M&A, IPO Boom Benefits Wall Street

A Record-Setting Year

Goldman Sachs (GS), Citigroup (C), and Jefferies (JEF) are among the Wall Street banks reaping big rewards from all the dealmaking going on in 2021. So far this year, companies have spent $1.8 trillion in the US and over $3.6 trillion globally on mergers and acquisitions. This year, M&A is expected to be higher than in 2015, which was a record-setting year.

That activity has translated into high advisory fees for Wall Street’s large banks and smaller shops. In the first six months of this year, leading dealmaker Goldman Sachs raked in over $1 billion in advisory fees for each of the past three quarters. The bank has topped that level only one other time in the past decade.

Business for Banks Expected to Heat Up

Bankers are poised to get even busier as summer comes to a close. Deal pipelines at many Wall Street firms hit record levels at the end of the second quarter as companies, PE firms, and SPACs flush with cash, hunting for deals.

The size of deals is also larger than in past M&A booms. Of the total volume, half came from deals of $1 billion to $10 billion in value. The Federal Trade Commission is swamped with deal filings. As a result, merger reviews are taking more time than the typical 30 days. Investors have been rewarding Wall Street bank stocks by sending shares higher. Goldman Sachs and Jefferies are up more than 40% so far this year.

IPO Enthusiasm Continues

It’s not just M&A deals putting money in the pockets of investment banks. Revenue from initial public offerings is also surging as a record number of companies go public. By the end of 2021, 100 companies are expected to join the 279 which already went public this year. 2021 is on pace to top the record setting number of debuts witnessed last year. Some of the well-known startups set to go public in the near future include Warby Parker, iFit, Allbirds, and Fresh Market.

With companies, SPACs, and PE firms sitting on cash they are looking to deploy, Wall Street has been a big beneficiary. These trends are expected to continue, at least for the remainder of the year.

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Tech Companies Bring Chip Design In-House

Pandemic, Need to Stand-Out Drive Shift

Apple (AAPL), Amazon (AMZN), Google (GOOG), Baidu (BIDU), and Tesla (TSLA) are among the technology companies gearing up to produce their own semiconductors in-house. These companies are aiming to make custom semiconductors specific to their products.

By developing custom semiconductors internally, the technology companies can better control how their software and hardware integrate. The tech companies can also design the chips to reduce energy consumption of their devices. The pandemic is also hastening the shift to internal chip development because of rising prices and limited supply.

AI Gets Tech Companies’ Attention

Artificial intelligence is one main area where tech companies are trying to integrate improved chips. Apple was the first to do this, announcing in November of 2020 that it was moving away from Intel’s (INTC) semiconductors to make its own processor, which is now found in its iMacs and iPads. Meanwhile, Tesla recently announced plans to develop a chip to train AI networks found in data centers. Baidu is also developing its own chips to enable devices to process large amounts of data.

Outside of AI, Google is developing a CPU in-house for its Chromebook laptops, while Amazon is developing its own chips for its cloud networks. Amazon is trying to reduce its reliance on the chipmaker, Broadcom (BRCM).

Focus on Design Only For Now

The tech companies are not at the point where they are able to run a large-scale chip manufacturing businesses in-house. Instead they are focusing on design and performance. After all, setting up a foundry to produce chips can cost as much as $10 billion and these facilities can take several years to construct. These companies would also need to hire the talent to design high-end processors, as most of their employees have traditionally been focused on software, not hardware.

With supply chain problems expected to persist for some time and with technology companies looking for ways to differentiate themselves, custom chips are in vogue. It will be interesting to see how much money the tech companies pour into this effort and how it shapes the future.

Investors Have High Hopes for Campus Real Estate

Colleges Open for In-Person Learning

As many colleges across the country reopen for in-person learning, some of the nation’s biggest property investors are pouring billions of dollars into off-campus housing. The likes of Blackstone (BX) and Brookfield Asset Management (BAM) are joining other real estate investors to buy and develop the housing. They are loading up their housing facilities with a slew of perks from video game rooms to gyms.

The investors are betting demand for off-campus housing will surge as more colleges and universities reopen after more than a year-and-a-half of pandemic shutdowns. It does not hurt that the off-campus housing market remained resilient during the pandemic. Many students chose to live in their campus housing and pay their rent even if they were learning remotely.

Brookfield Dips its Toes in Off-Campus Housing

Last month, Blackstone Real Estate Income Trust purchased a portfolio of eight student housing properties for $784 million. Preleasing for the portfolio, which is located near Florida State University and George Institute of Technology, has returned to levels seen in 2019. Blackstone’s rival, Brookfield, is in talks to create a joint venture with Scion Group, the student housing developer. The two plan to buy $1 billion or more in student housing properties. It would mark Brookfield’s first foray into purchasing campus housing.

As a result of the interest on the part of large and small investors, housing deal volume hit $2.52 billion in the first half of 2021. That is higher than the $1.68 billion in the same period a year ago and near the $2.96 billion seen in the first six months of 2019, before the pandemic struck.

Properties Near Big Schools Fare Better

Large investors are setting their sites on properties which are close to the nation’s colleges and universities with large enrollments. Housing at these large schools has performed relatively well during the pandemic. Meanwhile, student housing near smaller schools have not done as well for investors during the pandemic.

With most colleges and universities across the country for in-person learning, property investors see an opportunity. It will be interesting to see if this creates an oversupply of student housing or if investors’ bets pay off.