M&A wave proves profitable for banks

The current high level of mergers and acquisitions has meant a wave of new and profitable work for many banks.

by Richard Willsher for World Business
Last Updated: 23 Jul 2013

Now that Mittal Steel has consummated its EUR27 billion ($33.7 billion) bid for Luxembourg's Arcelor, banks advising both sides of the deal are set to share fees amounting to a reported $200 million. The attractions for banks in tilting for a slice of the action in the current global mergers and acquisitions boom are plain to see.

M&A deal-making is running at extraordinary levels so far this year.

Business adviser Grant Thornton estimates that $1.8 trillion worth of deals were announced globally in the first six months of 2006, 43% higher than for the first half of 2005, which was itself a buoyant year. No wonder then that as US investment banks announce their second quarter earnings, their M&A divisions are making significant contributions. And it is the usual suspects that are leading the M&A advisory league tables, wherever in the world deals are being done.

However, other banks are also looking to benefit from the bidding fest and in a number of different ways. Some are looking to tackle the M&A specialists head on by turning their geographical and sectoral strengths to good account. An example is Standard Chartered, the London-based bank that makes 90% of its revenues outside of the UK and US. It has hired Sundip Vyas, a former Goldman Sachs executive, to head its advisory team.

Its competitive advantage is its franchise in Asia, Middle East and Africa, where it has long had high-level connections among the corporate movers and shakers.

Standard Chartered's long-term rival in the Far East, HSBC, has been building its investment banking capability over several years, though with mixed success. Nonetheless, it is year-by-year extending its geographical spread to every continent and into all the major high-growth markets - China being chief among them. Another institution that would hardly have figured on anyone's list of competitors on the M&A scene a few years ago is Australia's Macquarie Bank, whose activity in bidding for infrastructure assets around the world and audacious bid for the London Stock Exchange have put it firmly on the map. Macquarie has succeeded in boosting its income significantly, and recently announced that it is heading for another year of record profits.

And banks can't afford to ignore the current M&A boom. With generally low interest rates, poor bond yields and high levels of liquidity, they, like institutional investors, private equity houses and hedge funds, are all searching and competing for places to deploy their resources and gain better yields. In this regard, the record level of M&A activity is fortuitous.

But what is driving M&A right now?

Sunil Kakkad, a partner with City corporate law firm Lawrence Graham, says: "Looking at cross-border M&A, the reason for the increase in activity is the growth in buying power of the emerging economies such as India, China and Eastern Europe, where businesses are really looking for something that will transform their particular sectors. Large family conglomerates such as Tata and Birla are looking for accelerated growth that they can't achieve organically.

"Meanwhile," Kakkad continues, "those deals where businesses are buying assets in the emerging markets are being led by deregulation. They are encouraged by the ease with which they can now acquire in those countries." He adds, however, that those acquiring in emerging markets are not necessarily picking up assets cheaply. But there are strong economic drivers for acquisition strategies, such as outstanding opportunities for growth. Whichever way the acquisitions are being made, banks are keen to support them.

However, it is not only corporates that are active on the global M&A scene. The private equity houses are now major acquirers of businesses, raising huge funds for deployment in every region of the world. The Indian subcontinent and Asia in general are a prime focus. Big hitters such as Carlyle, Blackstone and Texas Pacific among others have been active in fund raising. For example, Carlyle announced in mid-July its second Asia Buyout Fund, with $1.8 billion to invest. This brought to $4.8 billion the amount it has raised to invest in Asian markets. There are plenty of other examples of such funds investing across all sectors and all markets.

This means more business for bankers.

Nick Page, transaction services partner at PricewaterhouseCoopers, says that if the size of equity being invested by private equity houses' buyout deals is applied to a leverage multiple, it is easy to see the scale of bank lending operations supporting such transactions. In other words, the equity invested is the visible part of the funding iceberg, with significant amounts of leverage supplied by banks below the surface, but which are key to supporting private equity acquisitions. The banks have been busy deciding where, geographically, they are happy to provide funding, in support of which sort of businesses and what sort of lending they want to do - for example, whether it is secured or unsecured, with each representing a differing risk profile and producing a related level of return.

So the growth of M&A on a global scale presents significant opportunities for banks, depending on the angle they want to take on the market and on particular transactions. Not many choose to compete for lucrative advisory mandates with the likes of Goldman Sachs or Morgan Stanley, but they may be lenders in syndicated banking facilities that can support major leveraged bids. They may choose to get involved as an introduction to markets in which they have ambitions to expand, or they may feel that it represents a foot in the door of growing corporates with which they may want to do other business.

So it is fair to conclude that when M&A is in high activity mode, as it is at the moment, the result can be a wave of new and profitable work for many banks, and right now there is an awful lot of it to go around.

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