Advisory Fees For Banks Swell In Q3 As Global M&A Activity Remains Upbeat
After a decline in the total size of completed deals for the first two quarters of the year, the global M&A industry saw $618 billion in deals close over the third quarter – a 28% jump compared to the $482 billion figure for the previous quarter, and 36% higher than that for the same quarter last year. ((Global M&A Financial Advisory Q3 2014, Thomson Reuters Deals Intelligence)) Notably, the $1.6 trillion figure for completed M&A deals over the first nine months of the year is in sharp contrast to the over $2.7 trillion in announced M&A deals over the same period. This discrepancy largely stems from the fact that 13 of the 15 largest deals announced over the first three quarters have yet to close. In fact, data compiled by Thomson Reuters shows that the nine-month period was the best in terms of new deals announced since 2007.
The steady improvement in global M&A activity over the year is expected to reflect in an increase in advisory fees for investment banks, and Thomson Reuters estimates a 12% increase in fees for the industry as a whole in Q3 2014 compared to Q2 2014. In this article, we detail the performance of the largest U.S. investment banks – Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS) and Citigroup (NYSE:C) – in the global M&A arena in Q3, while also detailing the expected changes in advisory revenues for each of them year-on-year as well as quarter-on-quarter.
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These U.S. banking giants garnered a strong share of the $618 billion in M&A deals that were completed in Q3 2014, with the five banks taking up the top 5 ranks in the industry globally for the second consecutive quarter. The table below summarizes the Q3 performance of the M&A unit at each of these banks according to Thomson Reuters’ Deals Intelligence data. It should be noted that most deals employ more than one bank, which is why the sum of market shares for just these five banks is more than 85%.
| Bank | Deal Size | Mkt. Share | # Deals | Avg. Deal Size | Q3’14 Fees | Q2’14 Fees | Q3’13 Fees |
| Goldman Sachs | $132.6 B | 21.5% | 79 | $1.68 B | $485 M | $400 M | $338 M |
| JPMorgan | $107.4 B | 17.4% | 72 | $1.49 B | $401 M | $350 M | $330 M |
| Morgan Stanley | $102.3 B | 16.6% | 71 | $1.44 B | $307 M | $369 M | $299 M |
| Bank of America | $100.2 B | 16.2% | 60 | $1.67 B | $274 M | $223 M | $232 M |
| Citigroup | $85.9 B | 13.9% | 76 | $1.13 B | $329 M | $210 M | $164 M |
Goldman Sachs regained the top spot in the rankings for Q3 after being pushed to second place by Morgan Stanley in Q2 2014. The investment bank has ranked first globally in terms of deals completed in 10 of the last 13 quarters (except for Q1 2013, Q2 2013 and Q2 2014). It should be noted that the bank’s market share in Q1 2014 was nearly double the figure seen in Q3 2014. This reduction in market share can be explained by the fact that the bank remains busy with many of the major deals which were announced this year, but have yet to close.
But the shrinking market share did not get in the way of Goldman notching the #1 position among all investment banks in terms of number of deals closed. With a role to play in 79 deals over the quarter, Goldman has retained this position for eight consecutive quarters now – highlighting its strong presence in the global M&A industry. Moreover, Goldman Sachs had a larger average deal size than any other bank thanks to the considerably larger market share for the period compared to its peers. The $1.68 billion average deal size indicates that the bank was likely a part of each of the large deals that went through in Q3.
Coming to fee revenues for these banks, all the banks are expected to report a sequential increase in advisory fees except for Morgan Stanley, which is likely to see a 17% decline quarter-on-quarter. Goldman is likely to pocket close to half a billion in fees – representing a 43% jump over the figure for the same period last year and a 21% increase compared to the previous quarter. The bank that is likely to see the most gains in terms of percentage growth is Citigroup, which had a poor run in both Q3 2013 as well as in Q2 2014. A particularly strong performance this quarter is expected to result in a two-fold increase in fees for the bank compared to last year. Taken together, these five banks should see advisory fees improve 16% compared to the previous quarter – indicating that they fared better than the industry as a whole.
It should be noted 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. Despite the fact that banks often report numbers which differ considerably from these figures, imputed fees are generally a good indicator of what to expect in the upcoming earnings season.
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