now loading...
My previous comment for The Asset about HSBC’s decision to exit M&A advisory and ECM in Europe and the United States to concentrate on Asia and the Middle East got some amazing viewer stats on social media, demonstrating that there continues to be enormous interest in comings and goings in investment banking.
There’s always a lot of industry and media chatter about the state of the M&A landscape, more so than other parts of investment banking. That’s partly because it’s seen as the glamourous end of the business. ( I doubt the juniors working insane hours in advisory would necessarily agree, but that’s another story ). Even so, M&A accounted for just 28.5% of investment banking fees last year, according to LSEG Deals Intelligence data ( US$117.4 billion in total ).
Debt capital markets accounted for the biggest slice at 33.5%. Syndicated lending fell in not far behind M&A, at 24.5%, leaving ECM holding up the rearguard with 13.5%.
Nonetheless, in the weeks following the release of investment banking fee data and league tables, or when mega deals are in play, or when a firm decides to enter or exit, business media and the M&A commentariat go into overdrive. During downtimes, firms try to disguise any disappointment at the dearth of activity by playing up their M&A backlogs, i.e., their estimates of revenues from potential future transactions, and try to convince us – and maybe even themselves – that a deal bonanza is just around the corner.
I moderated a call with four established European bank lenders recently. When I asked them about their hopes for this year, they all said without hesitation a resurgence in M&A. Because that’s one of the few areas that will enable them to exceed their revenue budgets.
A firm’s league-table ranking depends on whether its clients are active in a given year. I know that’s stating the blindingly obvious but it’s particularly pertinent to M&A because while fees on jumbo completed deals can be enormous, companies don’t engage in M&A every year. In fact, I recall a seasoned investment banking veteran telling me good advice sometimes involves telling clients not to do a deal and that chasing deal fees is a losing strategy.
If a firm’s clients don’t play in a given year, it strikes me that it’s impossible to gauge whether that firm has risen up the advisory rankings in a sustained manner or lost its lustre. That’s why I steer clear of making magniloquent statements about the state of industry incumbents based on quarter-on-quarter ups and downs in league tables or, in the case of M&A advisory, even in year-over-year league tables.
By contrast, if you end up something like 17th every year for years on end when you want to be a top-10 player, that’s different and takes us back to situations like the one HSBC found itself in.
Just think about how many moving parts need to align to drive M&A, which is after all a major strategic undertaking for a company, unlike just another bond or loan. A thriving M&A environment needs a stable economic and monetary backdrop, limited sector and macro uncertainties, and orderly financial markets; factors that give rise to reasonable levels of confidence among buyers and sellers.
Even when both parties are interested in talking, the thorny issue of agreeing a price has scuppered many a deal, even deals that make sense on paper or deals where the parties want to push ahead. You can model the numbers up to your eyeballs and come up with valuations until you’re blue in the face. But fixing a price depends on how successfully each side in negotiations is able to game its growth and sector outlooks or impose its slant on the outcome of political, geopolitical or other factors and how all of that can all be spun as value-creative or value-destructive.
All-in commitment
So many moving parts having to align can render the M&A deal flow episodic. But maintaining a premier advisory platform can’t be episodic. It demands ongoing commitment regardless of the cycle. You can’t just sit on your hands and cold-call companies or financial sponsors when the M&A going is good and expect to get on a deal ticket just like that, even if you offer a cheap balance sheet.
( As an aside, JPMorgan did it that way but not everyone can be JPMorgan. JPM is a debt-led M&A house that successfully bolted on an advisory franchise, assisted by firm-wide commitment. And aggressive reminders to clients of how much of its balance sheet it had lent them. )
Bankers will tell you that it typically takes longstanding application, a track record, and, for integrated firms, a best-in-class skillset running across advisory, client and sector coverage, structuring, financing, and other areas, ideally aligned under a unified cultural umbrella. Hiring a bunch of rainmakers from other firms won’t necessarily cut it.
Supermarket, independent or boutique?
In the realm of broad fascination for M&A, another perennial topic in which the market and the media seem to have an almost morbid interest is the battle for supremacy between corporate and investment banks, independent advisory firms, and boutiques. Depending on where the fees are distributed in a given year, we are regaled with gushing “analyses” about how one group has risen or fallen at the expense of another.
The top 25 M&A advisers by 2024 deal value included 10 independents/boutiques. But what does that tell you? Not much in my opinion. M&A advice will always be provided by a variety of firms, from integrated financial supermarkets that offer the full suite of advisory, financing, and related services, to advisory-only or advisory-led boutiques, to others that sit at various points on the spectrum.
I’m not entirely sure either what distinguishes an independent from a boutique. Firms’ own descriptions of themselves tend to use the words interchangeably. I guess size is one gauge but where the size cut-off point is that separates one from another is beyond me. Jefferies’ offering and its 7,800 employees presumably put it in the camp of the full-service financial supermarkets.
The likes of Rothschild ( 4,600 staff ), Lazard ( 3,200 ), Houlihan Lokey ( 2,700 ), and Evercore ( 2,000 ) are advisory-led though hardly boutiques. But what about other firms in the upper echelons of the advisory rankings, like Moelis ( 1,300 ), PJT Partners ( 1,100 ), Perella Weinberg ( 700 ), or Centerview ( 600 )?
More to the point, does it matter?
