Early on, AT&T and Deutsche Boerse announced bold plans to acquire competitors across the Atlantic. Initial public offerings surged in the first half to levels not seen since before the U.S. financial crisis in 2008. Pipeline operator Kinder Morgan went public with a $3.3 billion IPO in February of last year that raised $1 billion more than projected.
Investor appetite for IPOs was even hotter by May: Shares of social-networking Web site LinkedIn surged 109 percent to $94.25 in their first day of trading.
The high point of the year came in mid-July, when Apax Partners launched the biggest leveraged buyout since late 2008 with a $5.7 billion bid for medical-device maker Kinetic Concepts in which Morgan Stanley advised Apax and designed the financing. And then investment banking deals vaporized. “No doubt, it was a tale of two years,” Taubman says. “The deal calendar dried up, and we limped into the end of the year.”
So far in 2012, the pattern is familiar. The year is starting strong, with Facebook announcing it will do an IPO — probably in May — that may value the company at as much as $100 billion. In February, commodities giant Glencore International announced a friendly $37 billion bid to take over mining company Xstrata. Those announcements were accompanied by strong gains for stock markets around the world, with the Standard & Poor’s 500-stock index up more than 20 percent from its October low through March 6.
“Our clients feel better about 2012, but they’re still concerned about the macro risks,” says David Solomon, co-head of investment banking at Goldman Sachs.
Goldman is No. 1 in the Bloomberg 20, a ranking of the best-paid investment banks by the fees they earn.
In 2011, total fee revenue at the biggest investment banks was down, sometimes sharply. Eight of the top 10 banks made less money in fees in 2011 than in 2010. In the cases of J.P. Morgan Chase and Zurich-based UBS, it was about $1 billion less.
Total investment banking fees for all financial institutions in 2011 were $49.1 billion, matching the $49.1 billion from 2010. Total deal volume also matched 2010, at $6.9 trillion.
Goldman took the top spot in the ranking even as its total fees fell in 2011, to $3.46 billion from $3.6 billion in 2010.
The falling fees were part of a tumultuous year for the big banks. Trading revenue also plunged to $13 billion in the fourth quarter from $28 billion in the first for the top five banks in the Bloomberg 20. It was driven by anxiety over Europe; by the Volcker rule, which will limit proprietary trading; and by new global capital regulations, known as Basel III, that limit the amount of leverage banks can take on, by increasing the amount of equity capital they must hold against illiquid assets.
The banks responded to the revenue shortfall by cutting jobs and compensation. Globally, more than 230,000 bankers were let go in 2011. Investment banking compensation fell as much as 30 percent.
Bankers say they are more cautious when it comes to committing assets on their balance sheets to certain deals, including long-dated derivatives contracts.
“Balance sheet is a much scarcer commodity and a much dearer resource,” says Hugh “Skip” McGee, head of global investment banking at Barclays Capital.
Total merger and acquisition fees rose to $20.3 billion in 2011 from $17.9 billion in 2010. But those numbers were offset by declines in fees from debt and stock deals. And they conceal the M&A freeze in the second half, when announced M&A volume plunged to $1.03 trillion, a drop of 18 percent from the first half.
The pullback from the deal market started in early July, when the International Monetary Fund authorized a $4.2 billion loan to Greece to prevent it from defaulting on debt held by European banks. Euro-zone leaders approved another rescue package July 21.
U.S. lawmakers then stoked fears that the United States could miss its own debt payments by waiting until Aug. 2 — when the Treasury Department said its borrowing power would be exhausted — to adopt a plan to raise the country’s debt limit. S&P downgraded U.S. debt on Aug. 5.
“We had a cocktail of the U.S. deficit, the downgrade and a whole number of issues around the sovereign-debt crisis in Europe,” says James Amine, global co-head of investment banking at Credit Suisse.
Economists revised growth projections down, and some predicted a double-dip recession for both the United States and Europe. “It looked like the U.S. economy was grinding to a halt,” Amine says.
Concern about a new U.S. recession has faded, but bankers say challenges remain.
“The U.S. feels slightly better, but Europe is still an issue,” McGee says.
The drama in Greece has hurt European banks. At Deutsche Bank, Germany’s biggest financial services firm, fourth-quarter profit fell 76 percent. Fourth-quarter profit at UBS, Switzerland’s largest bank, also dropped 76 percent.
Goldman Sachs emerged on top of the Bloomberg 20 partly by taking a bigger share of the M&A market. The bank acted as an adviser on 23.3 percent of the global M&A deals announced in 2011, up from 19.7 percent the year before. It surged ahead of the pack by acting as an adviser on a number of big deals completed in the fourth quarter, including beermaker Foster’s Group’s $13.1 billion sale to SABMiller and Global Crossing’s $3.2 billion sale to Level 3 Communications.
Yet Goldman was not immune. From January to June, the bank took in $2.7 billion in net revenue from M&A advice and underwriting; that number dropped to $1.6 billion for the second half. Underwriting revenue at Goldman plunged 68 percent to $258 million in the third quarter from $811 million in the second as chief executives and corporations shelved plans to issue new debt and stock in volatile markets.
“A lot of M&A activity is going to be driven by a desire to diversify geographically,” says Jacques Brand, co-head of investment banking at Deutsche Bank.
As they seek acquisitions abroad, companies are looking to their investment banks to navigate sharp swings in foreign exchange rates and commodities prices, Brand says. For example, Wal-Mart needed to hedge its foreign currency and other risks when it paid $2.1 billion in June for a 51 percent stake in Massmart Holdings, South Africa’s biggest food and general-goods wholesaler, Brand says.
“We are in one of the most volatile markets with respect to foreign exchange, commodity prices and interest rates,” Brand says. “If you don’t integrate risk management into every dimension of your M&A strategy, that can undermine the strategic and economic rationale of the transaction.”
Deutsche Bank, among other firms, handled the biggest announced M&A deal of the year when AT&T proposed to pay $39 billion for T-Mobile USA, a unit of Deutsche Telekom. The deal fell apart after the Justice Department sued to block it on antitrust grounds.
M&A activity in Asia picked up last year, with the region involved in 40 percent of all cross-border deals vs. 37 percent in 2010, even as China’s growth fell into single digits. Purna Saggurti, chairman of Bank of America’s global corporate investment bank, says his clients saw consumer demand in China decline toward the end of last year.
As 2012 began, confidence was rising among investors that Europe would contain its debt woes. “Europe is a challenge,” Brand says. “But, having said that, we just advised on a transaction involving the Polish mobile operator Polkomtel SA. It was the largest European LBO transaction since 2007.”
As of mid-February, companies and investors had stopped worrying about an imminent euro-zone collapse. The European Central Bank averted a banking crisis in December when it announced a plan to offer three-year loans at 1 percent to area banks, Taubman and others say.
“Volatility has dropped demonstrably in the marketplace,” Taubman says.
The Chicago Board Options Exchange Volatility Index, or VIX, measures swings in the price of the S&P 500. The VIX hit a 21 / 2-year high in August and remained elevated until the European Central Bank plan was announced on Dec. 8.
Credit Suisse’s Amine says many investors and clients think the U.S. economy could decouple from the European system and grow by as much as 2.5 percent this year, even if there is a broad-based recession across the Atlantic.
What bankers do expect is a healthy debt market. Corporations issued $2.9 trillion in bonds and debt instruments last year, the second-highest volume on record, after $3.2 trillion in 2009. Corporations were awash in low-cost funding options as the Federal Reserve kept overnight borrowing rates close to zero.
Many companies took the opportunity to refinance their debt at lower rates, says Jim Casey, who with Andy O’Brien runs the debt capital markets desk for J.P. Morgan, No. 1 in debt underwriting for 2011. About 65 percent of the companies that borrowed in the markets in the first six months used those funds to refinance other debt. That flipped in the second half of the year, when 61 percent of leveraged loans were used to make acquisitions and finance buyouts, Casey and O’Brien say.
“There was a fair amount of capital that was committed to in the first half that didn’t get executed until the second half,” Casey says. “And in the second half, when markets were weaker, issuers that just wanted to refinance saw that the markets were really difficult and backed away.”
While bankers are mildly optimistic about 2012, they temper their predictions. If the European Union saves Greece from default, then Europe could grow again and the markets could take off. No one, however, is counting on it.
“We still live in an uncertain environment where investor confidence can turn on a dime, liquidity can dry up and markets, even if they’re open, can quickly shut down,” Taubman says. “And markets that are closed can open back up almost overnight. In what is still a volatile, uncertain environment, I think the right answer is to be cautious.”
The full version of this Bloomberg Markets piece appears in the April issue.
Total fees in billions
|3||J.P. Morgan Chase||3.18||4.14|
|12||RBC Capital Markets||0.85||1.03|
|14||Royal Bank of Scotland||0.64||0.67|
|20||BMO Capital Markets||0.44||0.44|