The recently moribund merger and acquisition (M&A) departments at investment banks are unexpectedly having one of the busiest Augusts on record, following the explosion of energy deals this week.
Transactions such as BHP Billiton’s $43.8bn (£28bn) takeover of Canada’s Potash Corp have lifted global M&A weekly volume to $89.8bn, the highest since November last year, and the busiest August week since 2006, according to data from ThomsonReuters.
The sudden jump has caught some bankers off guard. For the first time since the credit crunch stalled M&A activity three years ago, they have been summoned back to work from holiday.
“There’s been couple of big deals and, in my area, the banking sector, people are feeling more confident after the stress tests cleared some uncertainty,” said a banker before joining in a conference call while on holiday in Mallorca.
Companies can now afford to buy rivals or other businesses as the credit crunch forced them to clean their books, reducing debt. Corporate profits are also up this year, though they are more driven by cost cuts than by a surge in consumer demand, analysts warn.
“The one sector in the economy that is cash-rich at the moment is the corporate sector,” said Neil Williams, Chief Economist at Hermes Asset Management. “They have done their deleveraging ahead of consumers and governments, who are still heavily borrowed.”
M&A has traditionally been the City and Wall Street’s darling, generating almost half of investment banking income. Bond issues and share sales bring banks more transaction volume, but it’s M&A where serious money is made.
Mergers and acquisitions this year represent about 35% of global investment banking fees, still below a 10-year average of 38%, according to Guardian calculations based on ThomsonReuters data. The sector peaked in 2008, when M&A accounted for 48% of all investment banking fees.
Bankers usually charge between 1% and 3% of the value of deal worth less than $500m, while the fee is down to between 0.8% and 1% for deals between $500m and $1bn, and to less than 1% for the biggest transactions, worth more than $1bn.
Banks are also turning back to corporate clients after courting national governments as one of their main sources of income last year. Multibillion-pound sovereign bond issues by high-deficit countries, such as Britain, the US, Greece and Spain proved juicy earners over the past 12 months.
As countries have already bailed out banks and rescued the near-collapsed financial system, government bond deals have almost halved this year to $851bn, down from a whopping $1.4tn over the same period last year, the data shows.
Banks prefer corporate clients to high-profile government deals, which often bring more prestige than real income. More focus on companies and less attention to governments and distressed deals has lifted investment banking fees by 53% in Britain, the data shows.
In the UK, Rothschild leads M&A league tables this year as its 31 deals grabbed 7% of the market share, earning fees of $86m. The Anglo-French private bank is ahead of second-ranked JP Morgan, which generated $83m of fees in Britain, and Goldman Sachs, which has earned $72m in the UK so far this year. The US investment bank leads the global M&A league table, with deals worth $350bn, about one quarter of the overall market share.
The US, Britain and emerging market countries such as Brazil are pushing this year’s 22% increase in global M&A deal volume, to $1.4tn. The US accounts for almost one third of the total, while growth has been flat in continental Europe.
Private equity deals are slowly coming back in the US, while junk bond sales are becoming one of the hottest asset class. With banks still weary, or too stretched, to increase lending, companies have rushed into the bond market to access funds. Low-rated companies, such as Virgin Media are among those that have issued junk bonds to a record this year.
Despite the booming figures, bankers are concerned a possible double-dip recession may bring them back into the deal drought of the past few years. Deal conclusion meals at expensive restaurants such as London’s Nobu or other big-spend celebrations are far from back, bankers warn.
M&A deals this week
17 August: $43bn – BHP Billiton bid for Potash Corp of Canada
16 August: $7.8bn – RSA bids for insurance business of Aviva
19 August: $6.5bn – Intel bids for McAfee Inc of the US
17 August: $3.6bn – RBS corporate bond issue
17 August: $3bn – Republic of Venezuela sovereign bond issue
13 August: $2.9bn – China National Petroleum Corporation bond issue
17 August: $1.8bn – Loan taken out by Taisei Corporation of Japan
13 August: $1bn – Loan taken out by Amphenol Corporation of the US
Source: ThomsonReuters
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