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Commentary

Corporate marriage trends

January 21, 2021

COMMENTARY

January 21, 2021

Dear clients and colleagues:

Early reports about COVID-19’s impact on marriages in the United States (US) indicate that marriage
rates were lower than expected in 2020¹. Recent trends show that the opposite has been true for
corporations, with the second half of the year seeing an unprecedented surge in corporate merger
and acquisition (M&A) activity. This surge comes after M&A volumes dried up by more than 50%
following the initial lockdowns in the spring of 2020, causing executives to re-evaluate opportunities,
given the uncertainty².

Although total deal value is still down 6% to $3.5 trillion for 2020, more than two-thirds of the activity
happened between July and December3. The fourth quarter of 2020 alone saw a 39% year over year
increase in announced M&A deals from 2019³. Further, December was the fourth strongest month in
history for M&A revenue. It is not just a high volume of small transactions; mega deal announcements
have been all over the news. Such examples include the S&P Global acquisition of IHS Markit for $39
billion, the Salesforce acquisition of Slack for $27 billion, and AON’s acquisition of Willis Towers
Watson for $30 billion.

So, how is 2021 looking, compared to the second half of 2020? It appears unlikely to be any different.
As management teams begin reflecting on what a post-COVID future looks like, we expect that
companies will reposition themselves to adjust to shifting consumer behaviour, created by COVID. A
quarterly survey of global CEO confidence reached a high of 64 in Q3 2020, after bottoming to 36 at
the beginning of the year (like with Purchasing Managers’ Index (PMI), ratings above 50 are positive
and below are negative)⁴. That same report highlighted that of the CEOs surveyed, 36% plan to
increase their capital spending over the next 12 months, compared to their previous expectations.
Given the recent political changes in the US, it appears likely that the next CEO confidence survey will
show even more optimism.

Furthermore, many industries, such as travel, entertainment and energy, are still near their multi-year
low; this makes companies attractive targets at their current valuation. While the initial expectation
was that many names in these industries would go bankrupt, all-time low interest rates and massive
liquidity injections made it so that they only had to load their balance sheet with more debts to stay
afloat. These factors make it likely that the record high of $1.5 trillion cash that private equity funds
currently hold will be put to work during the year. As opportunities become clearer, we will see a
record year for M&A and other investment banking activities.

As for the important question on everyone’s mind: how is Global Alpha getting exposure to this? We
own Rothschild & Co (ROTH PA), among other names. Founded in 1838 by the famous Rothschild
family, Rothschild & Co is one of the world’s largest independent financial advisory groups, with
headquarters in Paris, France. The company provides M&A, strategy and financing advice, as well as
investment and wealth management. With 50 offices and 3,500 employees, the company has a
foothold in over 40 countries, and it is still more than 60% family-owned. As a boutique firm,
Rothschild also benefits from a favorable reputation in comparison to larger banks, as well as the trend
of using more advisors to conduct individual deals. In 2019, boutique firms accounted for 22% of
advisory deal value versus only 9% in 2000; its share is expected to keep increasing over the next
decade.

Historically, the firm’s activities centered on its global financial advisory and its wealth and asset
management businesses. A little more than a decade ago, Rothschild added a new private equity
business that now represents 8% of their revenue, but 17% of their profit share, representing a new
growth driver for them. It is also the reason that Rothschild is able to maintain a better margin profile
than its peers. Additionally, this allows the firm to deploy its own capital alongside their institutional
clients and incorporate strong ESG principles in its investment decisions.

Within its global financial advisory business, Rothschild employs more than 1,100 advisors, and derives
two-thirds of its revenue from pure M&A, with the balance from capital markets financing. Rothschild
ranks sixthin revenue globally and first in Europe for its investment banking business. We are confident
that the company will be able to benefit from the current environment.

SWOT

Strengths
• Leader in the European Union, consistently gaining market shares
• Best in class talent and solid reputation

Weakness
• M&A is highly cyclical
• High family ownership is a risk for shareholders

Opportunities
• US market share can double in size
• Emerging markets expansion

Threats
• Departure of key bankers
• Weak M&A cycle

Have a great weekend.
The Global Alpha team

1 Divorces and Marriages Tumbled in U.S. During Covid, Study Shows, Bloomberg, January 5, 2021
2 M&A Deals Comes Roaring Back as Executives Plot Post-Covid Future, December 24, 2020
3 4Q20 Independent Financial Advisor & Regional Broker Earnings Preview, Piper Sandler, January 13, 2021
4 The Conference Board Measure of CEO Confidence™, October 20, 2020


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