Archive for May, 2008

Investment Banking Acquisitions and Consolidation

Posted on Monday, 26 May 2008. Filed under: Commentary, Mergers |

When companies are down and out, they become acquisition candidates, of course.  Who better at this time than investment banks?  The share prices of all investment banks – even those who were less impacted by the credit crisis – are much lower than last summer, and continue to be very volatile. 

Does this make them attractive acquisition candidates?  It shouldn’t – at least to firms from outside the industry.  (And if a non-banking company did consider entering investment banking now, wouldn’t you just wish you could listen when the independent non-executive directors asked  ‘why would we want to enter investment banking NOW and what how will our shareholders respond?’)

But how about industry consolidation?  Banks buying investment banks.  Investment banks buying each other or merging. 

Barclays missed out on ABN AMRO (and aren’t they happy about that!).  Deutsche Bank still isn’t enough of a bulge bracket firm to its liking – despite a strategy to achieve that status since it’s acquisition of Morgan Grenfell in 1989 almost 20 years ago and it’s acquisition of Bankers Trust / Alex Brown 10 years later. 

So I’m not talking here about companies buying INTO investment banking, but rather investment banks (or universal banks) buying other investment banks.  Stay tuned, but it may be starting.

See the reports first in Bloomberg on a possible Allianz (Dresdner Bank) / Commerzbank / Postbank merger.  Note the stories, first reported by The Daily Telegraph, that Bob Diamond at Barclays was interested in buying the investment banking parts of UBS or perhaps Lehman.

The big question I think is whether the large banks in China and India will want to get into this business.  They have been quietly building their domestic capabilities, but having been largely unaffected by the credit and liquidity market issues of the past ten or twelve months, they have a relatively greater ability to make a purchase than many American and European financial services firms.  Not sovereign wealth funds, but real banks.

Any comments welcome.  Who actually would be willing to buy into this industry?  Or who could be a consolidator?  Are Chinese banks ready yet for all the ‘fun’ of being global investment banks (with apologies to Ken Lewis of Bank of America who said last year that he’d had just about enough fun in investment banking, thank you)?

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M&A Advisors Moving to Asia — Is it officially a trend?

Posted on Wednesday, 21 May 2008. Filed under: Commentary, Mergers |

Two days ago, the BBC called me to talk about the move to Asia of senior investment bankers, as there had been a flurry of reports in the past several months about managing directors (Credit Suisse, Citi, Deutsche Bank, Morgan Stanley) moving to Hong Kong and other places in Asia from their current perches in New York or London.  You can see the BBC News article here, but it was also widely picked up in the past couple days by other media, ranging from Money Morning in the US to Finance Markets in the UK.

Investment bankers follow the money.  I can relate to this as while at Morgan Stanley in the 1980’s and 1990’s, I personally was transferred by the company first to Japan as that country was flexing it’s financial muscles in the mid-1980’s and then to Germany following the fall of the Berlin Wall and the reunification of the country.

With sovereign wealth funds (many being based in Asia) having a lot of money, with Asia having escaped the worst of the credit crunch and with the crunch having hit the US and Europe the hardest, it is not surprising at all to see this trend of executives – and indeed corporate centres of excellence – to Asia.  Once you get critical mass in a location, it begins to snowball and that is what is happening there. 

This doesn’t mean that London and New York will lose their crowns as respectively the #1 and #2 global financial capitals, but it may mean that their combined market share is lower.  It does, however, mean that the second tier financial centres – for example, Frankfurt, Chicago, Paris – will be most affected.

Do you think this is a long-term trend?  I think it applies to M&A (the focus of this blog) as much as any other area of investment banking, but we’re short of evidence at this point except anecdotally.

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M&A Deal Success in 2008

Posted on Monday, 19 May 2008. Filed under: Commentary, Mergers |

Now is the time to do deals.  Conventional wisdom may say that with the volume of M&A deals declining, a company should pause in its acquisition programmes.  No.  Please don’t so so.

Earlier today, Towers Perrin published a research report on the historical success of deals in the year after the M&A market has peaked.  Towers Perrin sponsored this research conducted by one of my researchers, Kate Chalova, and me at Cass Business School.  See coverage of this in eFinancial News, Wall Street Journal Market Watch, Dow Jones, The New York Times Deal Book, and Management Today amongst others and as covered as well today on the TV by CNBC.

We’re assuming, of course, that 2007 will have been the peak of this most recent (can we still call it current?) merger wave.  That makes 2008 the post-peak year.  Thus, 2008 corresponds best to 2000 (the year following that merger wave’s peak in 1999) and 1990 (following the 1989 peak).  When we looked at data in those two prior merger waves, we found incontrovertible evidence that the returns in the post-peak year exceeded those of the peak year and the years leading up to the peak.  Here’s our chart:

Deal Share Price Performance (Over / Underperformance vs Global MSCI Index)

  Deal Share Price Performance (Over / Underperformance vs Global MSCI Index)

 

In this climate, more than ever, deals will be scrutinised to see if they deliver value. Our previous findings have shown that the current merger wave has consistently reversed the historical trend and has been good for value creation. In previous waves, on average, value had been destroyed. But even then, the post-peak years have shown that sense came to play as the market cooled and value was created by companies not caught up in the froth of the market. So our analysis should provide positive grounds for confidence for corporations who have the ability to do deals today and for their shareholders. Based on our analysis, there is significant potential upside to doing a deal in 2008, a post-peak year, even though it may be even more necessary than ever to select deals carefully.

As I said in the press release about the study, in this climate, more than ever, deals will be scrutinized to see if they deliver value. This analysis should provide some confidence for both corporations that have the ability to do deals today and for their shareholders. Based on our analysis, there is significant potential upside to doing a deal in 2008, a post-peak year, even though it may be even more necessary than ever to select deals carefully

Why is this so?  Obviously, one reason is that there’s less hype in the market and that the cost of buying a company may be lower.  But there are other reasons as well.  Fewer auctions.  Better focus on deal selection because the market is going down and it may be less obvious why deals should be done (and thus deals are more difficult to justify to sceptical boards).  The declining market itself may be a discipline that keeps companies from doing poor deals.  In another report issued a few days after ours, Boston Consulting Group came to the same conclusion using some of the same information.

The full press release can be see on the Towers Perrin website here, which also provides a link to the full report.

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