Leon Kalvaria, vice chairman of the institutional clients group at Citigroup Inc., has a penchant for emerging markets. The 51-year-old M&A banker and coordinator of Citi's boardroom-focused senior strategic advisory group believes that the locus of dealmaking is increasingly moving away from the developed world, and he seems more than prepared to help clients such as Dutch brewer Heineken NV on its $7.6 billion acquisition ofFomento Económico Mexicano SAB de CV's beer operations, Femsa Cerveza. "People are going where the growth is," he says.
For Kalvaria, the rise of the emerging markets, writ large, is a sort of return. Born and raised in Bulawayo in what was then Rhodesia but is now Zimbabwe, Kalvaria says his early experience has given him a greater sense of the potential of the developing parts of the world.
He left Africa in 1975 to study at Princeton, receiving his undergraduate diploma in 1979. Kalvaria joined First Boston Corp. right out of school, working first in the corporate finance department, then in the firm's then-booming mergers & acquisitions group. Kalvaria, in fact, participated in First Boston's attempt to cobble together a competing bid for RJR Nabisco, earning a place in the iconic chronicle of that struggle, "Barbarians at the Gate," where Bryan Burrough and John Helyar referred to him as "a cigar-chewing Rhodesian."
In subsequent years, Kalvaria moved to the buy side, in 1991 becoming vice chairman and director of Triarc Cos., an investment firm focused on the consumer industry. In 1996, he jumped to investment bank Schroders Wertheim & Co., where he started as fixed-income chief before becoming head of consumer investment banking. "I wanted to get back into the more fast-paced life of investment banking," Kalvaria says. He joined Citi in 2000, after the bank, then run by Sandy Weill, bought Schroders.
Over the years, Kalvaria has worked on several landmark deals, with much of the focus on international markets. The former global head of Citi's consumer and healthcare group (he relinquished the title in May 2009, when the head of Citi's institutional clients group, John Havens, named Kalvaria coordinator of the special clients group), has recently worked with Kraft Foods Inc. on its $19 billion acquisition of U.K. confectioner Cadbury plc, and with InBev SA in its acquisition of Anheuser-Busch Cos.
In a conversation with The Deal's Vipal Monga, Kalvaria spoke about the impact of the financial crisis on corporate boardrooms, the outlook for M&A and the growing influence of emerging markets.
The Deal: How has the tone within corporate boardrooms evolved since the financial crisis?
Leon Kalvaria: The conversation in the boardrooms at the time [of the crisis] was one of survival. People put all strategic plans on hold as they were trying to see how things would stabilize. There was in many cases a fear of the unknown. We all knew that we were going to get out, that the question was five years or five months. And obviously this turned out to be longer and deeper than anyone imagined. Boards were addressing issues that they had never really had to face — for example, refinancing debt at a point in time when the capital markets were frozen, so it was hard to predict necessarily where businesses were going.
But as the year wore on, people understood that there was some stability in the system, that in fact that the world was not coming to an end.
We did an IPO in February of 2009 [for baby formula manufacturer Mead Johnson Nutrition Co.], and that was an interesting early turning point that showed that the capital markets were beginning to operate again.
We co-led a financing for Altria on its acquisition of UST [in February 2009], having also advised UST on its sale to Altria. You also had Wyeth being sold to Pfizer, and you had Schering-Plough being sold to Merck.
So seeing an IPO that could be done in size, seeing some mergers and acquisitions getting done, and the way the financings were getting completed, showed us that we were starting to get some liquidity back in the system. It gradually allowed people to get more comfortable.
What lessons did Wall Street firms learn from the crisis?
I think Wall Street has obviously gone through some difficult times. But there's a lot of good that's come out of the creations that we've made here. I was one of the early founders of ISDA [International Swaps and Derivatives Association] going way back when. Derivatives are good instruments when used properly, if they're used for real hedging.
Private equity has also done some great things, and people shouldn't forget that. But I think that people will come out of this era with a little bit more of a sober mentality about not chasing every single latest trend.
Do you think this relatively sober mentality will be imposed upon the business through regulation?
It's hard to see. I think it's hard to impose behavior. The regulations will be whatever they are, but I think that from a cultural standpoint, people have got to focus on what's right for their client, not what's right for themselves.
What are your feelings about a structural regulation like the Volcker Rule?
We need to see how all this really evolves. When you look at it, some of those products are very good for clients. Clients in wealth management like to invest in PE, so you have to get the right product for them. But we'll have to wait to see how all those rules apply.
What's the tone like today in terms of dealmaking?
I don't think 2010 will be a knockout year for this, but I think you're getting gradual improvement. We had a very good beginning part of the year. We're selling Volvo right now for Ford, we worked for Heineken buying Femsa, and we did Mead Johnson's spinoff from Bristol.
People are cautious, people are careful, but the one thing they also have is that their equity has recovered enough for some people to start thinking more strategically. I think the spread between buyers and sellers has gotten a lot better by virtue of the fact that the market has gone up. Early last year, the bid-ask spread was very wide. All the things people are looking at right now are relatively plain vanilla. People are trying to keep things relatively simple. No one is looking to do anything that could be looked at as being too creative. And you've seen more interest into and outside from the emerging markets.
Does that presage even more cross-border deals?
You're seeing a reasonable number of cross-border stuff. This year we've had [Chinese automaker] Geely buy Volvo. Heineken — a family bringing in a significant outside equity investment for the first time — going down to Mexico. You're seeing some of that in the healthcare space: We're advising Astellas, the Japanese pharmaceutical company, on its potential acquisition of OSI, which started out as a hostile. You have the Prudential plc transaction, which is buying the [Asian life insurance company] AIA assets from AIG.
People are going where the growth is, so the emerging markets are back in vogue. And you're seeing people in the emerging markets buying technology or brands one way, and people the other way buying growth.
For Volvo-Geely, it's the opportunity for a Chinese company to get a great brand. Heineken is going into Latin America to get a high-growth asset.
What about the element of nationalism we'd seen in some deals? How is that affecting cross-border flow?
Obviously every country has things that they consider to be national security. Natural resources, defense, but I think it's very hard for countries to sit there and defend certain things that are effectively not really associated with defense of resources.
In Cadbury's takeover by Kraft there was an element of that, by virtue of the fact that it was an old U.K. brand even though it owned assets in India, Australia, South Africa and the U.S. But I'm not sure that national interests are going to be tied to yogurt.
How open are the developed countries to takeovers initiated by emerging markets acquirers?
I think it's a new world. You look at Volvo being bought by the Chinese. You saw Tata, which we were involved in, buying Jaguar and Land Rover. These are old brands.
People recognize that they're good buyers. And if people want their brands to grow and thrive, they will have to go to the places where there's capital and growth. People realize frankly that a lot of these companies have evolved. Novartis may be based in Switzerland, but it's got a huge amount of business all over the world.
Over the last 10 years, the world is much flatter, so I don't see any kind of backlash to that. You look at the growth that's sitting inside these countries right now, and people would be remiss if they didn't figure out how to both invest in those companies and access capital associated with them.
How has the attitude towards buyout firms changed among corporations?
When corporations were looking at buying assets of significance, at one point they worried that they may have had to compete with financial sponsors, but they're much less worried about that now.
On the sell side, for larger scale asset sales, what sponsors provided for corporations was a floor bid. They knew that, in the worst case, they could sell to a private equity group for X, but in the best case, they had three strategic buyers competing for their assets.
But now, if it's of any size, they're not really going to be thinking about sponsors. I mean, obviously if it's for a few billion dollars — and you've seen some recent stuff here that's creeping up a little bit in size — they can think about sponsors. But the concept of a floor bid from a sponsor for a $10 billion deal is not sitting inside of most board books I've seen.
What's your sense of the financing markets? Is the spigot back on?
With low interest rates, you have funds out there that are looking for yield, and as the economy recovers they're more comfortable looking for yield in the lower end of the credit spectrum.
As the economy recovers, the odds of default are lessened. This means you can creep up leverage ratios.
We'll see how far it goes. Hopefully not much further. But remember, as you're seeing this, you're not seeing huge deals. You're seeing things done, but the volume of deals is still pretty low.
What's your outlook for M&A among pharmaceutical companies?
My feeling is there won't be much more in terms of large pharma transactions occurring. You could always see one or two, but not much more. Companies looking for growth will continue to look for late-stage biotech assets.
These will continue to be attractive insofar as they're coming into disease areas that people will want to invest in. So the outlook for the biotech sector for late-stage companies continues to be good.
Some companies will diversify a little bit more. Johnson & Johnson is a very well-diversified model. Pfizer is beginning to diversify with the assets that they bought out of Wyeth.
I think pharma companies, too, are looking at the emerging markets. As the emerging markets get more organized, people demand healthcare, and as the demand for healthcare goes up, there will be demand for hospitals, insurance and drugs.
What about the patent expiration cliffs that pharma companies are facing? How will that affect them?
That's always a concern, but they're managing their way through it. There's a lot of patent cliffs coming in 2011, 2012, 2013, but all of these companies have got pipelines.
And the marketplace has learned to value these companies as they get closer to the cliff. If you've got a bunch of growth assets, you've got some assets sitting in your pipeline, you've got some assets running off, and if you add up all three, that's your value.
What about the consumer sector?
Consumer has had a steady pace of activity for years. It will continue with more and more of an emphasis inside the growth countries right now and away from the developed world. I think there's also a point in time, three or four years ago, where they were worried about inflation from a cost standpoint. That's gone away, but you'll see a few more consolidation plays in consumer as people cut out costs.
Family-owned businesses around the world, certainly in some emerging markets, are trying to figure out if they go it alone or if they should sell or consolidate for stock.
Are we going to continue to see more hostile deals?
Most deals are friendly at the end of the day, so it's just a question of how they start off. But I think that the concept of a hostile deal as something bad is now out the window because it's not hostile to shareholders. So I think you may see more of them. OSI is a hostile, Anheuser-Busch's acquisition by InBev started as a defense of a hostile, Kraft was a hostile. You'll certainly see some blue-chip companies willing to go hostile and not viewing it as something that is inappropriate.
How much of an influence, good or bad, will activist shareholders exert in the next M&A wave?
If you look at a lot of the pushing that activists were once willing to do, a lot of it was reliant on cheap money — leveraging up of companies and things of that nature. A lot of that's over. You've got to push strategically, which is more difficult.
Now it's not much of a conversation in boards. There's been one situation in the last six months I've been involved in on defense of activists that was dealt with relatively easily. A few years ago boards were a little bit more concerned. They did not want to end up in public battles so in most of the cases, people tried to appease.
Today they don't really care. They'll do what they think is right, and they're not going to get pushed into doing something because someone wanted to sell their stock.
