One of the most interesting debates I’ve heard lately about this market is whether or not the increase in M&A activity is bullish. The bearish Doug Kass says it’s not and the ever-eBULLient Jim Cramer says it is.
I’m not sure who is right. But I’ll tell you what is right: putting money on the focused, experienced deal-makers at Evercore Partners (EVR).
This “boutique” investment bank — I’ve always loved that phrase, like it’s a shop on Fifth Avenue for the 1% (which it is I guess) — was founded in 1996 by current Chairman Roger Altman, a veteran of Wall Street and Washington.
Altman served as Deputy Secretary of the US Treasury in the late 1970’s and again in the 90’s and was head of M&A for Blackstone Group (BX) before launching his own firm on the premise that clients would be best served by an investment banking firm free of the conflicts of interest inherent to large, multi-product financial institutions.
Kill the Traders and Other Distractions
Altman believed that this pure advisory model, undistracted by proprietary trading and sell-side research, would serve clients the best and attract the most talented senior finance professionals to the firm.
This is important because while M&A deals seem like quick cash grabs on the surface where big money simply has to make a deal that makes both sides richer, there is a lot more to Evercore’s business, including advising on divestitures, restructurings, specialized financings, public offerings, private placements and other strategic transactions.
Re-Building the Core
Though global M&A activity rebounded fairly strong in 2010 and 2011 after the financial crisis, Evercore was a slow starter. You can see from the Price & Consensus chart below that earnings estimates would start out rosy for each year 2010 through 2012, only to be taken down. And, of course, the stock price followed.
But in late 2012, you can also see that story quickly began to change. Analyst consensus estimates made a dramatic turnaround on the heels of one of the company’s biggest deals ever, advising Kraft Foods on its $36 billion spin-off of Kraft Foods Group.
And as corporate deal-making heated up in into the end of 2012, with average Wall Street deal premiums crossing 25%, profit projections for EVR got hotter too. In early December, they signed on to advise McMoRan Exploration in its interest to be acquired by Freeport-McMoRan Copper & Gold (FCX) for $3.2 billion.
Evercore has now facilitated over $1 trillion in transactions, including advising a special committee of Dell’s board of directors in the recent bid to take the company private. And one thing to remember about Evercore is that even if a deal doesn’t close, they still get paid advisory fees for their work.
The firm also has a growing Investment Management Services division with over $12 billion AUM in private equity, venture capital, and trustee services for institutional investors and high net worth individuals.
How the Zacks Rank Banked Coin in EVR
We could talk about Evercore’s rising revenues, its balance sheet, or why the Zacks quantitative model picked up its dramatically improving earnings outlook. But, sometimes it’s best to just let a picture tell the story. Below is a 1-year price chart with notations about when the model turned from red to green.
Investors who spotted the “green lights” in December jumped on this story early for 50% gains. Even its earning of a #1 Rank on January 12 gave time for substantial appreciation. And while the momentum may slow soon, it looks like dips to the 50-day and that area of congestion between $38 and $40 should be bought as long as the Rank is at least a 3.
Evermore, A Deep Bench
I mentioned the leadership of Altman in creating a world class firm to take on the bulge bracket. But the firm’s CEO is equally impressive. Last week I watched an interview with CEO Ralph Schlosstein on Bloomberg and he comes across as not only a thoughtful economist, but a world class negotiator.
Schlosstein, who also worked at the Treasury along side Altman in the 70’s, was for almost twenty years the President of BlackRock (BLK), the largest publicly traded asset management firm with over $3.6 trillion of assets under management. He co-founded BlackRock in 1988
No stranger to politics, in the interview he carefully dissected the battle lines in Washington over fiscal issues and I could tell I was watching a master of solving problems and communicating solutions, skills which must be required at the top of multi-billion dollar deals with diverse shareholder interests.
Schlosstein also shared his steady view of the M&A horizon. First, he described the 3 major conditions in place for a continued M&A revival: (1) supportive capital markets, (2) economic visibility, and (3) CEO confidence.
Then he described Evercore’s tracking of 33 years of M&A data, calling it a secular growth story that continues to make higher highs and higher lows in deal volume throughout economic cycles. He noted that the average down cycle is 2 to 3 years, and the average up cycle is 5 to 8 years.
Since we are in year 4 of an up cycle, Evercore should be on your buy list of deal masters.
Kevin Cook is a Senior Stock Strategist with Zacks.com
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