Friday, January 6, 2017

The Latest M&A Rankings

The old Merrill Lynch franchise helps keep Bank of America in the top 5 in global mergers and acquisitions.
Investment-banking league tables--those lists that report who led banks in deals in a given quarter or year--appear to be a relic from the sporadic soaring periods of deal-making in the 1980's through mid-2000's.  The lists conjure images of the old Lucite trophies bankers used to collect on their desks after a deal closed and client companies paid their large fees.

The acrylic, translucent plaques, crowded on window sills of junior and senior bankers, seem to have faded as favorite industry props (partly because corporate clients and their bankers don't want to bicker over who should shoulder the celebratory expense).  However, league tables still appear quarterly.

And they still count for much.

At the least, they show which banks are the most prominent or most successful at attracting big corporate clients, winning big mandates, and getting deals done in all sizes and complexities (crossing borders, too).

The tables and lists are compiled for many banking products and activities--from syndicated loans to equity IPO's and corporate- and municipal-bond offerings. But the most widely reported and widely analyzed table is that for mergers and acquisitions, that most consummate of all investment-banking activity.

M&A is not a casual corporate event, although some companies (like pharmaceutical company Valeant in 2015 or GE in times of yore) acquired others as frequently as the weather changes.  M&A can transform a company significantly by changing its strategy, its organization, its people, and its size. M&A involves undeterminable synergy risk, the risk that what appeared idea on the spreadsheet of a Morgan Stanley associate doesn't make sense when operating units combine as one.

M&A, in some big investment banks, is a centerpiece of relationships with large corporations, because (a) the bank speaks directly to the client company's board, CEO and CFO and gets immediate feedback, (b) the bank earns millions in fees, if a deal is successful, and (c) the bank doesn't need to use up its balance sheet, unless it chooses to finance an acquisition (as many banks do). 

As for (c), if the bank doesn't finance the acquisition, the bank minimizes credit and market risks, although it must tend to reputation risk. (Reputation risk might range from the embarrassment of not being to manage an announced deal or the criticism it might get from arranging an vitriolic, unfriendly takeover.) Because of (c), boutique banks, such as Evercore or Greenhill, can compete head to head with the might of Goldman Sachs or JPMorgan Chase.

In 2016, merger league tables hardly budged. Those we expect to be at the top remained at the top. In a year of over $3.6 trillion in global deals (a total that doesn't even eclipse the industry's best year ever in 2015), the leaders of the pack are Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America Merrill and Citi.  (Thomson Reuters tallied the latest rankings.)

The old Merrill Lynch franchise still thrives at Bank of America, at least on the merger front.  Banks that have threatened for the past 2-3 years to downsize investment banking (Credit Suisse, Barclays, UBS, and Deutsche) still remain locked down in the top 10.  In fact, the ranking of UBS, a bank that announced a notable departure from investment banking, improved, as it remains a leader in Asia.

In this banking sector, boutiques don't take a back seat to their bigger brethren, even if they don't bring billions in financing commitments to the deal table to finance major mergers.  Evercore, Lazard, Centerview and Perella Weinberg are in the top 15. 

For which corporate industries are these banks arranging expensive link-ups?

Headlines would suggest banks swarming the globe making deals in technology and Internet industries. That's true in the number of deals, if not the size of deals. Recall in 2016 the announcements of Microsoft acquiring LinkedIn and Verizon taking over Yahoo. 

There were much commentary and discussion about pharmaceutical firms contemplating acquisitions or grabbing smaller companies.  But league-table statistics report the greatest dollar volume of transactions were done in oil-and-gas, chemicals, and power/utility industries.

Merger activity is driven by a confluence of factors:  shake-out and consolidation in specific industries, cheap sources of financing, surplus cash sitting on companies' balance sheets, economic outlook, regulators' interpretation of antitrust laws, tax considerations, shareholders' demands for better returns, and the aggressive efforts of investment banks.  The years 2015-16 were ablaze, but the second best deal year was 2007, the eve of the financial crisis.

Activity in league tables show evidence of banks generating millions in fees.  Deals they lead and participate in sometimes grab almost the same attention at some big banks as credit-card advertising.  When Microsoft acquired LinkedIn, industry analysts provided immediate critique of the deal, but were curious to know who orchestrated the deal and who helped set the price tag (and who would be entitled to receive the lucrative fees). 

Investment banks also show off league tables to win new deal mandates.  They do so to prove competence and ability to manage complex transactions around the world.  Every presentation by a bank to a company's board to outline why the company should wed itself to a competitor includes an M&A top 10 or top 20.

For the biggest banks, merger fees lead to prestige, while CFO's salivate that deals require minimal balance-sheet usage and insubstantial regulatory capital.  Still, at JPMorgan, Citi and Bank of America, merger fees contribute less than 8 percent of total net revenues, reminders that big financial institutions still make the bulk of their earnings from lending to large companies, not always from advising them acquisitions.

Meanwhile, for the boutiques, the merger business is their lifeblood.

Tracy Williams

See also:

CFN:  UBS De-emphasizes Investment Banking, 2012
CFN:  Credit Suisse and Its New CEO, 2015
CFN:  Merger Mania: Boom Times? 2013
CFN:  Can Morgan Stanley Please Analysts? 2012

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