2020, a Year to Remember....
Hello, to anyone who may be reading, I hope you are enjoying Christmas, and staying safe!
I know I said Saturday, but I decided to finish writing it today - it will normally be on Saturdays/Sundays.
As it’s my first newsletter, and it’s the end of the year, this will be a bit longer than usual, at the end, so do bear with me.
Please do let me know what you think at the end, noting that next week’s, and future ones, will be a bit different, shorter and with a little more humour, so don’t miss it!
Please read the disclaimer at the end of the newsletter
The Week’s Briefing:
M&A
Fidelity National Information Services (FIS) held unsuccessful merger talks with Global Payments Networks (GPN) to create a $180 billion payments powerhouse - the deal fell through in negotiations, at the last minute.
Wells Fargo to sell its high quality, $10bn student loan portfolio to Blackstone and Apollo
Oyal Rock and Dyal Capital Partners to go public through merging with blank-cheque company, Altimar Acquisition Corp. to create a new entity, Blue Owl, worth $12.5bn, managing over $45bn in assets. They expect to soon be managing $60bn, in the near future.
Goldman Sachs leads as the year’s top M&A advisor (again) followed by Morgan Stanley, in second, and JP Morgan Chase & Co. in third - down from second last year.
Banking, Insurance & Regulation
SEC approves ‘direct listing’ IPO model on the NYSE, an alternative to a traditional IPO.
US Dollar’s share as world’s reserve currency slips in Q3 2020, to 60.4%, down from 61.2% before - according to the IMF. This is the second consecutive quarter of decline in its share of currency reserves.
Goldman Sachs to reach further into the Real Estate market, with Goldman unit, Petershill, purchasing a stake in Oak Street Real Estate Capital LLC, in November, which buys stores and warehouses from large companies, such as Walgreens, and leases them back to them. The Goldman partnership gives them access to easy fund raising and thus can help them grow.
The FED lifts buyback restrictions on U.S. banks
JPM board authorises $30bn in share repurchases, Morgan Stanley authorises $10bn, and US Bancorp authorises $3bn in repurchases.
Money Market Funds struggling to survive with interest rates at zero, leading to Fidelity’s largest MM fund, managing $212bn, waiving $247 million in fees, as customers may face negative yields.
FCA admits to ‘not effectively supervising’ mini-bond issuer, LCF, which collapsed last year.
Lee Raymond, former Exxon Mobil executive, to step down from the board of JP Morgan Chase & Co., as climate activists push banks to focus on being more “ESG”.
Big U.S. banks fined, and paid penalties of nearly a quarter of a trillion dollars, $200bn, over the last 2 decades, led by BofA, with over $91bn in fines and JPM, with $40bn in fines, since 2000. Much were related to the GFC in 2008.
Private banker of Donald Trump, Rosemary Vrablic, quits Deutsche Bank
Fintech firm, Affirm, prepares for a possible $10bn IPO next year, after delaying it amid absurd speculation in IPO markets, for example Snowflake, Doordash and AirBnB.
Robinhood’s business model questioned by regulators, paid $64 million in fines so far.
Every week, we’ll look through a few of these headlines in further detail, let’s start today, with the merger talks between FIS and GPN.
This part of the payments industry has 3 main players, Fiserv, Fidelity National Information Services (FIS) and Global Payments Network (GPN), however there are risks to this oligopoly: fintech firms.
Fintech’s such as Stripe, Square and Adyen AV are putting pressure on this sector, fear of these fintech firms has lead to a wave of M&A in the payments industry.
However, such a large merger would certainly catch the eye of regulators, and the DOJ, who would be concerned about a possible monopoly in the industry, among other things.
The market caps of these companies are as follows (as of close on 24th Dec, Bloomberg):
$FIS = $87bn
$GPN = $62bn
$FISV = $76bn
What we know about the possible merger:
Would have been valued at $70bn (by far the largest in the industry, far outweighing the S&P Global - IHS Markit merger)
Talks fell apart just before they planned to announce the merger, this week
Low chance of deal being revived now, but may be returned to in the future.
GPN primarily provides payments and point of sale services to merchants, the merger would have expanded FIS’s merchant facing business, which currently accounts for 20% of its annual revenues. Much of FIS’s current revenues come from serving banks and FI’s (financial institutions).
Recent deals in the sector show this ‘wave of consolidation’ (WSJ) in the payments space, especially between these 3 companies:
FIS merged with Worldpay Inc. in a $37bn deal last year - this is still the largest payments deal ever
Fiserv paid $22bn for First Data Corp. last year, just before the FIS/Worldpay deal.
After the FIS deal, GPN bought TSYS in a $21.5bn deal
Why would the merger have been significant?
It would have created the biggest deal ever in the payments space, worth over $70bn, between the two largest players in an already small industry, nearly double the FIS/Worldpay deal in 2019. Not only that, but it would have been the largest deal in the markets for the whole of 2020, beating S&P Global Inc.’s purchase of IHS Markit for a whopping 44 billion dollars and Astrazeneca’s acquisition of Alexion Pharmaceuticals, for 39 billion dollars.
Wells Fargo
Wells Fargo, once on top of the banking world, is now a limping dog, even losing the backing of once huge fan, Warren Buffett.
In an effort to cut costs, by new CEO Charles Scharf, and slim down the bank, they reached a deal with private equity firms, Blackstone and Apollo, to sell them Well’s very high quality student loan portfolio. The portfolio is being serviced by Nelnet Inc. and has an average FICO store of 768 - according to reports by Bloomberg.
It is also rumoured that Wells Fargo is looking to sell its asset management devision, amid a wave of changes by CEO, Charlie Scharf, former CEO of BNY Mellon and Visa. Scharf has said he is targeting to save 10 billion dollars in annual costs over the long run, and the asset management division was already slimmed down last year, when they sold their retirement plan services to investment firm, Principle Financial Group, for $1.2bn.
Market observations, and recent economic developments
Quick economic data summary:
The economy has recently been slowing down its pace of recovery, since March. This is evident from the table above.
2020 has been a rollercoaster year for markets, with the S&P 500 on track to close the year returning nearly 14%, despite a 30+% drawdown in March, a global pandemic, and the worst global recession since 1929.
Not only is the S&P 500 set to close the year at record highs, but also at near record valuations. The Shiller Cape P/E ratio currently stands at a staggering 37.77 times earnings, the highest ever, even outpacing the Dot.com bubble level of around 37.3. One must note, however, that treasuries currently yield nothing, with the US10Y yielding just 92 basis points, coming off of its lowest levels ever, earlier on in the year. This has been a justification for the high valuations, but this is not sustainable, in my opinion, creating head winds for the markets, especially the tech sector, over the long term. The SPAC and IPO mania is just another sign of the bubble and a golden age for corporate fraud. Delusion has also been evident in markets, with so-called ‘story’ stocks, not even able to make a profit (in some cases even revenues) returning 100’s of percent this year, for example: Tesla, Nio and Square. Even extremely profitable companies, such as Apple and Adobe, are rampant with speculation and delusion. For example, Apple’s stock went up recently on rumours that in 4 years, that they were planning the enter the crowded, and notoriously high CAPEX & low margin automotive industry. And then you see the ‘crypto’ space where delusion is visible on a whole other level.
But, with the FED being the only game in town, what do valuations and fundamentals matter? The FED has totally distorted markets by ‘printing’ money (they don’t really print money, they buy treasuries from a bank, like JPM, who buys them from the Treasury), lowering interest rates to zero, buying corporate bonds, and buying MBS’s. What they’ve done, is created a market that is rampant with speculation and detached from all fundamentals, essentially, banning price discovery. Not only the markets have been distorted, but the economy as well. Whilst small businesses fail, the big ones come out of this crisis stronger, due to their access to the public equity markets, and credit facilities that small businesses are not able to reach. The PPP loans were a support to the economy, but still was rampant with fraud, and much didn’t even reach the small businesses that needed them. Stimulus is also needed, but what are the effects of too much? $2000 is far too much, and $600 is too little - this is quite the dilemma that governments face. Fiscal and monetary support is necessary, but overdoing it will likely lead to a net-harm position, in the long-run, especially for poorer people.
There has been a very rational concern recently of inflation, just as there was in 2009, and it has been evident everywhere, except for in CPI rates and measurements of inflation. Why is inflation different this time round? In 2008, the banks were bailed out, little money went to poorer people, and thus never really made its way into the economy. This time around, the money is going directly to poorer people, and thus will likely make its way into the economy through real spending. But will that money outweigh the negative effects on the economy? Due to the sheer sum of money ‘printed’, and a strong economic recovery, I think it will.
Banks, however, came into this crisis from a place of strength, and are well capitalised enough to handle such a crisis. This has, in my opinion, rightfully, led the FED to allow big bank share repurchases, and allow dividend payments (but not increases). Still, banks came into this crisis from a place of strength at the cost of weaker economy, as they were lending less, being more cautious and overly-restricted by the Dodd-Frank act, and regulators. This will likely be a drag on a very strong recovery in the future.
Weighing up everything I’ve seen, I don’t think that returns over the next decade for the equity markets will be as high as all the ‘strategists’ on Wall Street think, with markets at record high valuations, record corporate debt and leverage, record deficits, possible inflation and higher rates, all being headwinds over the long term. Whilst next year may be a strong year for the economy, as everyone leaves their homes and lives life for a while, I don’t see the next decade being another “roaring 20’s”.
But, hey, I’m just a 15 year old, so why listen to me, when you could listen to the shouty man on Twitter, who picks stocks out of a bag, and claims that he is better than Warren Buffett - who has recently been called ‘old’ and ‘out-of-touch’ by many (I don’t believe so, at all).
Thanks for reading!
If you enjoyed it, please subscribe, and stay tuned for next week's. I can assure you, they will be shorter than this, normally, but there were a lot of things to sum up as the year came to an end.
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Email: BIJournal@outlook.com
Twitter: @oabdelmaged1
Twitter: @banking_journal
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