YOUR GUIDE TO THE TWIN CITIES
Houlihan Lokey managing director Scott Richardson says a rebounding economy and $1 trillion in cash on corporate balance sheets will continue to fuel more merger and acquisition activity.
Scott Richardson, managing director of investment bank Houlihan Lokey, talked about what makes his business work in a recession.
Photo: Renee Jones Schneider, Star Tribune
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In September 2008, as the world financial system seemed teetered on the brink of collapse, Houlihan Lokey took a bold gamble.
The boutique investment bank, which is based in Los Angeles and Minneapolis, decided to go on a hiring spree, just as many on Wall Street were shedding thousands of staff. Over the next few years, Houlihan would snag top talent from Morgan Stanley, Deutsche Bank and Bear Stearns, among others.
The expansion paid off, enabling Houlihan to outhustle its rivals for business when the economy rebounded. Last year, Houlihan was the most prolific merger and acquisition adviser in the nation for deals of under $1 billion. Houlihan advised on 117 deals in 2010, the second most in the firm's 39-year history.
Scott Richardson, 40, managing director of Houlihan's Minneapolis office, discussed the firm's strategy, economic trends, and recent speculation that Houlihan might go public:
Q: Let's talk about what's driving the recent pickup in merger and acquisition activity. Deal volumes were up 62 percent in the first quarter over a year ago. Why the sudden flurry of deals?
A: First and foremost, companies are doing significantly better. Companies look to do mergers and acquisitions when they feel most comfortable with their own business. When things are going poorly and you're in a recession, everyone is looking internally. You know, we need to right the ship and figure things out. Even if you can buy something cheaply, you're worried that, `Look, our cash reserves are down, or our operations are upside down, we're losing money,' and so on. People are always looking internally when things are doing poorly. They look externally when things are going well.
Q: It's a bit counterintuitive. You would think M&A activity would pick up in a downturn because companies might sell out of distress.
A: Actually, if you're an owner of a company, the last time you want to sell is when your business is pitched like this [downward motion of his hand]. If you're selling in 2009, during the doldrums, it was because you had to, not because you wanted to. There was no willing seller. It was a seller that was being forced into the marketplace either because of cash flow or something was happening to them. Now, since the second half of 2010 there are a lot of really, really attractive deals in the marketplace.
Q: Companies are also sitting on records amount of cash. That's driving M&A activity too, right?
A: Yes. I think the non-finance portion of Fortune 500 companies are sitting on $1 trillion in cash. Cash! That's making no money. It's mind-boggling. They have to do something with that. ... What happened was, during this last downturn, people rightsized their companies for the revenue falloff they experienced, and what you've seen in unemployment is that people have been slow to rehire, even though revenues are at or above what they were before we went into the Great Recession. That's allowed cash flow to be higher as a percentage of revenues than it's been in history for a lot of these companies. So, they're now at the margin where they're looking to say, `All right, we can grow organically only so much. Let's look outward.' And if you look outward, it's going to be M&A, both domestic and international.
Q: Are these companies that are selling now in good shape?
A: By and large, any company that has survived the Great Recession is a good company. Bad companies don't survive in general recessions. But in a Great Recession, Darwinian theory takes over. I mean, if you're a manufacturing company and you're still around in the United States today, in light of what happened with the exporting of jobs to China and all the low-cost manufacturing countries, and the recession that we had after the technology bubble and this last recession, then you're a pretty damn good company. ... So, the companies that aren't great are vulnerable and, by and large, have been swallowed up by the events that have taken place over the past 10 years. The companies that are left are good companies and are run well.
Q: What are the sectors that will continue to be active in 2011 as far as M&A?
A: Healthcare and technology, for sure. Those are two sectors that you hear pretty much across the nation, anyone that's in investment banking, those are the two that have been and will continue to do well. The two that would be less familiar to the folks that aren't in this business is that government services continue to do really well. We have a very specific expertise in that.... Then I think food and agriculture will be ones that I think we'll continue to see pretty robust [M&A] activity.
Q: That covers a big portion of the economy.
A: You know what it doesn't cover? Services. That's still brutal. Generally, it's a difficult environment for those providing services. Real estate is still very difficult, and anything that deals in or around home building. Those are all very different sectors still.
Q: You have hired 30 senior investment bankers since 2008, during the depths of the recession. That certainly bucked the trend. Can you talk about why? And did you have any second thoughts?
A: I think you always have second thoughts, just to make sure you're getting the right people. But the strategy of actually going out and aggressively hiring people, we didn't debate that at all. It's one of the beauties of our platform. There is independence, which drives a lot of people our way, because our advice is independent. And the other thing is stability. People like hiring us because they know we will be stable. During [the recession], people were being fired from Bank of America, and J.P. Morgan [Chase], every firm that you could think of. At J.P. Morgan, you didn't know if the guy you hired was going to be there. And while you're hiring a firm, you're typically hiring the senior individual to actually provide you that advice. There was so much uncertainty. It was musical chairs. People were getting let go. The attrition rate on Wall Street was enormous in 2008.
Q: So you had a deliberate strategy to take advantage of the market turmoil?
A: It was strategic and selfish. We knew there was an extraordinary number of people that we could get that would be additive to our franchise in a down market, in an opportunity where it would be difficult to get them if there was a bidding war for them in a good market.
Q: Does the fact that you only offer investment advisory services, and not loans, put you at a disadvantage? I suspect that Goldman Sachs can win business just by throwing a few billion dollars into a deal to help finance it.
A: I think [lending] has, historically, been an advantage [for the banks], especially on large, multi-billion dollar transactions. ... But a couple things have happened. One, these guys got burned on their balance sheets in terms of being overexposed, and they pulled back. And that strains relationships, when you have to go to someone, a large client that you've loaned $2 billion to, and go, `You know what, we're going to have to tighten the purse strings here, and we're not going to provide you the credit.' People start to get a little angry. That has dissolved some of those relationships. What was their ability to lead and get the door open and maintain clients has kindof whipsawed them, because when you gotta be the bearer of bad news that says, `We're overexposed. We need to take you from $2 billion to $1.5 billion.' Well, that company has nowhere else to go to get that $500 million. You've now actually put them in peril. That has destroyed a bunch of relationships.
Q: And that has caused boards to change their behavior?
A: Significantly.... There has been a big swing on the part of boards and management teams to have advice that's independent. That has inured significantly to our benefit, especially on the corporate finance and fairness opinion side.
Q: How would you describe the difference in culture between your firm and say, some of the bulge-bracket firms on Wall Street?
A: One, I think that when you walk into a situation where you've got Goldman or Bank of America's business card, where everyone already has heard of you, then you have that halo of credibility, then it's easier. You're already going to win business. It's safe going with Goldman. Secondly, we don't have a balance sheet to buy business. You've got to win that deal in the boardroom because they think you're going to give them the best advice. When you're coming in, we're going to tell you what you need to hear, not what you want to hear, as opposed to saying, `We're also going to provide you this and this and this.' It's different. You have to win the business on its merits. It's a different type of individual that is able and willing to do that. You've got to roll up your own sleeves and do the work.
Q: Are there times when boards don't want to hear what you have to say?
A: Yes. ... When Sam Zell did that highly leveraged ESOP to buy the Chicago Tribune, and then it was a house of cards and fell apart ... they asked us to do the opinion. We looked at the facts and said, `No. We can't advise you that that's a good thing to do.' That's where we walked away from a bunch of money ... That's a case where, having a right to do something -- in this case, Sam Zell certainly had the right to do that transaction -- doesn't mean it's the right thing to do.
Q: There have been recent news reports suggesting that Houlihan Lokey might go public. Are you considering an IPO?
A: We actually just had our officer retreat out in California in the beginning of March. It was discussed. We looked at it, and decided it doesn't make sense for us for a number of reasons. The biggest reason for us is that we don't need the money to go public. We don't use a balance sheet. All we're providing is our advice. ... There's really little benefit to it for us.
Q: And you'd have to put up with all those quarterly conference calls with pesky analysts asking questions.
A: Having advised a lot of public companies, I like the fact that when one of the transactions I'm working on moves from a March 31 to an April 15 close, and thus moves from one quarter to another, that it doesn't matter. We're not having to report quarterly earnings. It literally doesn't matter for us as a firm. And then you have the CFO calling and saying, `Is that deal gonna close, is it gonna close?' ... I would never say never on the IPO, but not in the near term.
Q: Looking forward, what could cause the recent surge in M&A activity to reverse? What are the headwinds?
A: The cost of energy and commodities in general is a concern. Oil is over $100 per barrel, and it continues to creep up. Last week, it touched a new high that we hadn't seen in a couple of years. ... I'm still stunned that, given the price of where corn is and commodities all over the place, that you can still get food relatively cheaply at fast food restaurants. Someone's eating that. I don't know whether it's the manufacturers, the General Mills of the world, or who it is. But at some point, those costs are going to have to go up. It's interesting to me that all of this is happening -- energy prices are higher, commodity prices are higher and unemployment is still ridiculously high -- and we have no inflation, or at least very little inflation. We're at a pretty interesting time.
Q: Are you worried about a double-dip recession?
A: Last year, I was very concerned about a double-dip recession. It didn't come to fruition. Right now, I'm pretty bullish on at least the next two years. I think we are in a period of sustained economic growth, albeit low single digits. But I'm not concerned about a recession over the next couple of years. In M&A, it's impossible to look out any further than that. Things move too quickly.
Chris Serres • 612-673-4308
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About Scott R. Richardson
Last update: Saturday April 30, 2011 - 10:14 PM
Age: 40
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