PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
The hot mergers-and-acquisitions market surged deep into record territory during the first half of the year, according to new data released on June 30 by market researcher Dealogic. But the investment banking business isn't what it used to be: The numbers show that investment banking revenue has dropped 29% from the record level of 2000, the peak of the last boom.
Bang-up deals are getting announced nearly every day. Spanish-language media giant Univision (UVN) on June 27 disclosed that a group of private-equity players, including Madison Dearborn Partners would acquire it for $13.7 billion, including debt. Just a day before, Johnson & Johnson (JNJ) said it would pay $16.6 billion to purchase the consumer-products unit of pharmaceutical giant Pfizer (PFE). That same day, copper miner Phelps Dodge (PD) was reported to be in $40 billion deal talks with two companies at once, Inco (N) and Falconbridge (FAL) (see BusinessWeek.com, 6/26/06 “M&A News Fuels Stock Gains”).
RECORD DEAL VOLUME. Such deals helped hike global deal volume for the first half of the year to $1.93 trillion, up from $1.4 trillion during the first half of 2005, according to analyst Natalie Cogan of market researcher Dealogic. "Global announced M&A has reached the highest half-year volume on record," she said. At the current pace, the volume of M&A deals will approach the $4 trillion mark.
That would shatter the annual record of $3.32 trillion set in 2000, the peak of the late '90s stock and tech bubble. “Everyone who is in the business of buying companies—corporations, private equity funds, hedge funds, and others—is showing up at the table,” says Kevin Fagan, managing director at Chanin Capital Partners, a midmarket investment bank. “There's been a huge explosion during the last 12 months. There is a tremendous amount of liquidity that is driving the market.”
Certainly, the investment banks are taking in billions from the current boom, but revenues from banking operations are far below the record set six years ago. Investment banking revenue for the first half of 2006 totaled $7.53 billion, according to Dealogic. That's down from the $8.9 billion generated during the second half of 2005, though a bit higher than the $7.26 billion in the first half of last year.
One can argue over which comparison is more apt. Banking is often, but not always, stronger in the second half of the year. But none of the recent six-month periods can match the $10.6 billion of investment banking revenue banks collected in the first half of 2000.
DIVERSE REVENUES. While investment banking profits are soaring, much of their revenue and profit comes from businesses outside their traditional advisory services. Banks such as Goldman Sachs (GS) and Morgan Stanley (MS) are making a rising share of their money from their trading operations (see BusinessWeek.com, 6/22/06, “Boom Times for the Powerhouse Banks”). In a sign of the shifting business model, Goldman Sachs named trader Lloyd Blankfein as its new chief. He succeeded former chief Hank Paulson, an investment banker who left the firm to serve as Treasury Secretary.
Without doubt, investment banking remains phenomenally lucrative. But revenues may be getting pinched by such forces as globalization, which is making banking more competitive, putting pressure on margins. Blame changes in the stock market, too: In the market boom of the '90s, many startups used proceeds from high-flying initial public offerings to pay huge banking fees. Today, large corporations have huge piles of cash, but are more guarded about spending it. The crash that followed the boom and the ensuing regulatory crackdown have put more pressure on managers and directors to spend carefully.
Companies now tend to hire more than one adviser on a deal. That can lower the fees available for any single player, and it may decrease the total pool of clients as they play one bank off against the other. That's a change from a few years ago when corporations were more likely to stick with one bank in deal after deal.
TOP PLAYERS. So who is at the top of the game? Measured in terms of banking revenue, the top three players remain Goldman Sachs, Morgan Stanley, and JPMorgan Chase (JPM). UBS (UBS), Merrill Lynch (MER), and Citigroup (C) follow, although Citigroup and UBS switched rankings: Citi dropped from No. 3 to No. 6, UBS moved up from No. 6 to No. 3 while Merrill held steady at No. 5. They were followed by Lehman Bros. (LEH), which moved from No. 8 to 7, and by Lazard (LAZ), which broke into the top 10 at No. 8. Credit Suisse (CSR) came in at No. 9, down from seventh place, and Deutsche Bank (DB) came in at No. 10, down from 9. Rothschild, a powerhouse in Europe, dropped out of the top 10 altogether.
While the top 10 banks account for more than 60% of the market, smaller banks are finding waves of new business too. “I think the middle market is ticking along at a pretty robust level,” says Chanin Capital's Fagan.
Even if they're collecting less on the deals, investment bankers have plenty of reason to cheer. Many believe the current bull cycle will last. There are some M&A sectors, such as the U.S. health-maintenance organization market, that appear to be running out of steam. But companies across a broad spectrum of the economy have plenty of cash to spend. And with investors pushing management to find ways to boost returns, M&A will likely remain an important part of corporate growth strategies for the next few years at least.
Rosenbush is a senior writer for BusinessWeek Online, based in New York
READER COMMENTS
BW MALL
SPONSORED LINKS
VMware Fusion 3
The Best Way to Run Windows on Your Mac, Only $79.99
Printer-Friendly Version