U.S. Banks, Led by Goldman Sachs, Dominate Global M&A While European Rivals Lag

October 22, 2019, 5:34 PM UTC

Goldman Sachs tops a ranking of advisers on global mergers and acquisitions so far in 2019, underlining U.S. institutions’ dominance of a lucrative area of investment banking as European rivals pull back.

The American investment bank has thus far advised on 249 deals worth $982 billion, including the $120 billion merger of United Technologies’ aerospace division with defense firm Raytheonaccording to analytics company GlobalData.

There were few surprises in the Top Three. JPMorgan Chase was second with 211 deals worth $778 billion in the first nine months, according to GlobalData, which tracks worldwide M&A activity, plus private equity and venture capital. Morgan Stanley was third, advising on 182 deals worth $732 billion.

Ravi Tokala, financial deals analyst at GlobalData, said one of the main reasons that the three U.S. investment banks topped the list was that they advised on many of the 30 “megadeals’—deals worth more than $10 billion—announced this year.

“Among the 30 megadeals recorded, the top three advisers—Goldman Sachs, JP Morgan and Morgan Stanley—advised (on) 22, 15 and 13 deals, respectively,” he said. U.S. banks occupied the top six spots on the list.

Credit Suisse, at number 7, was the leading European contender, advising on 118 deals worth $283 billion. Britain’s Barclays and HSBC ranked 9th and 10th, advising on deals worth $242 billion and $193 billion, respectively.

The value of the deals handled by Goldman Sachs rose 11% compared with the same period last year, while JP Morgan’s deal haul was down nearly 11% and Morgan Stanley’s was down by around 19%. U.S. boutique investment bank Evercore, fifth on the list, saw the value of deals it advised on jump by two-thirds to $574 billion.

The value of deals handled by Barclays was down 52% while there was a 73% fall in the value of transactions advised on by Deutsche Bank, which is in the throes of a deep restructuring. HSBC was one of the few bright spots for non-U.S. banks. Its M&A deals business managed an increase of 27% in value.

M&A activity has fallen slightly this year as clouds gather around the global economy. U.S.-China and transatlantic trade friction, slowing growth in China, weak European growth and Brexit have combined to spook investors and gum up the capital markets.

According to analytics firm Dealogic, global M&A totaled $3.05 trillion in the first nine months of 2019, down nearly 6% from the same period a year earlier. Volume dropped significantly in the Asia-Pacific and Europe, Middle East and Africa regions, with the Asia-Pacific generating $600 billion in volume over the nine months, the lowest since the same period in 2014, Dealogic said.

The U.S. bucks the trend

However, M&A targeted at the Americas region reached a record high, with a deal volume of $1.67 trillion in the first nine months of the year.

That was mainly because of a spike in U.S.-targeted “megadeals” announced this year—28 transactions in total, Dealogic said. Such deals reached a record high in the first nine months, with volume reaching $840 billion, half of the total U.S. volume. Most U.S.-targeted megadeals were domestic and were partly driven by consolidation in healthcare and technology, it said.

Weakness in the market for initial public offerings, another important source of investment banking revenues, may affect some banks’ profits towards the end of the year.

The withdrawal of the IPO for office-sharing startup WeWork sent a chill through the market and several companies have subsequently cancelled or postponed IPOs regions around the world.

While the strength of U.S. M&A this year goes a long way towards explaining U.S. banks’ dominance, competition from European rivals has been waning as many European banks continue to downsize a decade after the financial crisis.

Despite being on the front line of the sub-prime mortgage crisis, U.S. banks have in general bounced back from the crash much more strongly than their European rivals. U.S. banks took decisive action to restore their balance sheets and offload bad debts after the crash while European banks have in some cases dragged their feet.

Economic conditions in the United States are much healthier than in Europe, where banks have had to contend with the euro zone crisis, slow growth and negative interest rates. You’re seeing the difference with the strength last week of third-quarter reports from the biggest American banks. European banks, meanwhile, once tried to rival the U.S. investment banking sector but have had to cut back sharply.

Royal Bank of Scotland (RBS), which grew quickly to become one of the world’s biggest banks by assets before the financial crisis, has slashed its assets and staff since being rescued by the U.K. taxpayer during the credit crunch. Deutsche Bank announced in July it would cut 18,000 jobs and shut down its global equities trading business. And,  HSBC could announce up 10,000 job cuts soon.

Swiss banks UBS and Credit Suisse have also cut their investment banking businesses. Barclays fought off attempts by an activist investor this year to persuade it to scale back its investment banking business.

Management consultants McKinsey warned this week that many banks may be poorly placed to withstand an economic downturn.

“On balance, the global (banking) industry approaches the end of the cycle in less than ideal health, with nearly 60 percent of banks printing returns below the cost of equity. A prolonged economic slowdown with low or even negative interest rates could wreak further havoc,” it said in a report.

To survive, some banks will have to get more serious about M&A. But in this case, they may need to find a merger partner for themselves.

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