Welcome to this week's episode of "What's the Big Deal?" We're going to take a look at M&A this week, aren't we? Indeed. I know we've talked a lot about M&A, but we're obviously in the financial services space. M&A is a big feature of certainly both of our former day jobs, and a lot of people I hope are listening to this podcast, and it's been kind of a crazy year for it.

A lot of really interesting themes, both on the positive and some maybe foreshadowing on some slowdown that might come.

So yeah- Absolutely ... a bit of an update on Q1, Q2 M&A.

Excellent. Before we dive into that, let's just provide a bit of context because the public markets, what's going on with those, they do have an influence on M&A. So let's just check in, shall we, with what's been happening in the markets.

Graham, why don't you kick off? What are the things that you think are particularly important before we talk about M&A? Two things that I want to talk about quickly.

One is just what's going on with SpaceX.

I know this is well covered, but I haven't followed it super closely, so I want to get your take on where it is now. And then this happened more last week than this week.

Markets have rebounded a little bit, but we just had a bit of a sell-off in the AI and the overall AI space last week, just with people, I think kind of rightly questioning, is this big CapEx wave slowly, not coming to an end rather, but is it starting to slow down? Hmm.

So first of all, on SpaceX, we talked about this, and everyone's talking about it. The valuation was just nuts.

It still popped, obviously, after listing.

It feels like a lot of that was due to some of the technical buying that we talked about.

Because SpaceX was fast admitted into NASDAQ, you've got all the pension funds, index tracking funds, whatnot, who literally just had to buy the stock, kind of driving it up.

And it's come down since then. So where are we now, and what do you expect to happen when we have the first wave of employee lock-up expiring? Which sounds like is actually pretty soon.

Yeah. So, just to kind of recap, we had a huge pop.

It was considered a very successful IPO.

But remember, we did predict that because of- Of course. From- ... oversubscription ... the best IPO in history, like Yeah. But it was really oversubscribed, and that oversubscription drove a huge increase in the share price.

Very much technical. No change in the fundamentals at the moment, really. But it's come back a little bit.

We're now at just below $160 per share.

And really, the expectation is that over the coming months, the share price will probably ease back a little bit because we are now at the point where the lock-ups, which the existing shareholders, and that's employees, but also some of the early-stage investors, they are going to now be in a position to start selling their shares.

And remember, the original IPO only listed about 5% of the share count. So as these- Yeah ... existing shareholders sell, it massively increases supply in the market, and you do get a drop-off in the share price.

That's kind of, as I say, just a technical impact.

So, that's going to play out over the coming months.

We predicted that the share price would be volatile, and it has been moving around a lot. There's been lots of other things happening in the market at the same time, which will have some impact on SpaceX as well. You mentioned the AI sell-off. We had, in June, really a bit of a correction for the AI stocks.

It is in the context of a strong year-to-date performance.

Yeah.

And it was very much only a correction.

Usually, we would consider that to be a 10% fall in share prices or less.

But yeah, so we've had a bit of a correction, and that's been triggered, as you say, by concerns over the discipline around CapEx spending, whether or not there is too much capacity in the market.

That is really, the market's very sensitive to both bottlenecks in terms of capacity, but also oversupply.

That balance between supply and demand and capacity is hugely important when we've got such a concentrated market, so focused on that AI theme. And then kind of adding to that, and I know people don't like to think about the bond markets and they think about the equity markets.

It's maybe not as thrilling talking about bond yields, but we have got an interest rate environment which is much more hawkish.

We have the Fed now talking about interest rate rises, a difference in approach to what they consider would be influencing their decisions around interest rates.

And that puts pressure on a lot of things, and probably we'll come onto that when we talk about the M&A, looking out on the M&A horizon as well.

But yeah, in terms of the equity markets, they do react to what's happening in the bond market. And when there's concerns around the interest rates being either increasing or just more hawkish tone around those, it does tend to cause the equity markets to pull back.

So it's been an interesting few weeks, shall we say, Graham.

It has, and there's been some interesting news that's just come out even, well, last week, this week as well. I think it was even today, Meta announced that they were going to start selling some excess compute.

I don't know if anyone was really aware they even had any excess compute until they mentioned it now, because I feel like the story that we've all been sold is that there's just been this compute scarcity.

You have to spend all the CapEx to build all the AI data centers and whatnot, but in the last couple months, we've had xAI sell off their spare capacity.

We're having Meta doing the same thing, and I don't know enough about the technical details of the compute that, say, Meta is putting up for lease to know that can you have one data center that runs literally every model.

I know there's a lot more specialization in GPUs, TPUs, that kind of thing.

So what I don't know is, is this a all compute is created equal, or is this more of a, all right, we've got some excess capacity in one area that doesn't influence all the CapEx spend over here. But I think in any case, if you are bearish in any way on the CapEx spend and the CapEx cycle for this AI build-out, then let's think about what that's going to do to the valuations for Nvidia, Broadcom, TSMC, all the companies we talked about, what was it, a couple months ago.

Because ultimately, everyone else's CapEx is their revenue. Right.

Mm-hmm.

So let's see what happens. So it's interesting because I think we talked a couple of weeks ago about we are maybe entering a market where the valuations for a lot of these businesses feel like maybe they've started to slow down in terms of their exponential growth. Now we've finally had some signs of, there's been a mini correction. Will there be another one yet to come? It feels like it's too early to tell.

I don't know what the impact yet of this excess compute capacity is going to be. And then I think the other thing that's going to be interesting, and we've already seen OpenAI delay their IPO.

I don't know yet exactly what Anthropic's plans are going to be, but there was news literally today about another Chinese model that claims to have performance that's basically as good as some of the frontier models at literally a 10th of the cost.

So as we think about IPO valuations, run rate revenue, if you are IPO-ing off a run rate revenue of X, but that's based on your customers having to use your model because it's the best.

If they can go use another one and acquire it for 10% of the cost, then why wouldn't they do that? So it's going to be an interesting finish to the year in this space, I think. So lots to keep our eyes on and keep tabs on.

Absolutely.

I can just see from what you're saying that it's just not going to take much to move the needle on so many US stocks.

It's going to be an interesting- Yeah ... journey as we- And to move- ... get more data ... and to move the market, by the way.

Actually, I just remember this is something, well, I was talking with one of my buddies a couple of weeks ago, and he was talking to a friend. I don't know what firm this friend works for.

Basically saying he was aware of a lot of people buying puts on the Nasdaq, in essence, right? Just kind of taking a view that just because you obviously can't short SpaceX yet- Yeah ... you just don't have the capacity to get the shares.

If you're taking the view that SpaceX is such a big component of the Nasdaq, if you're taking a view on that technical buying stopping and the share price coming down.

Actually, some people made some money shorting the Nasdaq. And again, I don't know what level they were shorting it at. I think you got to have really strong conviction and a really good kind of inside line into just the pace and the quantity of that technical buying in order to make that call. But the fact that you're basically shorting one stock by shorting the entire market is kind of nuts.

It is. But it's a reminder that the markets find a way, isn't it? Because I remember when we were first talking about SpaceX, we said, "The free float's too small for you to short that stock." Hedge funds would not touch it.

But as you've said, they've found a way, albeit- Yeah ... by having a short exposure on the entire index, not just on one company.

But that's, yeah, super interesting.

And I think probably some of the concerns that we're having about the markets are relevant to the M&A discussion we're about to have.

So let's dive into that.

In terms of M&A, I know we did, earlier in the year, looked at the M&A review for Q1. It was mega deal central, if you remember. We had pent-up demand because of 2025, things were on hold with what was happening with the US markets and tariff discussions. So Q1 was an absolute blinder, wasn't it? It was amazing.

It was.

What about Q2? Have we got more of the same, Graham? It's been more the same for the most part.

If you compare Q2 M&A value, we're up 41% compared to this time last year. So we're still proceeding at this breakneck pace of M&A. It's still the mega deals, though.

So- Mm ... Q2 value up 41%, deal volume or deal count up, I want to say 10%, 9, 10%. So we're still favoring the mega M&A deal. So it continues to be that kind of tale of two halves.

I think some of the themes are the same, but we've got some differences emerging maybe in terms of the motivation for some of this M&A. I think a lot of it, we were talking just even before we started recording the episode, a lot of this feels like defensive posturing on behalf- Mm ... of some of these big public companies.

I guess if you think about what's going on in the world right now, there's a ton of uncertainty. There's geopolitical uncertainty, there's business model disruption uncertainty from M&A.

If you're a large player and you're trying to protect yourself against the disruption from, say, a new AI startup who you think might come and take a piece of your pie, the easiest thing you can do is just buy them up. Right? So again, we're looking at this Bain report, and actually, we'll link to this. Let's put a link to this report- Let's do that, yeah ... in the episode, because actually, I think it's a free report. You can grab it from Bain's website.

It's actually quite a useful resource just to go through some of the high-level stats and then industry by industry.

It's also got some stats on the deal size.

So we've been talking about the mega deals, but also what's been up a lot in terms of both value and count is the really small cap kind of startup M&A, for lack of a better word, where you've got a big public company buying a small one.

Presumably, these are companies that are developing disruptive technology that a large corporate just wants to buy to protect itself.

So it does feel like people are excited about M&A, but it also feels like people are just are kind of taking this opportunity now to say, "All right, I don't know what the world looks like, so I'm going to do everything in my power, both through looking at my own internal processes, looking at how I can integrate AI into my business myself, and what else can I buy to make myself as defensive as possible, knowing that I don't know what 2027 and beyond looks like." It feels like- That's it ... that's the motivation right now.

For sure. And I think the report you're referring to, it has a really interesting chart, and hopefully we can pop that on the screen for those of you watching. But it highlights the increase in deals, in deal value compared with last year, up 41%, as you said. But for me, the big standout statistic actually was the smaller deals, venture capital and corporate venture capitals, as you say, companies going out and buying a stake, at least in another disruptive company, that defensive posturing that you mentioned.

That's up 200%, albeit small numbers, so that can be a quite volatile statistic. But I think that's really interesting.

In an environment where- Yeah ... you have got uncertainty, you've got more hawkish environment on interest rates.

If I was looking to buy a house, what would I want? I'd want a friendly interest rate environment, and I'd want cheap property, and I want certainty. We've got none- Yeah ... of those things in the market- Right ... at the moment for companies.

Yeah.

The fact that- Yeah, exactly ... we have got such robust deal volume, deal value is really interesting, isn't it? And as you say, definitely there's something behind that, and it seems to us like it is to do with defensive moves around uncertainty and particularly AI. Also, it always seems to come back to AI at the moment, doesn't it, Graham? It does, but I guess it's hard for it not to right now.

When you think about a technology that is this transformational and this disruptive, it's really back to the early days of the internet, where- Yeah ... you have this new thing that's going to change how everyone behaves, how everyone buys the stuff that powers their daily life even.

Yeah.

It does feel much we're very much on the kind of next wave of the internet almost.

Where we've got this technology that is just so incredibly disruptive, and I don't think anyone credibly can say with a huge degree of certainty exactly what it's going to disrupt, how it's going to change stuff.

I think we can with kind of a high degree of certainty to the near-term things that we've seen already and kind of project that out.

But over the next, say, five years, I think it's almost tough to make a really credible claim right now about exactly what can get replaced and displaced by AI. So I think everyone right now is just saying, "Okay, I'm going to do everything I can to protect myself." Yeah.

Now, one of the things that I found interesting about going through this report is they've also got a sector-by-sector split of M&A value.

And I want to make sure I'm quoting my numbers right.

It is M&A value, and value is up across the board sector by sector. The one where it's not, or not that much, is financial services.

And this is global M&A, I believe. It doesn't say it's not. So let's just assume for a second this is global M&A.

Europe has been a big driver of M&A.

There have been some big bank deals in Europe, so let's just assume for a second what you can read into that is actually American M&A is down in financial services.

If we're basically flat year on year- Mm-hmm ...

we know it's up in Europe. That implies a decrease here in the US.

I don't have a great read on why that would be the case. Because if everyone is taking this defensive posture, say, buying up companies that have AI technology to help protect their business model, I don't know why that's not the case in financial services. And I don't know if that kind of factors into financial services are or appear to be, or they think they are more resilient to disruption by AI.

If they think that actually AI is only, or can only be a benefit to them in terms of, say, taking people and processes out and making them more efficient, rather than wholesale losing customers to a new startup. I guess if you're a bank and you're underwriting a mortgage, are you just kind of thinking, "You know what? AI's not really going to change that.

People are still going to buy houses.

They still need a mortgage to buy the house." An AI startup isn't all of a sudden going to start underwriting mortgages. Or who knows? Maybe it could, but I don't have a great sense for why that's the case.

No, I don't either. My fallback with financial services is to think about regulatory capital and whether capital constraints prevent them being able to do any kind of M&A reach.

But I'm not aware of anything there either.

But hey, let's throw it out to our audience.

What are their thoughts? Do you have any suggestions for why financial services are not seeing the same level of increase in deals that we are seeing in the other sectors? And we are seeing- Yeah, drop us a note in the comments.

Yeah.

Because we talked about, this is more investment banking, but we talked about investment bank Q1 results, what, a month ago or so, something like that.

Yeah.

Up across the board, fees are up. So there should, in theory be- There's profits ... capital to go out and make some acquisitions.

But it just doesn't seem to be happening at the same pace that it is in other industries, and that one seems a bit funny.

Yeah. And the industries where we do see the huge increase is energy and industrials. And energy, there's been some big deals around energy suppliers for data centers.

Industrials, again, things like cabling and infrastructure.

Yeah.

So I think those where we have seen the big deals, they are ones that at least feed into the AI theme.

But it is interesting, isn't it, that we see that big variation across the sectors.

I think another thing that you mentioned there, Graham, was about Europe and the relative influence of the different regions on the deal stats.

And I think what really jumps out is, again, we can put the charts on the screen, is the fact that there's been such an increase in deal volume related to European targets relative to Asia-Pacific and Americas, which was really surprising to me. Albeit we have spoken previously about the differences in valuations. I think P/E multiples in Europe are around 15 times versus in the US, forward P/E multiple is about 22 times.

So there is that- Right ... huge valuation differential.

So from a US perspective, it does make European companies attractive targets. But is there something else going on behind the scenes that makes acquisitions of European companies easier or more interesting or more exciting? Well, it's interesting. One thing reading through this Bain report, and this is the first I've heard of it, so actually curious to see if you have as well.

And if you haven't, I'm interested in just learning more about what this is all about. But obviously, anytime you do M&A, you've got to get your regulatory sign-off or competition clearance in Europe. It sounds like Europe is also considering, in essence, a second test for M&A, where in addition to clearing competition, you also have, I think they're calling it a merger benefit test. Is this merger beneficial? Now, I have no idea what that test entails. Is there a societal benefit? Is it you can only lay off so many people, or you've got to hire so many people? I don't know what's going to factor into that, but I'm wondering if people are just pushing up, again, on this note of uncertainty, right? We don't know what European M&A is going to look like in six months or a year, whatever the timeframe on this is.

So let's buy Europe now while we can. And it's cheap.

Yeah. Okay. That was completely news to me, Graham. Really interesting.

Europe's always been challenging with M&A. They are generally quite reluctant to allow their businesses to be acquired by particularly foreign buyers. They have lots of red tape around making big transformations, headcount changes, location changes that companies often want to do post-M&A in terms of synergy and creation. So yeah, it sounds like they're putting down some extra barriers there, extra friction, and people are trying to get ahead of the new rules.

Potentially. So I'm going to do a bit more digging on that, see if I can find out what it's all about. But it was the first I'd heard of it, and I thought it was interesting.

Yeah.

So what's your prediction, Debs, for the second half of the year? All this- So- ... all is being taken into account.

Okay. I acknowledge that Bain, who produced the report, probably know a huge amount about deals which are already in the pipeline.

But I think I'm a bit skeptical about extrapolating Q1 and Q2 into the second half. It feels like H1 has benefited from the pent-up demands, this defensive maneuvering around AI. But going into the second half, you have got the uncertainty. You've got more hawkish interest rate environment.

You've got what are really quite frothy valuations in some sectors. It, for me, doesn't feel like H2 is going to be quite as thrilling as H1. But what about you, Graham? Let's think.

Right. Given the long lead time on a lot of M&A transactions, I suspect there's probably a lot more still in the pipe that's already been identified and currently being worked on that just has to work its way through. So if I had to actually put money on it or make a real bet, I would anticipate that we're going to continue to see growth, but just not at the same level as we have in the first couple quarters.

And then I think the open question is around 2027 and- Yeah ... in the beginning of the year, once we've worked through the current M&A pipeline, do we finally start to see these numbers come down a bit? I mean, not finally start to see them come down.

It's not like we're anti-M&A or anything, but it does feel like there are some one-time reasons for this big spike we're seeing right now. Because to your point, it doesn't really match up with the fundamental value drivers that you- Yeah ... tend to see typically drive M&A volumes like this.

So- Interesting ... yeah, that's what I'd say.

Absolutely. Well, we'll watch that space.

Thanks to all of you who have been listening in to our discussion around the latest M&A update. I hope you found it useful.

Don't forget to add your comments if you've got a view on what's been happening with financial services M&A. We look forward to hearing from you.

That's it from myself, and over to Graham.

Thanks, everyone, and we'll see you same time next week.