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M&A Boom May Last Until 2010
Mergers and acquisition activity should remain strong until about 2010, according to an analyst report that hands a boost to investment banks reeling from the summer's decline in underwriting fees.
Banc of America Securities analyst Michael Hecht predicted in a report today that there are two to three years left in the boom cycle in mergers and acquisitions. Hecht noted that M&A cycles usually last for six to seven years. He dated the start of the present cycle to 2004, suggesting high investment banking fees from takeovers until around 2010.
Hecht also noted that activity should stay strong because there is a $1.5 trillion (€1.04 trillion) backlog of 2,721 deals announced this year but not yet completed. About three-quarters of those deals should close by the end of this year.
The current value of mergers and acquisitions is about 7% of the overall market capitalization of all US companies. Typically, the overall market capitalization of US companies and M&A activity are strongly correlated, and M&A stands at around 20% of total market capitalizations when mergers are at their peak, according to the report.
Almost all of the investment banks reported strong advisory revenues in the third quarter, but they were also hit by billion-dollar writedowns for troubled debt such as leveraged loans. JP Morgan grew merger fee income 36% in the quarter to $595m, but also took a $1.3bn loss on loans and subprime exposure. Merrill Lynch's advisory revenues were steady despite the bank writing down a record $8.4bn.
Advisory-focused firms, including Greenhill, have fared best. Greenhill more than doubled its revenues in the third quarter. Today the bank opened an office in Calgary, Canada after hiring a senior lawyer, Douglas Black. Black was formerly a vice-chairman with law firm Fraser Milner Casgrain. Greenhill expanded into Canada last year with the acquisition of Toronto-based Beaufort Partners.
However, markets business has suffered. Last week alone, underwriting fees for the investment banks fell 26% to $646m, according to Banc of America Securities.
Equity issuance fell by $1.4bn, and in the investment-grade corporate debt market, companies raised only $17.4bn, scraping the ground compared to $63.8bn last week. The high-yield debt market also suffered, with proceeds falling to $3.2bn from $4.3bn, according to Hecht.
Heidi Moore