US banks ride high as executives make big M&A bets
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Fee pool for mergers and capital-raisings passes $60bn so far this year
America is on a knife-edge. Polls have been see-sawing, suggesting a range of possible outcomes from the presidential election next week.
But corporate executives are making big bets anyway. The past few days has seen a succession of large M&A deals, netting huge fees for the advisers involved, capping one of the busiest Octobers for global dealmaking on record.
“There’s an extremely strong desire among executives and boards to position their companies for the long term, that is outweighing the short-term instability linked with the current political cycle,” says Jeff Raich, co-president at Moelis & Co, the advisory boutique.
That is a big relief for Wall Street, because 2016 had been shaping up to be an unremarkable year in investment banking. In the first quarter, choppy markets caused clients to scrap plans to do deals or raise money, meaning that many banks have a lot of ground to make up if they want to hit their full-year targets for profit. Overall, the fee pool from advising companies on mergers and capital-raising comes to just over $60bn so far this year, according to Dealogic, down from $65.8bn at the same point last year.
Things would be a lot worse for the banks, though, were it not for that mini-boom in M&A.
On Monday, General Electric agreed to buy oil and gas services provider Baker Hughes in a $25bn deal, leading a trio of companies announcing big takeovers that lifted the total value of transactions attempted in October to more than $500bn.
On the same day, US telecoms group CenturyLink said it would buy larger Level 3, which provides infrastructure that allows business to connect to the internet safely, for $34bn including debt. And private equity group Blackstone said it would acquire TeamHealth, a US provider of physician services, for $6.1bn including debt.
On Dealogic figures, M&A accounts for 32 per cent of total fees from investment banking so far this year — the highest share since 2008, and well clear of the average 28 per cent over the past two decades.
M&A was already looking fairly solid before the fourth quarter began. On Tuesday afternoon JPMorgan Chase, a dominant force in various lines of investment-banking business, posted a 10-Q showing a year-on-year rise of 5 per cent in revenues from M&A advice over the first nine months, to $1.59bn. That offset a 23 per cent fall in revenues from equity underwriting (to $860m) and an 8 per cent drop in debt underwriting (to $2.36bn).
But advisers say the prospects look good for more deals in the rest of the year and beyond. Whoever wins the White House, the Senate or the House, they say, this is still a low-growth world; debt is still cheap and abundant; while the S&P 500 index remains within a few percentage points of its record high. So why not explore combinations to drive up profits for shareholders?
“Most balance sheets are in good shape, management teams have managed their businesses to highly credible levels of efficiency, and financing environments are supportive,” says Ray McGuire, Citigroup’s global head of corporate and investment banking.
Last week he sent a jubilant memo to his team in which he celebrated Citi’s second-best week ever, in terms of the value of deals it advised on. This week Citi has appeared in three of the big four, including TeamHealth’s $6.1bn acquisition by Blackstone, and Abraaj Group’s $1.8bn sale of a controlling stake in K-Electric of Pakistan.
“We’re executing on our strategy, encouraging people to stay close to clients and give the best unfiltered advice,” he says.
Boutiques such as Centerview, Allen & Co and Perella Weinberg are increasingly being hired to lead deals, as was the case in AT&T’s proposed $85.4bn acquisition of Time Warner announced last month. But large investment banks such as Goldman Sachs,Morgan Stanley and JPMorgan continue to dominate the league table in terms of deal volumes, number of transactions carried out and revenues.
The big losers so far have been bulge bracket European banks such as Deutsche Bank,UBS and Barclays, which have been retrenching their investment bank capabilities over the past few years.
One boutique riding high is Evercore Partners, rising to ninth spot by global M&A revenues so far this year, from 13th last year.
Evercore recently advised Qualcomm in its $47bn takeover of NXP, the largest European tech deal ever, and it advised the board of CenturyLink in its $34bn acquisition of rival internet network group Level 3.
Roger Altman, Evercore founder and executive chairman, says the conditions we see today are “most likely” to be in place six months from now, but cautions that financial markets are hard to predict. “As long as markets remain stable, at least in my judgment, we’re going to see strong volume,” he says.
Some worry that executives are not quite as chipper as market prices might suggest. Gregg Lemkau, co-head of global M&A at Goldman Sachs, says there is “a bit of a disconnect” between the level of the S&P and confidence within boardrooms. He says that could be because prices “feel driven more by monetary policy than pure fundamentals”.
Still, bankers say the pipelines look solid — Trump or no Trump.
“I think people have put their heads down and continued to move forward,” says Mr Lemkau. “Their attitude being: the administration will be what it will be and if our deal makes sense, let’s just try to get it done.”
Big banks bulk up in debt underwriting
Fixed income has been a tough line of business on Wall Street. Banks have gutted debt-trading desks in recent years to cut costs, while trimming the bonds they hold on their balance sheets in a bid to conserve capital, writes Eric Platt in New York.
But despite the shrinking size of trading floors, many of the largest banks have been investing in the business of underwriting sales of debt for corporate clients.
Revenues from debt capital markets businesses — known by the acronym DCM — climbed 4 per cent from a year earlier to $16.7bn in the first nine months of the year, according to data from Dealogic. DCM revenues accounted for more than 30 per cent of global investment banking fees in the first three quarters of the year, up from 26 per cent last year and 22 per cent five years ago.
Bankers say the recent surge in M&A activity could propel DCM divisions further in 2017, as acquirers replace bridge loans with long-term bonds. Low interest rates, too, should keep conditions buoyant.
“Nothing has upset the applecart,” says Jennifer Powers, head of Mizuho’s investment-grade DCM business. “The ‘long and low and slow’ [interest rate] mantra has conditioned our corporate clients to think about growth.”
Underwriting debt also offers an edge as banks shift to an agency model, matching up buyers and sellers of debt rather than holding big positions in the bonds themselves. A bank that sold Nike or UPS debt, for instance, has a better idea of who originally bought the bonds and might still own them. That is a help if they are on the hunt for those securities for a client’s trade.