JPMorgan Repeats at Top in Fees as Bankers Anticipate More Deals
As David Solomon sees his industry, the glass is a little more than half full.
“Things are improving,” says Solomon, global co-head of investment banking at Goldman Sachs Group Inc., which was second behind JPMorgan Chase & Co. (JPM) in Bloomberg Markets’ 10th annual Bloomberg 20 ranking of investment banks by the fees they collect, the magazine will report in its April issue.
“But it’s hard given everything going on and given sentiment coming out of a pretty tough crisis in 2008; it’s hard to be ebullient.”
Solomon and others are optimistic that mergers and acquisitions activity will post a strong comeback; the only issue is when. Companies are sitting on record cash, the Federal Reserve continues to hold overnight borrowing rates near zero, and cheap corporate financing is plentiful.
Bankers are encouraged by the U.S. economy, which grew at a 2.4 percent pace in the fourth quarter of 2013, and by the steady, if slow, speed of recovery in Europe. Corporate chief executive officers and chief financial officers echo that sentiment.
“The tone among key decision makers -- CEOs, CFOs and then, most importantly, board members -- is markedly more positive today than it was a year ago,” says Mark Eichorn, global co-head of investment banking at Morgan Stanley (MS), which remained at third place with an estimated $3.71 billion in total fees in Bloomberg Markets’ ranking.
“That’s notwithstanding some of the market gyrations that everyone is chalking up to normal capital markets behavior.”
Such enthusiasm builds on momentum that began last year. Investment-banking fees generated from advisory services and debt and equity issuance rose 4.9 percent to an estimated $53.4 billion in 2013, according to data compiled by Bloomberg. That’s the highest amount since the peak of $86.9 billion in the pre–financial crisis, irrationally exuberant year of 2007.
U.S. equity markets went on a tear in 2013, with the Standard & Poor’s 500 Index (SPX) surging 30 percent. Initial public offerings, from companies such as Twitter Inc. and Hilton Worldwide Holdings Inc., returned in a big way. The total value of global IPO issues rose 45 percent to $164.7 billion, according to Bloomberg data.
This year is getting off to a strong start in M&A. Comcast Corp. agreed on Feb. 13 to acquire Time Warner Cable Inc. for $45.2 billion in stock, combining the two largest U.S. cable companies. JPMorgan and Barclays Plc (BARC) are among firms that may split as much as $143 million for advising on the deal. London-based Barclays is the parent of Barclays Capital, which rose to No. 6 in the Bloomberg ranking, from eighth place in 2012.
The rebounding U.S. stock market last year also gave voice to a noisier brand of investor: the activist. Hedge-fund executives, asset managers and other institutional shareholders are increasingly using their large stakes to wrest changes from corporate boards, which dealmakers say may translate to fee revenue down the road.
Activists targeted 369 companies last year, 12 percent more than in 2012 and 14 percent more than in 2011, according to Philadelphia-based Hedge Fund Solutions LLC, which tracks investor agitation. Such activity can mean more business for bankers who advise on ensuing acquisitions or other deals.
“They’ve been successful, so they’ve been emboldened,” Paul Stefanick, head of global investment-banking coverage and advisory at Deutsche Bank AG (DBK), says of shareholder activists. Deutsche Bank was No. 7 in the ranking.
Corporations took advantage of low interest rates to refinance their balance sheets in 2013. Refinancings sparked another strong year for such big debt underwriters as JPMorgan, with an estimated $3.87 billion in total fees. The bank, led by CEO Jamie Dimon, was No. 1 among bond underwriters, third in M&A fees and fourth in equities.
The triumvirate of New York megabanks -- JPMorgan, Goldman Sachs, with an estimated $3.77 billion in total fees last year, and Morgan Stanley -- has dominated the top three spots in Bloomberg’s ranking since 2009.
Emerging markets that had boosted deal flow in recent years fell out of favor in 2013, making companies in developed economies like the U.S. attractive targets for Japanese and European executives seeking growth. Rising long-term rates in the U.S. and other developed economies gave investors the yield they craved without excessive risk, especially in currencies.
Dealmakers say political instability in developing countries and the economic slowdown in China are their biggest concerns in 2014. Such previously hot economies as Brazil have skidded to a halt as U.S. growth improves and the Federal Reserve curtails bond purchases that had once helped increase demand for assets in other countries.
“If you look at emerging markets, I think you’re going to be challenged to find growth,” says Jeff Urwin, global head of investment banking at JPMorgan. “Some of those economies could see capital outflows.”
Investment bankers say they’re contending with a still-difficult fee environment. The U.S. stock market cooled in January, beginning with a 318-point drop in the Dow Jones Industrial Average (INDU) on Jan. 24. Many dealmakers say the decline was a temporary setback after the run-up in 2013 -- and not the beginning of a lingering slowdown.
“Things can accelerate; they can pause,” Stefanick says. “Last year, we had issues around the debt ceiling and the budget. Hopefully, we won’t have those issues this year.”
Goldman Sachs’s Solomon predicts continued improvement in overall economic growth.
“But I don’t think it’s going to be meaningfully robust or blow away expectations,” he says.
Dealmakers have reason to be cautious: They have spent several years flirting with a comeback in investment banking. After the recession, bankers predicted fees from debt and equity underwriting and advisory services, which bottomed out at $46.4 billion in 2009, would bounce back starting in 2010.
Then Europe’s sovereign-debt crunch and the downgrade of the U.S. credit rating sent markets around the globe into a tailspin. Fee revenue remained flat from 2010 through 2011, at an estimated $49.1 billion.
Bankers’ optimism resurfaced in February 2012, when Facebook Inc. announced its initial public offering. The botched May IPO sent a chill through the markets, and fee revenue moved up by just 3.7 percent in 2012 to an estimated $50.9 billion.
“Every year for the last three years, people have said it’s getting better, it’s getting better, all the conditions are there: high cash levels, low interest rates, low inflation,” says Tom King, co-CEO of corporate and investment banking at Barclays. “I’m not going to predict that this is the year, but the conditions are there, and it’s been a long time that people have been calling for it.”
Christian Meissner, head of global corporate and investment banking at Bank of America Merrill Lynch, agrees.
“The big difference this year is the absence of big macro crises,” he says. “Maybe something will pop up and change that view. But we’re seeing the green shoots of recovery and the absence of significant tail risk.” Bank of America Merrill Lynch was the fourth-best-paid investment bank last year, with an estimated $3.52 billion in fees.
There’s one other sign that sets 2014 apart from the previous five years: confidence.
CEOs are increasingly optimistic about the world economy, a January survey of corporate chieftains in 68 countries by PricewaterhouseCoopers LLP shows. Forty-four percent say growth will improve in coming months, up from 18 percent at the start of last year, according to those surveyed. Just 7 percent predict deterioration, a quarter of the share in January 2013.
“There is genuine confidence and conviction around a global recovery and upswing centered around the U.S. and also around the world,” says Franck Petitgas, global co-head of investment banking at Morgan Stanley.
Last year’s megadeals and the ease with which New York–based Verizon Communications Inc. got financing for its $130 billion purchase of Vodafone Group Plc’s stake in their wireless joint venture helped stoke the enthusiasm.
Corporations striving to boost revenue are running out of options to find growth after refinancing their debt, cutting costs, buying back shares and fortifying their balance sheets. Quarterly net revenue for the companies that comprise the S&P 500 Index fell by an average of 1.8 percent during the 12 months ended on Dec. 31, according to Bloomberg data.
With few choices to improve profitability outside of acquisitions, CEOs and board members are investigating an increasing number of strategic deals for the first time since the financial crisis.
“Two or three years ago, they were more like, ‘OK, amuse me,’” says Gregg Lemkau, global co-head of M&A at Goldman Sachs. “‘I’ll carve an hour or two out of my week to talk about M&A, but come back in a year.’ Last year, it got more real.”
Twitter’s (TWTR) IPO, led by Goldman working with Morgan Stanley and JPMorgan, raised $2.09 billion for the San Francisco–based micro-blogging service. The shares rallied 73 percent in their first day of trading -- emboldening investors after the biggest one-day pop for an IPO that raised more than $1 billion since Alibaba.com Ltd. made its debut in 2007, according to Bloomberg data.
Alibaba Group Holding Ltd. took its Hong Kong–listed Alibaba.com unit private in 2012 in what bankers expect may be preparation for an IPO of the parent, China’s biggest e-commerce company.
The robust stock market allowed private-equity firms to cash out of investments they made before and during the crisis.
Blackstone Group LP played on renewed investor appetite for stocks, taking Hilton public six years after buying the world’s largest hotel operator for $26 billion.
The IPO, led by Deutsche Bank, raised $2.71 billion for Hilton and gave Blackstone a 76 percent share in the company, which had a market value of $22 billion in early March. Bank of America, Goldman Sachs, JPMorgan and Morgan Stanley helped on the offering.
Activists helped shake up U.S. companies, sparking dealmaking -- and potential business for investment banks. Yahoo! Inc. hired former Google Inc. executive Marissa Mayer as CEO after Daniel Loeb’s Third Point LLC crafted a campaign to boost shareholder value. Mayer unleashed a series of acquisitions, including the $1.1 billion purchase of blogging site Tumblr Inc. in June. In November, the company issued $1.25 billion of convertible notes, raising money that could fund further deals.
Gardner Denver Inc. sold itself to private-equity firm KKR & Co. for $3.9 billion in July after activist investor ValueAct Holdings LP pressed for a deal to increase value for investors. Goldman Sachs advised Gardner Denver, a Wayne, Pennsylvania–based company that makes compressors and pumps. UBS AG, which was No. 8 in the ranking, and Simmons & Co. worked for KKR.
“Whether you’re responding to an activist or anticipating what an activist would want you to do and trying to get ahead of it, it’s going to lead to more activity,” JPMorgan’s Urwin says. “The shape of the business in 2014 is going to be different.”
A big sign of that change: Serious discussions with executives exploring strategic acquisitions, particularly in health, consumer goods and technology, are up sharply, bankers say.
Companies raring to grow may find their record cash, still-low borrowing costs and stable-to-improving economies a mix that’s too tempting to pass up.
“The view is that we are on our way to a global recovery,” Morgan Stanley’s Eichorn says. “Investors are going to continue to look for sustainable growth, and big strategic moves may well fit with the long-term objectives of the board.”
Bankers are betting all that may spell more work -- and an even fuller glass -- in the year ahead.
How We Crunched the Numbers
To identify the Bloomberg 20, we examined the fees that investment banks collected for underwriting securities and advising on mergers and acquisitions worldwide in 2013. Not all of those commissions were disclosed, so we extrapolated total fees from those made public in regulatory filings.
We made two key changes in our methodology for 2013, the 10th year of our annual ranking. First, we based fees for advising on M&A on transactions that were completed last year rather than those that were announced. The change reflects our reasoning that investment bankers collect fees when deals conclude. (Termination fees aren’t included in this ranking.) We also adjusted the M&A volume to reflect completed deals for all years considered.
For equity underwriting, we used the Equity Offerings (IPO) function on the Bloomberg Professional service to obtain information on initial public offerings and secondary issues that disclosed both fees and the number of shares distributed to each underwriter. In the past, we calculated all of those fees ourselves.
IPO calculates and totals disclosed fees for each underwriter. For deals that didn’t appear in IPO because fees and share allocations weren’t disclosed, we multiplied each underwriter’s share of the total value by the firm’s weighted-average fee. (We awarded full credit to the bookrunning manager or split credit equally among multiple bookrunners.) The weighted average fee is the sum of the disclosed fees for a firm divided by the total value of the issues. We added the fees we derived for each underwriter to the figures calculated in IPO.
M&A fees are rarely disclosed and typically vary according to the size of a deal and whether a bank is advising the target, acquirer or seller. We based our ranking on the fees disclosed in about 700 M&A transactions going back to 2010. We took an average of the fees for advisers to target companies, acquirers and sellers for deals in five different size categories and applied those percentages to completed transactions for which fees weren’t disclosed. We divided the fees equally among advisers.
Our ranking of bond-underwriting fees includes corporates, sovereigns and government agencies. Average fees tend to vary widely, so we created custom searches for each type of bond using the Underwriter Rankings (LEAG) function. (The average fee for government agency bonds was 0.087 percent in 2013, for example, while the average for corporate bonds was 0.514 percent.)
We multiplied the value of a firm’s deals by its weighted-average fee. Then we totaled the fees for each firm. If a firm didn’t have a weighted-average fee or if it disclosed less than 30 percent of its fees, we used the average of all bonds in that segment.
Equity-linked bonds weren’t included in the ranking. Municipal and asset-backed bonds were also excluded, as were bonds with call periods and maturity lengths of less than 18 months. In addition, we didn’t consider self-led deals, which are sales or issuances of a financial institution’s bonds or equities by its own investment bank.
In practice, investment-banking fees can vary from firm to firm. A bank’s position in this ranking may differ from its standing in traditional league tables, which are based on the dollar value of transactions.
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