Wall Street Tempers M&A Outlook as CEOs Await Fed Shift
Wall Street takeover advisers, whose business has benefited from low interest rates and record stock prices, are tempering forecasts for the rest of the year as chief executive officers wait to see if a Federal Reserve policy shift moves equity markets.
Total first-half fees climbed 1.4 percent from a year earlier for the biggest five U.S. investment banks and three independent advisory firms, earnings reports released this month show. The pace of new deals slowed in the period, with companies announcing $988 billion of takeovers, down from $1.03 trillion a year earlier, according to data compiled by Bloomberg.
“What we are increasingly hearing is a reassessment of timing,” Morgan Stanley (MS) Chief Financial Officer Ruth Porat, 55, told analysts on a July 18 conference call. The New York-based firm’s first-half revenue from advising clients, which includes fees generated by deals announced previously, climbed 1.4 percent from a year earlier.
The Fed will probably start reducing $85 billion in monthly Treasury and mortgage-debt purchases in September, curtailing a stimulus program that has helped cut yields on those securities and driven investors into stocks, according to half of the economists surveyed by Bloomberg News earlier this month. That’s led some CEOs to wonder if share prices are about to swing, according to Doug Sipkin, an analyst at Susquehanna Financial Group LLLP.
“People are reluctant to buy things because they’re not sure what the true value is,” Sipkin said in an interview. “People are just struggling with what the real prices for stuff are.”
The Standard & Poor’s 500 Index fell the most in 19 months June 20 after Fed Chairman Ben S. Bernanke said the central bank could cut back monthly bond purchases later this year. Stocks recovered to record highs after Fed officials said the benchmark interest rate will remain low even if bond-buying decreases.
The whipsaw in equities markets means “not everyone believes in these being stable valuations,” said Alexander Roos, who leads Boston Consulting Group’s global M&A practice from Berlin, in an interview. The recovery “has to eat through into the real economy -- into the brick and mortar, steel and airplane selling.”
Not all executives are hesitating. Publicis Group SA and Omnicom Group Inc. said yesterday they agreed to merge in an all-stock transaction that will create the world’s largest advertising company. Two closely held merger specialists, Moelis & Co. and Paris-based Rothschild, advised on the deal, shutting out larger banks.
Perrigo Co. agreed to buy Irish drug company Elan Corp. for $8.6 billion, according to a statement from the companies today. Barclays Plc advised Perrigo and Citigroup Inc. (C), Morgan Stanley, Ondra Partners and Davy Securities advised Elan. Hudson’s Bay Co. agreed to buy Saks Inc. in an all-cash deal valued at about $2.9 billion today. Bank of America Corp. (BAC) and Royal Bank of Canada advised Hudson Bay, while Goldman Sachs Group Inc., Morgan Stanley and Guggenheim Securities LLC worked with Saks.
In the second half of last year, deal announcements accelerated as executives grew more confident that stock markets would no longer be roiled by the European sovereign debt crisis and U.S. fiscal negotiations. Companies also rushed some deals ahead of a tax-code change at the end of 2012. That boosted the value of announced deals in the fourth quarter to the highest level since 2008.
As those transactions closed, investment banks booked higher fees. In this year’s first half, combined advisory revenue rose 0.8 percent to $3.05 billion at the five largest U.S.-based Wall Street banks -- Goldman Sachs, Morgan Stanley, Bank of America, Citigroup and JPMorgan Chase & Co.
Revenue from providing advice to clients on deals and other matters jumped 39 percent at Greenhill & Co., the independent New York-based merger adviser founded by Robert Greenhill, and 32 percent at Evercore Partners Inc. (EVR), which was started by former U.S. Deputy Treasury Secretary Roger Altman. It declined 17 percent at Lazard Ltd. (LAZ), the largest of the so-called independents, which typically don’t trade or underwrite securities.
“People generally don’t engage in M&A unless they have some confidence in their assumptions about the future,” Lazard CEO Kenneth M. Jacobs, 54, said in a July 25 interview. “That generally happens when you can see the macroeconomic environment either improving or stable. And that hasn’t been the case for the past six years or so, really since before the crisis.”
U.S. gross domestic product grew at a 1.8 percent annualized rate from January through March, faster than the 0.4 percent rate in the prior quarter and slower than the 3.1 percent speed two quarters earlier, Commerce Department data showed.
Goldman Sachs Chief Financial Officer Harvey Schwartz, 49, said on a July 16 conference call that the New York-based company’s advisory fee backlog, or stream of unannounced deals, was “down a very small amount” at the end of June from three months earlier. That revenue climbed 1.3 percent in the first half.
Citigroup, the third-biggest U.S. bank, reported a 34 percent jump in first-half advisory revenue from a year earlier. While that was the largest increase among the five so-called bulge-bracket banks, the New York-based company’s global co-head of mergers and acquisitions, Mark Shafir, said he’s starting to wonder if the pace of M&A will ever return to the levels seen in 2006 and 2007.
“It looks to us like we may be actually in a decelerating market as opposed to an accelerating market,” Shafir, 57, said in a July 24 interview on CNBC. “You’ve got great credit markets, you’ve got a lot of liquidity, there are a lot of reasons to think that we should be doing something better than we are.”