Guggenheim’s Schwartz Says M&A Harder to Cross Finish Line

Alan Schwartz: The Tax Code Needs to Be Reformed
  • Schwartz says regulatory uncertainty adds to market headwinds
  • Paul Taubman, Ken Moelis have also warned of M&A risks

Guggenheim Partners Chairman Alan Schwartz, who’s been building the firm’s focus on investment banking, said intensifying regulatory scrutiny is contributing to a slowdown in dealmaking.

“While a lot of activity is being discussed, it’s a little harder to get transactions across the finish line,” Schwartz, 66, said in an interview last week at Guggenheim’s New York headquarters.

Schwartz advised Pfizer Inc. on its $160 billion plan to combine with Allergan Plc. The deal, which would have been the largest health-care merger in history, fell apart after the U.S. Treasury Department cracked down on inversion transactions that move a company’s tax address abroad. Halliburton Co. and Baker Hughes Inc. said Sunday that they were calling off a $28 billion merger after the U.S. Justice Department raised concern the combination would stifle competition in the oil-exploration industry.

Wall Street veterans Paul Taubman and Ken Moelis have also said that political and regulatory uncertainty could make it harder to get deals done. Moelis, chairman of the investment bank that bears his name, cited antitrust concerns, while Taubman, head of PJT Partners Inc., has said some companies may be waiting for a new administration in Washington.

“The political process is sort of broken,” Schwartz said Monday in a Bloomberg Television interview with Scarlet Fu. The U.S. is one of the few developed countries that taxes both domestic and foreign earnings, which puts American firms at a disadvantage, he said.

“The tax code needs to be reformed,” he said, adding that inversions are “one of the most misunderstood subjects in all of the tax code.”

Milken Theme

Schwartz, who is scheduled to moderate a panel discussion on income inequality Monday at the Milken Institute Global Conference in Beverly Hills, California, said financing might create another obstacle for companies this year. While debt markets have been forgiving to troubled companies in the past, years of easy money are coming to a close, he said.

“You’re seeing pressure on profit margins across corporate America so, clearly, expectations of default have risen and spreads have widened,” he said during last week’s interview. “But again, it’s much more of an adjustment than a collapse.”

Guggenheim has been building up staff devoted to mergers, restructurings, underwriting and trading, while larger rivals have shrunk in response to tighter regulations since the 2008 financial crisis. The firm promoted Mark Van Lith and Gerald Donini to co-chief executive officers of its securities division in 2015, and opened a San Francisco office with 11 professionals earlier this year.

ROE Pessimism

Schwartz, who led Bear Stearns Cos. before joining Guggenheim in 2009, said the financial industry has gotten too big, and firms aren’t likely to deliver 20 percent returns on equity like they did in the past.

“They’ll still be profitable,” he said. “You had a long, secular cycle of financials seeing big growth. Now it’s coming back down, and you’re in a process of re-sizing.”

The topic of Schwartz’s panel discussion at the Milken conference has been a theme of the U.S. presidential election this year. Democratic candidate Bernie Sanders has made income inequality the focus of his campaign. His rival Hillary Clinton has suggested ways to close the gap between Wall Street and Main Street, as has the leading Republican candidate, Donald Trump.

Wall Street wages have more than doubled in the 25 years through 2014, while pay in the rest of the economy climbed about 21 percent, according to Bureau of Labor Statistics data. Schwartz said he’s most concerned that the U.S. has fallen behind much of the world in terms of quality of life.

Unrest Risk

“Why should the United States have more infant mortality, more obesity, more deaths due to homicide, more people incarcerated, lower achievements in education than other societies? How does that make sense?” Schwartz, who’s a director at the poverty-fighting Robin Hood Foundation, said, adding that social unrest could emerge if wages continue to stagnate.

“When a book on the topic by a French economist can be No. 1 on the best-seller list, it tells you people are becoming more aware of the issue,” Schwartz said, referring to Thomas Piketty’s “Capital in the Twenty-First Century” in 2013. “But the polarization of our politics are keeping common-sense solutions from being created.”

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