MD of New York & Chief Information Officer, MOELIS & CO
Moelis Says `Business as Usual' in Most of Middle East
Feb. 3 (Bloomberg) -- Ken Moelis, the former UBS AG investment banking president who founded and now heads Moelis & Co., ...
About Ted Ferguson
Ted Ferguson, Managing Director and Chief Information Officer at Moelis, was quoted in a September 2012 Bloomberg interview discussing the firm's perspective on Middle East business conditions and broader M&A trends. Ferguson stated that most of the Middle East region was "doing business as usual" and that the political situation in Egypt was being treated as an "Egypt specific event" by regional economies. He advised that corporations considering strategic acquisitions in Egypt should "wait for more information" due to uncertainty about the outcome of regime changes. Ferguson also commented on the M&A outlook, predicting a "good year" for dealmaking but not a "blockbuster" compared to 2006-2007, noting that while buyers are strong, sellers lack incentive to sell at current prices due to strong recovery in margins and growth. He identified commodities and energy as the sector most likely to consolidate, describing it as a "major trend" rolling through the globe. Ferguson emphasized that Moelis was building a "global information-capable network" to serve clients worldwide, with offices in Hong Kong, Sydney, Dubai, and London.
Transcript (35 segments)
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Host0:00
Wall Street is chock-a-block with bankers these days. A true rainmaker, however, is hard to find—the kind of uber banker who doesn't have to pitch anything. The adviser who doesn't have to call the CEOs, they call him. Ken Mullis is one such rainmaker, and he has built one of Wall Street's biggest investment banking boutiques: Moelis & Company. We welcome Ken back to The Inside Track this morning to talk about the mood in corporate America and the outlook for M&A. But Ken, first of all, we really need to start with Egypt. What's going on there? You've just opened an office in Dubai, in fact. In the past couple of weeks, you were in Dubai and Kuwait last week. I want to know: what are your clients telling you? What are your clients asking you? What do they want to know from you when it comes to the uprising in Egypt?
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Ken Mullis0:41
You know, I think it's the same for us as for everybody. You turn on the TV in the morning and you see what's happened overnight. It's very hard to figure anything out. I mean, yes, we have an office there, but I don't think we have any specific insight as to how this will play out. It seems every day there's new news.
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Host0:59
Okay, well, clients though, clients like yours have very big decisions to make when it comes to what to do about regional investment. They're doing deals there, they're eyeing deals there. How do you evaluate the risk? Is it just a gut feeling or is it something a little more scientific than that?
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Ken Mullis1:14
No, I think one of the reasons we have an office on the ground there, and we've been very close to the situation in Dubai, helping to advise the Dubai government in the restructuring of some of those debts that they had. But look, it's like anything else: when you have a relationship, when you get to know the people, when you understand the inner workings of a geography by being there, you can very much assess the risks better and know who to call. I think in almost any place in the world, it helps to have relationships on the ground.
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Host1:45
What's the status right now of deal making in the Middle East? Is everything on hold because of what's going on in Egypt? Are things going to get cancelled? How long might it be before we see a deal fall apart? And is it region-wide or just confined to Egypt right now?
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Ken Mullis1:58
I think right now the rest of the region is acting as if this is an Egypt-specific event. For the time being, those economies continue, when you're over there, they are very impressive. They have tremendous—with commodity prices where they are today, the region, at least a significant amount of that region, has substantial economic benefit with oil getting near $100 a barrel. I think for now, you're going to see them continue to stay fairly aggressive and continue to operate as if Egypt is a one-off event.
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Host2:32
Ken, earlier today we had Naguib Sawiris. He's one of Egypt's richest men, he runs Orascom, he's the chairman of one of the region's largest telecom companies. He was telling us that ultimately this is good, right? There is no price for freedom, that this is what needs to happen in Egypt. We've seen similar moves undertaken by Jordan, we've seen similar moves undertaken in Yemen—the cabinet being dumped, the government being dumped in Jordan, the president of Yemen saying he's not going to run in 2013 again. Is that the sense that you get from people as well, that from the business community this is the way forward?
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Ken Mullis3:10
I think that if you make the assumption that the ruling party that takes over is what businessmen are hoping in their heart, and if that happens, possibly that's good. I think the right answer right now is to wait and see. I think things can happen; it can go either way. There can be regimes that come into place that are not as good as that outcome, and I think we don't know yet.
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Host3:37
So if a CEO came to you right now and said, 'Hey, you know, these valuations in the Middle East are getting quite attractive. Stocks, as we've been discussing this morning, Egyptian stocks in any case have been falling.' Would you advise him or her to hold off, to wait, and if so, for how long? I mean, is it a three-month shakeout, is it a six-month shakeout?
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Ken Mullis3:57
Well, look, you have the Middle East and the region and Egypt—they're separate, very separate things. So I'd say the region is still doing business as usual, most of the region. Egypt is interesting. Look, I see people talking about the stocks in Egypt and when they're cheap or not. For a corporation though, they can't look at Egypt as a stock trade. You can't be in on a Tuesday and say, 'Oh, I made a mistake, I need to trade out on the Thursday.' So I would say if you're looking at a strategic acquisition or something that is illiquid in Egypt, my gut feel is you have to wait for more information.
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Host4:35
Ken, I want to talk about the M&A environment. I spoke to Steve Schwarzman last week of the Blackstone Group, and he said Blackstone is going to be a whole lot more active this year. The preconditions are there to do a lot of interesting investments, is what Steve said. David Rubenstein talked about the fundraising environment—you can go out and raise $10 to $12 billion for a private equity fund. It sounds as though there's going to be a whole lot more capital being dedicated towards M&A, and not just from private equity. We hear about all the strategic buyers, the companies that have cash on their balance sheets. Is this going to be a blockbuster year for M&A?
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Ken Mullis5:07
I think it's going to be a good year. I don't think it'll be a blockbuster when measured against the 2006-2007 timeframe. The reason for that is, Eric, everybody always focuses on the buyer and how strong are the buyers in an M&A environment, like you just said. Steve Schwarzman is usually a buyer. What I see out there, the sellers are—when we go to boards and talk to the seller boards, they're seeing a very strong recovery in margins and growth, and I'm not sure that there's a huge desire to sell at these prices.
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Host5:43
Not a huge desire to sell, but I'm just wondering: how much of the combined M&A that we could see this year is going to be the healthy kind, to your point, or how much is going to be done in desperation?
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Ken Mullis5:53
Very little desperation left out there. It's been an unbelievable 18 months. Refinancings are going on for people that 18 months ago we would have been 100% sure their only choice was Chapter 11. Instead, they're refinancing. The growth in revenues—it's been an amazing year, I think, for capitalism in general, to see what private companies were able to accomplish when they put their mind to it and looked at lower demand, lower interest rates, and how quickly companies got themselves back in.
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Host6:25
If you have to pick one sector that's going to consolidate more than any other, which one is it?
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Ken Mullis6:30
Look, you have to still look at the commodities and energy. I think that trend is going to continue. It's a trend that's rolling through the globe, whether it be food commodities, metals, mining, energy. I still believe that you're going to see that be a major trend this year.
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Host6:51
And after that, would you expect to see some of the similar trends that we saw play out in 2010 more in financial services, more in real estate, for example?
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Ken Mullis6:59
I think you'll see all that. It's kind of across the board. We're seeing an interest by a lot of PE, by a lot of people to get more aggressive. The world feels a lot better to a lot of people and their specific companies. Most CEOs, most boards feel very good about their situation right now.
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Host7:17
Ken, you were telling us earlier that there are CEOs out there who are reluctant to sell their companies because they feel the economy is improving, their financial condition is good, they have good access to the debt markets, they've got a strong balance sheet. But confidence cuts both ways, right? I mean, look at a chart of CEO confidence and you can see that people feel confident in the economy, look at how it's gone up over the past couple of years. So how is that going to play out? On the one hand, you have these people who are emboldened to buy, and on the other hand, you have these people who are emboldened not to sell.
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Ken Mullis7:50
Well, look, I think that's what advice is all about. It's about judgment—when is the right time to do a transaction? I hear over and over people talk about the strength of cash on balance sheets and the strength of the buyer side of the transaction. But I think you're seeing a lot of companies feel like 2008 and 2009 were a low point, a decade low point in their stock price and their valuations. Some of them want to wait to see how far they can rebound before executing. So we'll see more resistance.
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Host8:24
So we'll see more resistance from the likes of Smurfit-Stone, D.E. for example? The Aventis deal has been going on for months. These are companies that don't want to sell. At the same time though, let's go back to these business conditions: improving confidence, low interest rates, access to capital markets, strong balance sheets, lots of cash, the improving economy. I mean, when were conditions this fertile for M&A last?
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Ken Mullis8:48
The trouble is this: 2006 and 2007 felt a little like this. Very low-cost financing—the financing is almost back to that level. The interesting part is most people just don't want to take on that leverage anymore. I think they've learned a lesson on what too much leverage can do to a very good business. But confidence is in the boardroom. People that we're talking to at these companies feel very good about where they are in the cycle. I think you are seeing people now look for growth; there's a desire to do M&A again, or at least explore it.
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Host9:22
How much is regulatory change driving the market in one way or the other? You've got companies like Goldman Sachs, for example, that can no longer run their own leverage buyout businesses—private equity effectively—and that applies on a smaller level to firms like JPMorgan and Morgan Stanley. So some of the bid is coming out of the market. Is that going to find its way into other firms' hands, or are those going to be permanently lost players from M&A?
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Ken Mullis9:47
You're talking primarily financials. Yes, look, I think we're in the early innings. Basel III, regulatory—there's a lot left to play out here as to how the financial institutions exist within the framework of their regulators. I think it's fresh. Remember, 2009 is not that long ago, and we had to let a lot of repair go on in financial institutions before implementing what I think will be some regulatory environment. But you're seeing a lot of change happen. I hope Moelis & Company is part of that change.
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Host10:17
Ken, like I said, almost 500 people, you're hiring at a blistering pace, you're opening offices all over the world. What's the end game for Moelis & Company? Are you building a business for yourself? Are you building a business to sell? Do you want to take it public? People want to know. I spoke with one of your former colleagues yesterday, and he said you got to ask him that question. Why can't you just build something for your clients?
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Ken Mullis10:37
Look, I've been servicing and been around clients for 30 years. What I wanted to put together was a global information-capable network so that I can go to my clients and give them the information that they need to make decisions around the world. I think today that requires you to be in Hong Kong, Sydney, Dubai, London. It requires that kind of information. So I'm building what I think a client needs to get advice.
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Host11:02
Okay, but you've added, like I say, more than 400 people in the space of a little over three years. Evercore, another company, another boutique investment bank, does great work as well, of course. They took five years to double from 250 to 500 people, so at a much slower hiring pace over a much longer period of time. How big a business do you plan to build?
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Ken Mullis11:23
Big enough to service the clients in the way they want to be serviced, and small enough to be relationship-based. I think there's a huge difference. I have 500 people; we don't have 250,000 people. So I think we're small enough to have relationships but large enough to deliver all the services.
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Host11:40
I want to ask you an operational question, Ken, about your expansion. You told Eric that just—talent is cheaper these days. Is that why you can expand so fast?
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Ken Mullis11:48
Well, it doesn't hurt. But look, what we want to do is hire talent and pay them a lot of money. You know, we're not looking to squeeze our talent. We're looking to hire great people, set up a culture where they do great work, focus on the clients, and not the internal politics. I'm hoping to pay these people a lot of money.
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Host12:07
How do you pay them though? That's what I want to know. You know, I know where you stand in the league tables. Are you generating as much revenue as Evercore, say, that just closed out their 2010 at $380 million in revenue?
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Ken Mullis12:21
Well, we're a private company, so I don't want to say too much about our financials. But let me say this: we had our best year ever. Our revenues in the fourth quarter—our best fourth quarter ever—and we were up somewhere between about 70% over the year before. So we're doing very well as a firm. Our clients like us, and we're going to continue to grow.
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Host12:42
Quick question here: one theme that we spoke about before North Africa blew up, for lack of a better term, is how all these cross-border deals would be done: outside companies buying US assets. Is that something that you see, or did North Africa in the past two weeks change that?
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Ken Mullis12:57
I don't think North Africa has changed that. I think the big risk to that has always been protectionism. As you see with natural resources, you see countries more and more looking to protect strategic resources. If there were to be something that would continue to block cross-border transactions, I think it's going to go more to strategic resource protection than instability in a single country.
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Host13:21
Ken, thanks so much for joining us here for the hour on The Inside Track. Ken Mullis, the CEO of Moelis & Company.