Earlier this week we cited a Wall Street Journal columnist's description of today's investment bank office as a "phantom realm" where bankers show up for work but can't produce because deals are all but absent. The latest data and forecasts of deal activity suggest that situation won't change in 2009, either for merger advisory or corporate finance bankers.
One dismal forecast comes from BernsteinResearch and its high-profile bank sector analyst, Brad Hintz. His recent report projects the value of U.S. M&A announcements will plummet 25 percent next year and 15 percent in 2010 after shrinking an estimated 13 percent this year, according to Financial News.
That extended falloff in deal activity will compress banks' advisory fees, with negative implications for bankers' job security and compensation prospects next year. Hintz looks for M&A revenue at three top-tier U.S. institutions (Merrill Lynch, Morgan Stanley and Goldman Sachs) to shrink by one-third this year, by a further one-quarter in 2009 and 4 percent in 2010 before recovering in 2011 and 2012, Financial News says.
Government Intervention and Mergers For Survival
Much of the M&A activity that does exist is being driven by government intervention and forced sales by financial institutions facing insolvency. That's likely to continue in 2009 - for investment bankers, a mixed blessing at best.
Amid record borrowing costs and rampant funding pull-backs, more than 1,000 pending M&A deals have been killed so far in 2008. Almost $100 billion worth of leveraged buyouts were cancelled since credit markets began seizing up 18 months ago. The withdrawn deals denied banks an estimated $1.3 billion in advisory fees, based on estimates by Thomson Reuters and Freeman & Co.
The past few weeks saw cancellations of two of the biggest announced mergers ever: BHP Billiton's $66 billion offer for Rio Tinto Group, and the planned $41 billion takeover of BCE Inc. by Ontario Teachers' Pension Plan and a group of U.S. private-equity firms.
Worldwide M&A deal volume may shrink 30 percent next year to about $2 trillion, according to estimates by Barclays Capital and Nomura cited in a recent Bloomberg News story. However, activity may shift toward smaller deals in which healthy companies acquire credit-starved competitors, and toward purchases by Chinese and Japanese companies fueled by current account surpluses and a strong yen. Potential beneficiaries are mid-market investment banks and institutions with strong advisory relationships in China and Japan.
On the other hand, a November survey of middle-market deal professionals found that 44 percent expect the deal environment to deteriorate over the next six months. That's the most pessimistic outlook ever from that twice-yearly survey, conducted by by the Association of Corporate Growth and Thomson Reuters.
IPO Volume Down Nearly Two-Thirds
Meanwhile, capital markets bankers no busier than their counterparts on the M&A side. Ernst & Young reports that global initial public offerings plunged 58 percent by number and 63 percent by dollar volume this year through November, compared with the same period last year. Activity is at the lowest level since 1995.
More than three-fourths of this year's $95 billion of worldwide IPO volume came from markets in Asia (about $30 billion, primarily from Greater China), North America ($27 billion, dominated by Visa's record $19.7 billion listing on the New York Stock Exchange) and the Middle East/Africa (about $16 billion, most from Saudi Arabia).
Emerging markets accounted for 15 of the year's 20 largest IPOs. Yet, the downturn hasn't spared the largest emerging markets, the so-called BRIC countries of Brazil, Russia, India and China. BRIC IPO deals plunged 55 percent by number and 74 percent by volume - no better than the worldwide figures.
Still, the consulting firm points out that the pipeline of companies aiming to go public remains "robust." The IPO process has a long lead time of 12 to 24 months, says Gil Forer, E&Y's global director of IPO initiatives. "Clearly it is difficult to predict when IPO activity will recover and capital markets need first to stabilize in order to rebuild confidence. However, many companies will use current market conditions to fully prepare themselves to take advantage once the IPO window reopens."