In a torrid first half of the year for investment banking on the primary side, fees from mergers and acquisitions have been a rare bright spark, but if current stormy conditions prevail even that could be snuffed out.
The bulk of M&A revenue usually comes when a deal is completed. Last year’s flurry of proposed transactions – a record for M&A – meant a good harvest of deals were completed in the first six months of 2022. The value of completed deals was U$1.95trn, up 6% from 2021, according to Refinitiv data.
Most banks have therefore indicated their take of M&A fees had a good start to the year too.
For the first quarter JP Morgan and Bank of America both reported 18% rises to US$801m and US$473m respectively. Citigroup saw a 23% surge to US$347m and Morgan Stanley’s revenues almost doubled to US$944m. M&A market leader Goldman Sachs’ fees were up 1% to US$1.1bn.
This looks set to continue in the second quarter, although the rate of growth could slow. At the end of May Daniel Pinto, head of the corporate and investment bank at JP Morgan, said M&A advisory continued to hold up compared with equity and debt underwriting, which have slumped across the industry.
That trend was confirmed by the Canadian banks when they reported results for the February-April quarter, and by Jefferies for the March-May period. Jefferies' underwriting performance was dire, but M&A advisory was down a modest 5% to US$372m in the second quarter.
Jefferies has been a major sponsor of special purpose acquisition vehicles, many of which need to find deals this year or return the initial cash raised to investors. That has lifted hopes of a continued strong intake of M&A fees in the second half.
Chief executive Richard Handler said execution remained “dependent on market conditions”. However, he was optimistic. “Based on our ongoing dialogues with our clients, we believe that M&A and capital markets activity will pick up when stability and visibility improve,” he said.
But this optimism may be misplaced.
Pipeline fading?
The past week has seen several major M&A proposals fall through. Most notable was Walgreens Boots Alliance’s sale of UK pharmacy chain Boots, which had been earmarked to fetch £5bn, with Apollo and Reliance Industries frontrunners as potential purchasers (see Top News).
The company blamed the “unexpected and dramatic change” in the markets since launching the process in January. This “market instability severely impacting financing availability” meant no third party could make “an offer that adequately reflects the high potential value” of Boots.
On Thursday the deadline to complete one of the biggest de-SPAC deals, the reversal of crypto broker eToro into Betsy Cohen’s FinTech Acquisition Corp V, passed without a deal being done. The transaction valued eToro at US$8.8bn. EToro declined to comment on a report that its deal had been dropped, only saying it would update the market in the coming days.
And on Friday US retailer Kohl’s said it had scrapped sale talks for as much as US$7.7bn with Franchise Group. “The current financing and retail environment created significant obstacles to reaching an acceptable and fully executable agreement,” said Kohl’s chairman Peter Boneparth.
Goldman Sachs had advised both eToro and Kohl’s.
Other major announced transactions, such as Elon Musk’s US$40bn tilt at Twitter and KKR’s possible US$40bn approach for Telecom Italia, are also teetering. Musk has said he would like to see more detail of Twitter’s business. KKR said it may back an alternative plan for Telecom Italia.
The overall value of announced deals for the first half was down 21% from a year ago to US$2.17trn, according to Refinitiv. If these and other major deals crumble then banks’ pipelines and potential fees will start to look thin too.
So far around 60 deals with individual values of more than US$500m have been withdrawn. The largest have been Unilever’s US$68.4bn approach for GlaxoSmithKline’s consumer health business and Nvidia’s US$40bn offer for chip designer ARM.
More than 328 deals of more than US$1bn have been completed this year but only 75 of that size have been announced.