JPMorgan No. 1 Investment Bank Driven by Emerging Market Deals
Investment bankers, whose institutions have already been bailed out to the tune of $817 billion across the globe, now have something else to thank taxpayers for: deals.
In a year when some of the biggest transactions came from emerging markets, governments from Washington to Beijing helped buoy investment banking fees by selling off their stakes in financial companies, automakers and other corporations.
Bankers eagerly signed up to handle those government offerings, even though they sometimes paid fees of less than 1 percent, compared with a historical average of 3 percent to 5 percent, Bloomberg Markets reports in its April issue.
The government-backed deals helped to push fee revenue up last year by 5.8 percent across the industry to $49.1 billion from $46.4 billion, as total deal volume stayed constant at about $7 trillion, according to data compiled by Bloomberg Markets magazine for its seventh annual ranking of the best-paid investment banks.
The volume of announced mergers and acquisitions rose 27 percent, to $2.2 trillion, while fees rose 23 percent to $17.9 billion.
Deal totals in the bond markets fell to $4.1 trillion from $4.7 trillion, and fees also fell.
Fees for all IPOs and secondary stock offerings dropped to their lowest level since Bloomberg began compiling such data in 1999, averaging 2.9 percent. The industry average in 2003 was 5.6 percent.
On the Mend
Although bankers say global markets are on the mend, it will take years before they see anything close to the record $86.9 billion in investment-banking fees earned in 2007, says Hugh “Skip” McGee, head of global investment banking at Barclays Plc (BARC)’s Barclays Capital in New York.
“You’re going to be hard-pressed to get back to ’07 levels anytime soon,” he says.
The world’s best-paid investment bank in 2010 was JPMorgan Chase & Co. (JPM), which ranks No. 1 in the Bloomberg 20 for the third year in a row, with total fees of $4.14 billion. The bank also led the field in fees from bond and equity issues.
Morgan Stanley supplanted Goldman Sachs Group Inc. (GS) for the No. 2 position in total fees for 2010, earning $3.67 billion.
Goldman Sachs is No. 3 overall with $3.60 billion. It ranks No. 1 in earnings from mergers and acquisitions, as it has every year since the Bloomberg 20 started in 2004.
James “Jes” Staley, chief executive officer of JPMorgan’s investment bank, told investors and analysts at a Feb. 15 meeting at the bank’s New York headquarters that Asia was a “critically important” region for the investment bank in 2010.
“Three of the five largest markets last year in terms of IPOs were Hong Kong at $57 billion, Shenzhen at $47 billion and Shanghai at $27 billion,” Staley, 54, said. He said that while his unit gets 18 percent of its revenue from emerging markets, the growth in revenue from that sector is 1½ times that of the investment bank as a whole.
Outside Asia, the U.S. Treasury was one of the most important customers for Wall Street last year, selling stock it acquired during the 2008 to 2009 financial meltdown in a long list of companies, including American International Group Inc. (AIG), Ally Financial Inc. (formerly GMAC), and Citigroup Inc. (C) Treasury negotiated rockbottom prices, paying bankers, including Morgan Stanley, JPMorgan and Bank of America Merrill Lynch, 0.75 percent to sell about half of its stake in General Motors Co. (GM)
Petrobras’s Big Deal
Morgan Stanley picked up only 0.4 percent in fees as sole underwriter for the $10.5 billion in Citigroup stock Treasury sold. Brazil’s Petroleo Brasileiro SA (PBR) paid underwriters 0.65 percent to execute $23.5 billion of its $70 billion secondary stock offering, the biggest in history.
Agricultural Bank of China Ltd. (1288), which launched the biggest IPO ever, paid its underwriters 1.96 percent for the $12 billion that was raised in Hong Kong.
JPMorgan was an underwriter of the Agricultural Bank offering. At the meeting with investors, Staley said the investment bank expanded its workforce last year by 42 percent in China, 40 percent in Brazil and nearly 20 percent in Russia.
Bankers are less optimistic about fast growth in Europe and the U.S., where new strictures by the Federal Reserve and the European Central Bank on the amount banks must hold in reserve against bad loans, and the amount of leverage they can take on, mean the high-flying days of 2005 to 2007 are over.
Dreaming of 2007
“The 2007 levels will be really difficult to get back to because of the new capital requirements and the deleveraging of financial institution balance sheets across the board,” McGee, 51, says.
Asian corporations kept their bankers busier than in any other region. Asia provided seven of the ten biggest IPOs in 2010, including the $22.1 billion dual offering in Shanghai and Hong Kong by Agricultural Bank.
While the U.S. and Europe lagged in the sale of new stock and bonds, the younger, emerging economies bubbled with new money and deals.
“All those countries that we thought of as the emerging markets are very developed right now,” says Purna Saggurti, co- head of global investment banking at Bank of America Corp. (BAC) “China is the second-largest investmentbanking fee market already. You can’t call it an emerging market anymore; it is the developed world.”
Mergers, acquisitions and share offerings were the daily bread of bankers last year in the BRIC countries -- Brazil, Russia, India and China.
About 25 percent of the banking industry’s M&A volume and some of the largest IPOs came from crossborder deals in Asia such as U.S. insurer AIG’s $20.5 billion spinoff of its Asian arm, AIA Group, which was the second-largest IPO last year.
A host of big Western banks had a hand in that deal, including Barclays, Citigroup Global Markets Asia, Deutsche Bank AG (DBK), Goldman Sachs, JPMorgan Securities Asia, Morgan Stanley (MS) Asia, Bank of America’s Merrill Lynch Far East subsidiary and UBS AG. (UBSN)
“Firms are once again thinking global after the retrenchment of the last couple of years,” Barclays’s McGee says. “They are looking to resume their growth trajectory.”
In the U.S., Timothy F. Geithner’s Treasury Department kept investment banks busy last year. Deutsche Bank alone advised the U.S. Treasury on 13 separate transactions that sold $3.9 billion in warrants for taxpayers in 2010.
Paul Taubman, co-president of institutional securities at Morgan Stanley, says the most important transaction of 2010 came very late in the year -- the November IPO of General Motors, which filed for bankruptcy on June 1, 2009. On Nov. 17, it launched an initial public offering in which it sold $18.1 billion of common shares at $33 each, making it the second- largest U.S. IPO on record. General Motors stock, after rising as high as $39, was down on March 4 from its IPO price, closing at $32.39.
“The General Motors deal was important for the economy; it was important for the markets,” Taubman says. “It was a defining moment last year in many respects. It was increased in size; it was increased in price; it traded well in the aftermarket.”
That deal marked the culmination of a banner year for Morgan Stanley’s investment bank. Profits from continuing operations in the unit, including trading, more than doubled to $3.75 billion last year from $1.39 billion in 2009. The firm generated higher investment-banking revenue in the fourth quarter than Goldman Sachs.
The firm, which in June 2009 repaid the government $10 billion it borrowed through the Troubled Asset Relief Program, was a lead underwriter on three of the four largest IPOs last year: GM, the Agricultural Bank of China and AIA Group.
Taubman, 50, credits Morgan Stanley’s rise in investment banking to its high-profile hiring over the last half of the 2000s, beginning with the bank’s global head of M&A, Robert Kindler, who Taubman lured away from JPMorgan in 2006.
Kindler, 57, was a mergers lawyer for New York law firm Cravath Swaine & Moore LLP before becoming a banker in 2000. Morgan Stanley also hired Gary Shedlin from Citigroup, who Taubman says brought with him a long roster of clients, and Dan Toscano, hired last year from HSBC to run Morgan Stanley’s leveraged finance business.
“We’ve been able over the past few years to systematically attract, recruit and integrate some of the best bankers on the Street,” Taubman says.
Morgan Stanley, JPMorgan, Goldman and other big banks are more heavily invested than ever in serving multinational corporations doing cross-border transactions. Banks that have such a global presence have to be able to handle everything from sharp swings in currency rates to political unrest, says Jacques Brand, co-head of investment banking at Deutsche Bank in New York.
The exchange rate of the euro, for instance, swung during 2010 from a high of $1.45 in January to as low as $1.19 in June. By October, it was back above $1.40.
That represented a bigger swing in value than those of the Russian ruble and the Brazilian real during the same period.
In 2010, the market for mergers, stock and bond issues in the U.S. and Europe was dampened by a series of crises that began on April 22, when the European Union estimated that Greece’s budget deficit for 2009 had been 13.6 percent of gross domestic product, more than triple Greece’s own previous estimate.
The cost to buy credit protection against Greek debt surged, and markets in both Europe and the U.S. recoiled as the EU quickly put together a 440 billion euro ($594 billion) bailout fund to guarantee the debt of Greece and other shaky euro-zone economies, including Ireland, Portugal and Spain. The euro plunged against the dollar.
Blow to Confidence
The next blow to confidence came on May 6, when in the course of less than an hour shares listed on the New York Stock Exchange plunged, briefly erasing $862 billion in market value. The U.S. Securities and Exchange Commission issued an October report on the incident, concluding that it started with a $4 billion automatic sell order by an asset manager that triggered a flood of follow-on sales by highfrequency traders.
“The first couple of months of 2010 were very strong,” Deutsche Bank’s Brand, 50, says. “A combination of the sovereign debt crisis in Europe, particularly around Greece, combined with the flash crash, really undermined the investor confidence that’s necessary for robust M&A and capital raising.”
The midyear freeze on deals in Europe sealed the fate of European investment banking for the entire year, Barclays’s McGee says.
“That market shrunk pretty significantly from ’09 to ’10,” he says. “The total fee pool was actually down year over year, so that has an impact on anybody that has a sizable presence in the region, as we do.”
London-based Barclays moved up a notch to No. 8 in the Bloomberg 20 with total fees of $2.25 billion.
Though Europe’s troubles dulled the overall deal market, there was still a steady stream of transactions in the U.S., particularly toward the end of the year.
“We saw a good pickup in the U.S. markets,” Bank of America’s Saggurti says. “The 2010 capital raising was all about cleaning up balance sheets and refinancing because the markets were forgiving and were available.”
Corporate and sovereign bond sales worldwide declined overall by 12 percent, and yet 2010 was still the second-best year on record, with companies taking advantage of low interest rates to refinance higher-interest debt and garner cash for share buybacks and acquisitions, bankers say.
Bond Fees Down
Fees overall fell to $14.9 billion from a record $15.5 billion in 2009 due to the decline in volume, according to data compiled by Bloomberg.
Within the debt markets, companies around the world sold $369 billion in high-yield “junk” bonds -- the most lucrative for underwriters -- the most since Bloomberg began keeping count in 1999.
“High-yield will continue to thrive in the current environment in a world in which issuers are fearful that rates may increase,” Saggurti says. “Well-regarded, well-capitalized B, BB, BBB credits are a bit of a safe haven as the economy continues to heal.”
The rise in announced M&A deals in 2010 bodes well for investment banking generally in 2011, Taubman says.
“If there’s more M&A activity, that drives all the volumes around it,” he says. More M&A activity means more so-called bridge financing to help companies complete their acquisitions, he says, which can in turn be followed by bond and equity deals for the merged company.
Spending $1 Trillion
In the U.S., bankers say, corporations are ready to put the $1 trillion in capital they’ve been hoarding over the past two years to work.
“We came into 2011 with a lot of momentum,” Brand says. “The market broadly is coming off of a very strong high-yield issuance, very strong equity market in the fourth quarter and increasing momentum in M&A activity. Corporations feel optimistic about their ability to consummate transactions, so I think we’re going to see an uptick in M&A activity.”
One good sign for the bankers: Private-equity firms are doing deals again. Firms such as Blackstone Group Inc., Carlyle Group and KKR & Co. represented 25 percent of investment-banking fees during the height of the leveraged-buyout boom in 2006 and 2007, according to Deutsche Bank. That figure dropped to about 5 percent of the market in 2008 and 2009.
Private Equity Comeback
Last year, private equity accounted for about 16 percent of the industry’s fees, Brand says, and he expects the number to exceed 20 percent this year.
Deutsche Bank advised IMS Health Inc., a Norwalk, Connecticut-based health-care company, in its $5.2 billion sale to TPG Partners, which was announced in 2009 and completed in February. It was the largest leveraged buyout since the collapse of Lehman Brothers and the fifth-largest ever.
“We saw sharp, renewed LBO and IPO activity in 2010, and we expect that to continue in 2011,” Brand says.
Investment bankers are confident that M&A and stock and bond issuance will all rise substantially this year, especially if Europe stabilizes. Deutsche Bank led 24 technology IPOs around the world last year and has a healthy pipeline slated for 2011, Brand says.
The U.S. Treasury will continue to be a source of revenue. The Treasury still owns large stakes in General Motors, AIG, Ally Financial and other U.S. corporations. Virtually every bank on Wall Street got a piece of the business last year.
More Mergers Coming
Investors should also expect to see more mergers among natural resource companies this year, including metals, mining, coal and oil, McGee and Saggurti say.
“The consolidation opportunity in those sectors has been brewing for quite a while now, and people are pulling the trigger as we speak,” Saggurti says.
Irving, Texas-based Exxon Mobil Corp. (XOM) completed its biggest acquisition since 1999 and the largest purchase in the world last year when it paid $41 billion in a stock swap to buy Fort Worth, Texas-based natural gas company XTO Energy Inc. McGee calls the purchase, announced in 2009, a “game changer” in the energy field and notes that it was followed by smaller acquisitions of natural gas companies by Chevron Corp. and others.
All the ingredients are there for a strong recovery in investment banking this year, bankers say, though they still worry that unemployment in the U.S. and Europe and inflation in China and other emerging markets could muffle economic growth.
Still, more deals will be done by private companies -- which have less clout when it comes to demanding discounts. That means fees may continue their rise through 2011.
To contact the reporter on this story: Dawn Kopecki in New York at Dkopecki@bloomberg.net.
To contact the editor responsible for this story: Michael Serrill at firstname.lastname@example.org.