Bankers’ next pitch is corporate finance fiction


NEW YORK (Reuters Breakingviews) – It won’t be a good year to be an investment banker. Merger and IPO advisory fees fell in the first half of 2022 as rising interest rates and choppy debt markets inhibit private equity buyers. Bankers must therefore find a new way to win business. There is an opportunity to prepare CEOs still reeling from a global pandemic and the invasion of Ukraine to face the next calamity.

The value of global mergers announced so far this year is around $2.1 trillion, down a fifth from the same period in 2021, according to Refinitiv data. And that’s despite big deals, like Microsoft’s $69 billion acquisition of gaming group Activision Blizzard and software maker VMware’s $61 billion union with chip giant Broadcom. The amount raised through IPOs worldwide plunged nearly two-thirds to less than $70 billion as stock markets — especially tech companies — sold off.

Even the buyout funds, which rely on hundreds of billions of dollars in unspent funds, are not benefiting from the sale. The value of global private equity deals fell to a 12-month low in May, according to S&P Global Market Intelligence. Buyout firms have been involved in deals worth $542 billion so far this year, up slightly from 2021, but the number of deals has fallen 24%. Debt becomes more expensive as interest rates rise; UBS estimates leveraged loan volumes will decline by around half in the US this year and 59% in Europe. The market for debt-financed buyouts should therefore become more difficult. On Tuesday, Walgreens Boots Alliance dropped plans to sell its UK pharmacy chain, saying no buyer was able to make an adequate offer.

So bankers from Goldman Sachs, JPMorgan and Morgan Stanley are vying for a shrinking pie. Investment banking fees were $24.8 billion in the second quarter, according to Refinitiv – the lowest quarterly tally since the third quarter of 2018.

This forces investment bankers to be more creative. Often advisors come up with ideas that fall within a reasonable range of expected outcomes. But business leaders who have spent the past two years battling the Covid-19 pandemic and the aftermath of Russia’s invasion of Ukraine are rightly concerned about so-called tail risks, or the possibility that another unforeseen event could disrupt their business.

They are not paranoid. Late Tuesday, US officials said they were stepping up efforts to vaccinate people against monkeypox. That’s why investment bankers are increasingly offering contingency plans for a range of hard-to-predict outcomes. It could be some time before CEOs return to trading. Negotiators willing to engage in the science fiction of corporate finance have a better chance of being heard.

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The value of announced mergers and acquisitions in the first half was $2.1 trillion, down 21% from the same period of 2021, according to Refinitiv data released June 30. Investment banking fees were $24.8 billion in the second quarter, the lowest total quarterly fees since the third quarter of 2018.

(Editing by Peter Thal Larsen and Oliver Taslic. Graphics by Vincent Flasseur.)

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