Deutsche Bank’s M&A Business Growing on Asian Demand
Deutsche Bank (NYSE:DB) is a leading global investment bank headquartered in Frankfurt, Germany. The bank offers financial products and services for corporates, government, financial institutions, private and business clients globally. It competes with other global investment banks like Credit Suisse (NYSE:CS), UBS (NYSE:UBS), JP Morgan (NYSE:JPM), Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS).
Deutsche Bank’s investment banking services come under our M&A and Capital Markets division, which comprises of Mergers and Acquisition Advisory (M&A), Equity Capital Markets (ECM) and Leveraged Debt Capital Markets (LDCM). The offering includes comprehensive financial advisory services on mergers & acquisitions (M&A), restructuring advisory and capital raising services in the debt and equity capital markets. For providing these services, Deutsche Bank, like other investment banks, charges a fee which is generally a percentage of the total value of the deal.
We estimate that the M&A and Capital Markets division constitutes around 6% of our $54.80 price estimate for Deutsche Bank’s stock.
Asian Growth Boosting Demand for Banking
Investment banking activity, which witnessed a steep drop during the recent economic downturn, has been picking up in 2010. Thomson Reuters releases annual league tables for M&A, equity capital markets, and debt capital markets and states that the value of global M&A activity increased to $2.4 trillion in 2010, nearly a 23% increase from last year. [1]
M&A advisory fees from completed transactions increased 27%. The increase in M&A activity in 2010 has largely been driven by growing demand from emerging markets, where investment banking activity increased around 76% from last year and accounted for around 33% of the total value. [1]
We estimate that M&A deal volume will recover after it dipped considerably in 2008 due to a decline in global M&A activity ($3.7 trillion in 2007 to around $2.0 trillion in 2009). As capital markets begin to normalize to pre-recession levels, we expect to see M&A activity hit 2007 levels by 2015. If instead, volume picks up and recovers to these levels by 2013 instead and fees on these deals recover to prior levels, this could contribute around 2-3% to our price estimate.
Deutsche Bank’s M&A market share globally has fluctuated ranging from 14-17% historically. It jumped significantly in 2008 as a result of a higher volume of deals completed by Deutsche Bank compared to the prior years. We expect Deutsche Bank to maintain a strong position in the M&A market as it focuses on expanding abroad.
We believe that Deutsche Bank’s established presence in emerging markets, and in particular Asia, could help it expand its M&A market share globally. [2] If market share reaches past levels by 2013, this could add another 1-2% to our price estimate.
If Deutsche Bank can use its global presence to secure higher M&A market share and assuming that fees and deal volumes return to past levels at a quicker pace than we currently expect, we could see at least 5% upside to our current estimates.
See our full estimate for Deutsche Bank here.
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