M&A Fees Lag Volume Surge

The M&A fee pool fails to keep up with a significant increase in transaction volume this year, suggesting some league table-focused banks are doing business at discount prices. In the year to October 21, M&A deal volume booked by advisors reached $205bn from 1,047 deals, up 185% from $72bn (675 deals) in the corresponding period of 2009. M&A revenue, however, has risen just 27% year-on-year, to $500m YTD. “It’s a global trend in all products,” says the head of LatAm investment banking at a major institution. “There are lots of new entrants offering services to get market share,” he adds. Even excluding large trades like Slim’s telecoms consolidation, or a fairness opinion on Petrobras’ jumbo equity – both stretching the meaning of “advisory” – volume is still a hefty $134bn YTD. “It’s got to be people doing work for free, or almost free,” says a banker focused on international markets. “I don’t think fee levels have gone down.” The banker says divergence is likely the result of banks doing cheap fairness opinions. Merging entities often arrange a pact themselves without the aid of advisors, since they’re already very familiar with the target. They may bring an advisor in at the end just to finalize terms, but the fee would be lower, since internal teams do all heavy lifting. “There is a pretty substantial number of deals either arranged without advisors at all, or mostly without advisors, and maybe they brought somebody in for a final analysis,” says a LatAm M&A specialist. He refers to Vale’s sale of various mining assets to Norsk Hydro for $4.9bn, in which the vendor did not use banks, as an example. Norsk Hydro retained Citi and Credit Suisse on that deal. Most surprisingly this month, Barclays is number 4 by M&A volume, claiming credit for 7 deals worth a combined $46bn, much of it a fairness opinion on Petrobras’ $42.6bn oil-for-shares swap. Rothschild also makes a surprise appearance at number 2, also propelled by Brazilian oil.