M&A banks: deal or no deal
Without blockbuster deals producing multimillion-dollar fees, senior bankers look very expensive
Many companies, even troubled ones, have managed to raise cash with relative ease during the coronavirus pandemic. Yet when it comes to spending the money, buying other companies has not been a priority. Last week, Wall Street banks reported earnings that showed a jump in overall investment banking revenue. The bulk of those fees came from selling stocks and debt, not advising on M&A deals. Advisory revenue for the first half of 2020 fell between 5 per cent and 11 per cent across JPMorgan Chase, Morgan Stanley and Goldman Sachs.
Just how painful this year will be for deals is going to become more clear this week, as independent banks that only offer advice provide their outlooks along with second-quarter results.
Because deal fees are paid upon closing there is a lag between market conditions and bank revenues and profits. A slump in 2020 will largely be felt in 2021. Wall Street estimates for the two largest US independent banks, Evercore and Lazard, show analysts have lowered revenue expectations for 2021 by 14 per cent each since the end of 2019.
Lazard has a large asset management business that can generate steady revenue. But without a flurry of blockbuster deals producing multimillion-dollar fees, senior bankers start to look very expensive.
Two small rivals may have a better chance of performing well. Shares of PJT Partners and Houlihan Lokey are up at least 15 per cent this year. The former has a large private equity fundraising unit along with a significant practice advising distressed companies. It is in its growth phase. Houlihan Lokey also focuses on troubled companies but sticks to unglamorous middle-market private company deals that are more resilient through economic cycles.
The question that remains is what happens if the underlying economy picks up steam in 2021. Will Corporate America be bold enough to resume buying and selling assets? Forward earnings estimates have fallen much more sharply than stock prices. Average price-to-earnings ratios have jumped more than 50 per cent so far in 2020. A rebound in dealmaking appears to be priced in — even if it is premature.