M&A Activity Was Depressed In 2013 Despite Healthy Q4 Figures

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Thomson Reuters released its quarterly M&A league tables for the fourth quarter and full year 2013 last week, and the figures show that the industry’s notable recovery in the last quarter was not enough to cancel out the weak performance witnessed over the first nine months of the year. ((Global M&A Financial Advisory Q4 2013, Thomson Reuters Deals Intelligence)) Global investment banks completed M&A deals worth a total of $586 billion in Q4 2013 – a strong 29% improvement compared to Q3 2013 but 12% below the Q4 2012 tally of $667 billion. In terms of the number of deals, the negative trend in the industry was also apparent, as 2013 saw the lowest number of deals being announced (36,800) and completed (27,194) in a year since 2005.

The fall in demand for M&A advisory services will no doubt have a direct impact on the fee revenues the world’s largest investment banks generate. Thomson Reuters’ data indicates a 12% reduction in fees for the industry as a whole in 2013 compared to 2012. Thankfully, the strong Q4 performance helped boost fee revenue for the quarter considerably, with the industry making almost 29% more for the period compared to the much slower Q3. While the performance of individual banks (especially the biggest banks) may vary considerably compared to the industry trend, this fact should help set expectations from the banks’ advisory desks right as the earnings season kicks off next week.

See the full Trefis analysis for Goldman SachsJPMorganMorgan StanleyBank of AmericaCitigroup

As mentioned above, the total size of M&A deals completed in the fourth quarter of the year was $586 billion. U.S. banks garnered a strong share of this figure, with Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC) and JPMorgan (NYSE:JPM) occupying the top three spots in the rankings. U.K.-based Barclays (NYSE:BCS) and German banking giant Deutsche Bank (NYSE:DB) took the 4th and 5th spots, respectively.

The table below summarizes the Q4 performance of the M&A unit at each of the five U.S. banking giants, according to Thomson Reuters’ data for Q3 and Q4 2013. It should be noted that most deals employ more than one bank, which is why the sum of market shares for just these 5 banks is nearly 100%.

Bank Deal Size Mkt. Share # Deals Avg. Deal Size Q4’13 Fees Q3’13 Fees
Goldman Sachs $168.4 B 28.7% 107 $1.57 B $531 M $338 M
Bank of America $122.1 B 20.8% 69 $1.77 B $301 M $232 M
JPMorgan $113.2 B 19.3% 71 $1.59 B $427 M $330 M
Morgan Stanley $89.6 B 15.3% 64 $1.40 B $313 M $299 M
Citigroup $83.2 B 14.2% 54 $1.54 B $253 M $164 M

Goldman Sachs closed more deals than any of its competitors in the industry again in Q4, with the investment bank playing a role in deals worth nearly 30% of the total M&A deals that were completed. The bank’s quarterly standing improved sequentially from #3 in Q1 to #2 in Q2 to #1 for Q3 and Q4. The bank also continued to lead the list in terms of total number of deals – being a part of 107 deals that closed in the quarter.

Bank of America had a surprisingly strong quarter – leapfrogging from the bottom of this list for the first three quarters to the second spot by helping close deals worth $122 billion in Q4. JPMorgan was not too far behind in terms of either deal size or number of deals closed, and ranked third.

Interestingly, Morgan Stanley (NYSE:MS) had the lowest average deal size among these three banks – indicating that the bank was not a part of some of the biggest deals that closed this quarter. On the other hand, Bank of America likely played a role in most of the largest deals, thanks to which it had the highest average deal size here of almost $1.8 billion.

Coming to the most important aspect of fees generated by the banks from these deals, Goldman should be very happy with imputed fees north of half a billion dollars from its advisory desk. It must be noted here that imputed fees are merely an estimate based on historical data about fees demanded by the banks for a particular role in the complex M&A advisory process. Although the banks report numbers which often differ quite a bit from these figures, the imputed fees is a good indicator of what to expect.

As is evident from the comparison of fees for the third and fourth quarters of 2013, all the banks had a good quarter in terms of M&A revenues with M&A advisory fees growing by between 30-50% sequentially for all banks except for Morgan Stanley. Considering the fact that the revenues for the industry grew by roughly 29% in Q4, most of these investment banks did better than their smaller competitors this time around.

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