Analysis: With no big deal safe, investment bankers move to safeguard fees

Hawaiian Holdings

22/07/2024 11:00

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      Bankers push for fees on deals that regulators thwart
    

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      Top banks seek up to 25% of breakup fees 
    

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      Fairness opinion fees rise to 20-25% of success fees
    

  
    By Anirban Sen
       NEW YORK, July 22 (Reuters) - Investment bankers are
changing how they ask to be paid in a bid to preserve and boost
fee revenue they generate from advising companies on mergers and
acquisitions, as more big deals face challenges by regulators.
    Many of these fees are awarded only if a transaction is
completed. Bankers have been pushing to get paid even when a
deal is thwarted by regulators, and are charging more for
services paid irrespective of whether a transaction closes,
interviews with more than a dozen dealmakers showed.
    The banks' tactics include taking a larger slice of the
breakup fee paid by the acquirer to the target for failing to
close a deal, and charging more for "fairness opinions" they
provide to companies on whether they should sell themselves. 
    At stake is the dealmaking revenue of the top investment
banks in North America and Europe. While banks that are listed
on the stock market do not break down the source of their fees
in their investment banking revenue disclosures, the dealmakers
said that fees paid even when transactions fail have helped
boost profits this year amid a flat market for mergers and
acquisitions and a rise in the challenges to deals.
    U.S. antitrust regulators filed 50 enforcement actions
against mergers in the 12 months to the end of September 2022,
representing the highest level of enforcement activity in over
20 years, according to the most recent data published by the
Federal Trade Commission and U.S. Department of Justice. 
    In Europe, the European Commission issued two prohibition
decisions in 2022 and one in 2023 against deals, compared with
none in 2021 and 2020. "The European Commission is more likely
than ever to block a merger," White & Case lawyers wrote in a
note to clients earlier this year. 
    Political opposition amid rising economic protectionism is
also a growing risk and has led, for example, to U.S. officials
casting doubt on whether Japan's Nippon Steel  5401.T  can
complete its $14.9 billion acquisition of U.S. Steel  X.N  amid
U.S. labor union opposition. 
    Top investment banks, including Goldman Sachs  GS.N ,
JPMorgan Chase  JPM.N  and Morgan Stanley  MS.N , are pushing to
be paid as much as 25% of the breakup fee on some transactions,
depending on the transaction's size, according to the dealmakers
who were  interviewed. That is up from a historic average of
receiving about 15% of the breakup fee, they added. 
    Goldman Sachs, JPMorgan, and Morgan Stanley declined to
comment. 
    Investment banks have also been making roughly 20-25% of
their advisory fees to companies selling themselves subject to
delivering fairness opinions, which are paid even if a deal does
not close. Referred to in the industry as "announcement" fees,
these are up from an average of 5% to 6% of the total advisory
fees during the previous decade, according to several dealmakers
and regulatory filings.
     
    SPIRIT AIRLINES, WORLDPAY
    In the case of JetBlue's  JBLU.O  failed $3.8 billion
takeover bid for Spirit Airlines  SAVE.O , Spirit's advisers
Barclays and Morgan Stanley negotiated a cut of roughly 25% of
the termination fee that JetBlue paid to Spirit when regulators
shot down the deal earlier this year, according to people
familiar with the matter. On deals of a similar size, banks were
paid less than 20% of the breakup fee a few years earlier, the
sources added. 
    Barclays and Morgan Stanley declined to comment on the
matter.  
    In another example involving private equity firm GTCR's
$18.5 billion deal to buy a majority stake in the merchant
services business of payment processing company Fidelity
National Information Services  FIS.N , Worldpay's lead advisers
JPMorgan and Goldman Sachs took a cut of about 25% of the total
fees as an announcement fee, the sources said.  
    On deals of a similar size, banks were paid about 5% to 6%
of the advisory fees as an announcement fee a few years earlier,
the sources added.   
    JPMorgan declined to comment and Goldman Sachs did not
respond to requests for comment on the matter. 
    "The increased scrutiny of transactions by antitrust
regulators and uncertainty over how the antitrust laws will be
applied has led to significant changes in the way that M&A
agreements are negotiated," said Logan Breed, global co-head of
the antitrust, competition and economic regulation practice at
law firm Hogan Lovells. 

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Global M&A volumes grow at sluggish pace Global M&A volumes grow
at sluggish pace    https://reut.rs/3Ls47lJ
Investment banks move to safeguard fees    https://reut.rs/3W7OJzH
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 (Reporting by Anirban Sen in New York
Editing by Greg Roumeliotis and Matthew Lewis)
 ((mailto:Anirban.Sen@thomsonreuters.com; Twitter: @asenjourno;
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