private club in Madrid to which all the members of the Spanish exchange were invited. One of the first Spanish brokers to seek membership in BATS was Javier Domínguez, the managing partner at Auriga Global Investors. He said that he was attracted to the new exchange because of its reliable technology and low prices.

“They have huge muscle and they can go for it,” Mr. Domínguez said.

But Mr. Domínguez is the rare local broker who is not skeptical. Jesús Sánchez-Quiñones, the managing director of the brokerage firm Renta 4, said that the main people rooting for BATS’s success were Wall Street banks.

No one has fought the newcomer harder than the national exchange in Madrid, Bolsas y Mercados Españoles, and its chairman, Antonio Zoido Martínez. He said he was afraid to see Europe moving closer to the stock trading paradigm in America, where 13 different exchanges and dozens of dark pools allow banks to trade without revealing their hand.

Mr. Zoido acknowledges that BATS does offer cheaper trading, but he argues that BATS does not partake in the most basic social functions played by exchanges. BATS does not list new stocks, for instance, which is what allows companies to raise money from investors. BATS also tends to shut down when the main national exchanges are down, suggesting that BATS is relying on the national exchanges to determine the proper price of stocks.

“If it moves to another degree then it’s dangerous for the society, and for the things that exchanges exist to do in society,” Mr. Zoido said.

Mr. Hemsley fights back against those accusations, and says BATS limitations are primarily a result of barriers put up by the existing changes. The company has recently begun, for the first time, listing exchange-traded funds in London â€" a first step toward listing stocks. Mr. Hemsley said that his company’s expansion in Europe had given traders choices and made it cheaper for almost anyone trading on the Continent.

The existing exchanges in Europe were “monopolies that were willing to work together by not going into each other’s backyards,” Mr. Hemsley said. “We put our feet in everyone’s backyard.”

The BATS Chi-X that exists in Europe today is a combination of two earlier trading platforms â€" not originally exchanges â€" that came about in response to that 2007 change. Initially, it was Chi-X that experienced the fastest growth. Peter Randall, who helped found the trading platform, said that when he began, he told his staff, “I shamelessly want to copy the tricks that were used in America to make these things work.”

That included offering small payments to brokers who sent certain types of orders to the exchange. Previously, brokers had paid to trade on the exchanges. The other thing Mr. Randall aimed to improve on was customer service.

Mr. Hemsley, a jovial former rugby player, was asked by Lehman Brothers, which was an early investor in BATS, to start the BATS European operation. Before BATS and Chi-X, a broker wanting to trade stocks across Europe had to join every single national exchange. As BATS and Chi-X expanded, they allowed brokers to trade in every country while connecting to only one trading platform. Both firms grew quickly, and merged in 2010.

Today, BATS’s headquarters in Europe is in the middle of London’s financial district, on the sixth floor of a modern building with a glass elevator. On the systems monitoring floor, employees chatter on the phone in French and Spanish. The actual trading for all of Europe takes place in a data center in a suburban town 20 miles from London.

The company’s success has drawn in a new group of competitors. The London Stock Exchange has been increasing its investment in Turquoise, which allows traders to buy and sell stocks across the Continent. Another new pan-European trading exchange, Aquis, began operating in late November, led by a former chief executive of Chi-X.

But Mr. Randall said that catching up to BATS would not be easy.

“The regulators now view them as a critical part of market infrastructure â€" that’s not an accolade that is given lightly,” Mr. Randall said. “How fantastic, to come from nowhere in a very few number of years.”