Analysis: US investment banks see early signs of revival in dealmaking

The Brink's

27/10/2023 11:00

By Tatiana Bautzer and Lananh Nguyen
       NEW YORK, Oct 27 (Reuters) - Major Wall Street firms
said a dismal year of dealmaking appears to have hit a trough,
and now some companies are looking to merge, offering hope that
investment banking revenues could pick up after a disappointing
third quarter. 
    Dealogic data showed that globally, investment banking
revenue tumbled 16% in the third quarter from a year earlier.
But lately, bankers have been sounding more positive on the
transaction pipeline after Exxon Mobil  XOM.N  and Chevron
 CVX.N  both announced acquisitions for more than $50 billion. 
    Those takeovers, alongside a nascent revival in initial
public offerings (IPOs), should bolster investment banking
revenues next year. 
    "This is going to happen in fits and starts a little bit,
and so not all of those discussions are going to wind up in
announcements, and not all the announcements will close," Lazard
CEO Peter Orszag told Reuters in an interview. There was
"definitely ... some difference relative to six to nine months
ago" and that for mergers & acquisitions (M&A) the "market is
bottoming out," he said.
    "Client discussions have been turning more constructive over
the past several months," said Orszag, who took the helm earlier
this month. The independent investment bank on Thursday missed
Wall Street estimates for third-quarter profit, as its advisory
business reeled from a prolonged slump in dealmaking.
    Morgan Stanley's newly appointed CEO Ted Pick, who takes up
the role in January, was similarly upbeat, telling CNBC on
Thursday the "forward pipeline has gotten sequentially bigger
with each passing month." He said mid cap and large-cap M&A
across industry groups were "seen as the most interesting part
of the next cycle." 
    Pick noted that given the three- to six-month lag before
deals close, the forward pipeline is the relevant indicator. 
    Morgan Stanley lagged its peers in the third quarter. The
lethargic dealmaking disappointed investors, sending shares more
than 6% lower when results were announced on Oct. 18. On
Thursday, shares rose 1%. 
    Global investment banking revenue stood at $50 billion in
the first three quarters of this year, 20% below the same period
in 2022, according to Dealogic. 
        
    CONSERVATIVE PREDICTIONS 
    Predictions for 2024 remain conservative given an uncertain
economic environment. Wild cards include U.S. interest rates,
inflation and conflicts in Ukraine and the Middle East. 
    Investment banking revenue will probably rise 5% to 10% next
year for the largest banks, according to Mike Mayo, an analyst
at Wells Fargo. Still, activity will remain subdued relative to
a blockbuster year in 2021.
    "It remains hard to predict when deal activity will
sustainably rebound," Citigroup CEO Jane Fraser told analysts on
a conference call this month. The bank advised Exxon on its
acquisition of Pioneer Natural Resources  PXD.N , announced
earlier in October. 
    "We have begun to provide more leverage finance for key
clients," and companies are becoming more active in issuing
debt, Fraser said, but the IPO outlook appears more fragile.
    In further evidence of deal flow, activist investors have
pushed for M&A in nearly half of all campaigns tracked by
Barclays this year, despite tougher financing markets. 
        Last week, Engaged Capital called on apparel maker VF
 VFC.N , which owns The North Face brand, to consider selling
non-core assets. Starboard Value recommended that News Corp
 NWSA.O  spin off its digital real estate division and Jana
Partners called on Frontier Communications  FYBR.O  to sell
itself.
  
         At Bank of America's earnings, expectations were
broadly steady after investment-banking fees grew 2% in the
third quarter, helped by deals from bankers serving
middle-market companies.
    "We basically doubled the size of that team, and we'll
double it again," CEO Brian Moynihan told analysts, without
specifying staffing numbers.     
    In Goldman Sachs' recent earnings CEO David Solomon was more
bullish than his peers, despite largely flat investment-banking
fees in the third quarter. 
    "If conditions remain conducive, I expect the continued
recovery for both capital markets and strategic activity," he
told analysts on a post-earnings conference call. 

 (Reporting by Tatiana Bautzer and Lananh Nguyen; additional
reporting by Svea Herbst-Bayliss; Editing by by Megan Davies and
David Gregorio)
 ((tatiana.bautzer@tr.com; Mob: +1-646-2397968; Reuters
Messaging: tatiana.bautzer.thomsonreuters.com@reuters.net))