Wall Street Cedes M&A to Bank Collapses as Fees Decline to 2005

By Ambereen Choudhury and Elisa Martinuzzi
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Oct. 13 (Bloomberg) -- The only bright light in mergers and acquisitions is looking more like a death star now that 60 percent of the $389 billion in takeovers since the beginning of September are the result of bank collapses.

The loss of more than $5 trillion of shareholders' equity -- wiping away the biggest percentage of the stock market since 1937 during the Great Depression -- means that fees of about $36 billion from share sales and M&A are down 33 percent so far this year from 2007, according to data compiled by New York-based research firm Freeman & Co. Business is so bad that no one sees any recovery before 2010.

``There will be a deeper decline in investment banking than we've seen so far,'' said Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein & Co. in London. ``If you're a patient on a drip, you won't go out and play football.''

Companies from Swiss mining group Xstrata Plc to U.S. drugstore-chain Walgreen Co. canceled transactions during the past month as banks, pinched by the credit squeeze, clamped down on lending for M&A. The value of takeovers announced this year fell 30 percent to $2.3 trillion as of Sept. 30, according to data compiled by Bloomberg. Global fees for the full year are set to fall to their lowest level since 2005.

``With credit markets now in total disarray, M&A will be exceptionally slow for the rest of the year, excluding deals driven by the financial crisis,'' said Rob Kindler, 54, vice chairman at Morgan Stanley in New York. ``Even healthy companies are focusing on their own liquidity and balance-sheet issues rather than M&A.''

IPO Drought

The market for initial public offerings has dried up. There were no IPOs in the U.S. in September, the first month since July 2003 in which no shares were priced, Bloomberg data show. Globally, IPOs fell 81 percent in the third quarter to $10.7 billion, as investors shunned new securities. The period was the slowest in five years.

After marketing itself to investors for a month, Schott Solar AG, a German maker of solar equipment, shelved a 657 million-euro ($884 million) IPO on Oct. 8, citing the ``dramatic deterioration in international capital market conditions.'' The next day Germany's Deutsche Bahn AG postponed an IPO for its train-operating division, a 5 billion-euro sale. Enea SA, the Polish power distributor that planned a 3 billion-zloty ($1.2 billion) share sale in Warsaw, also withdrew its offering.

``It is difficult to do deals in such a volatile environment,'' said Pat Guerin, 37, co-head of European mergers at UBS AG in London. ``There may be plenty of opportunities, but it still takes a brave buyer to make a big bet in the middle of this turbulence.''


Distressed Banking

Still, banking purchases sparked by the credit squeeze are producing fees for bankers. New York-based Morgan Stanley, Merrill Lynch & Co. and Lazard LLC are the top advisers over the past five weeks to financial-services companies, according to Bloomberg data.

Bank of America Corp. in Charlotte, North Carolina, agreed to buy New York-based Merrill Lynch in a $40 billion transaction announced Sept. 15. Three days later, Britain's HBOS Plc was taken over by rival Lloyds TSB Group Plc in a proposed 10.4 billion-pound ($17.7 billion) sale brokered by the government as the bank's shares plunged 80 percent this year.

San Francisco-based Wells Fargo & Co. sealed an $11.7 billion plan last week to acquire Wachovia Corp. of Charlotte, creating the largest U.S. bank by branches and fending off a challenge from New York-based Citigroup Inc., which had made its own offer days before.

Failures Forecast

Royal Bank of Scotland Group Plc, the U.K.'s fourth-biggest bank by market value, is now under pressure to embark on asset sales faster than planned after the Edinburgh-based company agreed to take part in the government's 50 billion-pound banking- industry rescue package.

More ``major'' financial institutions will collapse or lose their independence before the global credit crisis ends, Lazard Deputy Chairman Gary Parr said in a speech at a Foreign Policy Association conference in New York on Sept. 24.

``Ratings agencies continue to downgrade financial institutions very aggressively,'' said Parr, 51, who has advised Bear Stearns Cos., Fannie Mae and Lehman Brothers Holdings Inc. this year. ``That is going to create problems, capital raising needs, and more bankruptcies. Major institutions will be taken over. They will have to be.''

Banking transactions ``are happening because they have to happen,'' said Frank Aquila, a New York partner in Sullivan & Cromwell LLP's mergers and acquisitions group, which advised JPMorgan Chase & Co. and American International Group Inc. this year. He said the return of larger purchases and private equity transactions in other industries may be 15 months away.

`Tumultuous Period'

``This has been a tumultuous period on all levels,'' Aquila, 51, said. ``Clearly it has had a dramatic effect on M&A activity.''

Although fewer acquisitions are getting done, the rates firms charge to advise on mergers remain about the same, partly because companies are struggling to find banks that can provide financing, said Teck-Tjuan Yap, a managing director at Freeman in New York, which uses Thomson Reuters Plc data.

That's not true for commissions for IPOs, which dropped this year, data compiled by Bloomberg show. Fees averaged 2.9 percent this year, down from 3.6 percent in 2007. The decline partially reflects the dominance of larger offerings, for which commissions tend to be lower, bankers said.

In the first three quarters of the year, IPOs involving $1 billion or more accounted for 62 percent of investment-banking assignments, up from 35 percent a year earlier, Bloomberg data show.

No Russian IPOs

``There won't be a recovery in the initial public offerings market this year, and beyond that it's hard to say,'' said Tom Troubridge, head of capital markets at PricewaterhouseCoopers LLP in London.

Even emerging markets, where IPOs had been surging, came to a standstill after equity markets plummeted. There have been no Russian IPOs this year, compared with 12 offerings that raised $14.7 billion in the first three quarters of last year, according to Bloomberg data.

``The U.S. is going into a recession, Europe is going into recession, and my guess is there is likely a cascading of this and the emerging markets will go into a recession,'' said Washington-based Peterson Institute fellow Edwin Truman, former head of the Federal Reserve's international-finance division. ``This is going to be a difficult period.''

To contact the reporters on this story: Ambereen Choudhury in London achoudhury@bloomberg.net; Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net