UBS’s global head of advisory, Piero Novelli, talks to Danielle Myles about expanding in the US in the aftermath of Donal Trump's tax reforms, and explains why he is expecting a stellar year for M&A activity.
Judging by the numbers, this is a good time to be a mergers and acquisitions (M&A) banker. In 2017, global volumes exceeded $3500bn for the fourth year in a row, and the announcement of $276bn of M&A deals in January made it the briskest start to the year in nearly two decades.
Based on supportive financial markets, dialogue with clients and encouraging policy developments such as US tax reform and Chinese outbound investment rules, UBS's global head of advisory, Piero Novelli, expects 2018 to follow this trajectory. “The bull case seems to be stronger than the bear case,” he says. “I expect activity to be as healthy, if not healthier, than in 2017.”
A boutique on steroids
M&A is a market in which the Swiss-headquartered group is well placed to take advantage. Its multi-year restructuring, known as Project Accelerate, created a leaner investment bank by inter alia, drastically downsizing its fixed-income business and all but ceasing to lend to non-Swiss corporates.
Advisory quickly became a key pillar of this capital-light model, as evidenced by its hiring of a multitude of seasoned dealmakers – including Mr Novelli himself – in 2013 and 2014 as the restructuring gathered steam. This focus has not, however, come at the expense of other business lines. “In a way, we’ve almost become an investment banking boutique on steroids,” says Mr Novelli. “We have the full offering of products and global reach, but we don’t rely on our balance sheet.”
The lack of relationship-based banking has, he believes, avoided lethargy and placed a premium on quality advice. “It forces us to provide real insight and genuinely add value to clients, as if we don’t provide that we won’t be retained,” says Mr Novelli, who was appointed co-executive chairman of the broader corporate client solutions group (CCS) last year. “It has brought a lot of discipline into the business, and a form of natural selection in terms of hiring and retaining the right type of bankers.”
At the heart of UBS’s post-crisis restructuring was its pivot to private banking, but Mr Novelli says this has not demoted the investment bank to a supporting role within the firm’s strategy. “We know we belong to a group whose most important division is wealth management. That’s crystal clear. But the wealth management division actually often creates an angle for us,” he says. Indeed, its relationships with industrialists, entrepreneurs and the world’s billionaires (of which UBS banks about half) can open doors in an M&A context, as these clients are often connected to buyers, sellers and targets.
US expansion
While the investment bank’s adjusted return on equity for 2017 was a flush 16%, its decline in fourth-quarter advisory revenues (year on year) outpaced the decline in the overall M&A fee pool. Commenting on this result in an analyst call, CEO Sergio Ermotti noted that CCS is underweight in the US – where dealflow has been buoyant – compared with other regions. “That’s something that we want to correct in a sustainable way without rushing it,” he added.
Mr Novelli affirms that the US is at the heart of UBS's CCS expansion. “In Asia and Europe we have a critical mass of personnel. But in the US we plan to grow, we plan to hire and we plan to become stronger. There is no doubt.” This could prove to be a timely decision. US corporates are expected to repatriate some of the $2500bn in cash they hold overseas following the recent passage of federal tax reforms that lower the company rate from 35% to 21%. Whether they use this cash to grow by acquisition or buy back shares is still an open question, but Mr Novelli is leaning towards the former. “It’s more likely to go towards acquisitions as investors aren’t welcoming buybacks to the same extent they did three or four years ago,” he says. “Also, strategic acquisitions generate real synergies that create higher quality earnings accretion and therefore greater support of higher share prices.”
While domestic dealflow has the most to gain from the reform, it could also boost transatlantic activity. “For European buyers, a year ago there was uncertainty over the tax consequences of acquiring in the US,” says Mr Novelli. “That is now removed, so we expect inbound M&A to be stronger as well.”
Activists take root
This is just one of many European M&A drivers he forecasts for this year. Another is a combination of factors that make the region fertile ground for activist investors. Well established in the US, the rise of passive forms of investment such as exchange-traded funds and the decline of industrialist family reference shareholders have seen activist investors steadily gain traction in Europe over the past decade.
They have become more strident of late. “Frankly, the past 12 to 18 months has seen a major acceleration in activists’ public campaigns in continental Europe, which could be a catalyst for more M&A,” says Mr Novelli. Their influence has been strengthened by proxy advisers ISS and Glass Lewis, which in 2017 recommended shareholders vote in favour of a record high proportion of activist campaigns globally.
In terms of sectors, utilities and consumer goods will continue to be busy; in 2017 UBS displayed its capabilities in the latter by advising on the successful defence of Kraft Heinz’s $143bn hostile bid for Unilever’s spread business. Mr Novelli also believes the time is right for the region’s overcrowded lending market to rationalise. Given that the global post-crisis upswing is among the longest in 50 years, it may be nearing its end, and history shows that this is when the sector is most likely to engage in M&A. “A lot depends on regulators, but there is no doubt that from an economic perspective it makes tremendous sense for Europe to have another round of consolidation among banks,” says Mr Novelli.
Change in Asia
A major reason global M&A in 2017 was down on previous years is because of the slowdown in Chinese M&A. Following local corporates’ overseas buying sprees over the two previous years (in 2016 volumes were a record high), regulators clamped down on outbound M&A as part of capital controls imposed to strengthen its currency.
But an uptick is expected in 2018 thanks to developments over the past seven months; most notably, new guidelines which lay out the sectors in which outbound M&A is encouraged, permitted or banned, and the outcome of the Communist Party Congress. “Now that a new strategy has been outlined, we feel that particularly in sectors that are strategic to China – those relating to the One Belt, One Road initiative – firms will be more acquisitive,” says Mr Novelli. “We may not see the excesses of 2015 and 2016, but we certainly expect a more normalised level of activity.”
China is a market in which UBS has a long history, being among the first locally licensed foreign banks. This has helped it win key roles on the unprecedented restructuring of the country’s state-owned shipping industry, advise Syngenta on its $43bn sale to ChemChina, and act as sole adviser to China’s sovereign wealth fund on its €12.25bn acquisition of European logistics firm Logicor.
The region’s leadership team underwent some changes in 2017. After losing head of Asia-Pacific M&A Alison Harding-Jones and China investment banking boss Jiang Guorong to Citi, UBS elevated Australia-based Greg Peirce to run the regional M&A franchise and re-hired David Chin to replace Mr Jiang. They are at the helm of one of the region’s strongest advisory outfits. According to Bloomberg’s league tables for the past two years, UBS has ranked in the top four in Asia M&A (excluding Japan) and in the top two for Australia and New Zealand.
Comeback kid
Mr Novelli’s arrival at UBS nearly five years ago was notable for two reasons. His was the first senior appointment made by the investment bank’s then new president Andrea Orcel (bar his Merrill Lynch colleagues who made the move soon after him), and he was returning to a bank he had worked at pre-crisis. His decision to rejoin UBS was spurred by seeing that the bank was on the cusp of transitioning into a completely different firm, and Mr Orcel’s presence. “He has the track record of an extremely successful large-cap client M&A adviser, and we have the same background, having done lots of big M&A deals for corporate clients for 25 years,” says Mr Novelli. “I saw someone I could relate to, with whom I shared similar DNA and ambitions. It became an easy decision.”
Over those two-and-a-half decades he has racked up many blockbuster mandates, but Mr Novelli considers his real career successes to be those times at which he has advised clients at critical points in the biggest deals in their history. “That remains the most valuable part of what I do and what I’m genuinely proud of. The corollary to that is adding value to your colleagues, knowing they come to you for ideas or with a complicated situation,” he says. “These are the things that motivate me every day.”
