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Investment Banking Fees

The only records set so far in 2016 is the huge volume of busted deals, which have left the bankers high and dry and bereft of their windfall.

With earnings season still a month away it’s a bit premature to speculate about just how bad the 2nd quarter will prove to be for the investment banking and related fee driven businesses on Wall Street. But reading the tealeaves, most market observers seem to be anticipating more disappointing results and further cutbacks to come.

A recent story in the Wall Street Journal captures the mood completely – Nightmare on Wall Street. The story contrasts the enormous volume of M&A activity in 2015 that drove investment banking fees to record levels last year compared to the dismal results so far this year. In fact, as the Journal points out, the only records set so far in 2016 is the huge volume of busted deals, which have left the bankers high and dry and bereft of their windfall. According to Dealogic, the busted deal total for 2016 has already reached the level of $395 billion, including such mega-deals as the proposed mergers of Pfizer and Allergan, Staples and Office Depot, as well as Halliburton and Baker Hughes. By the Journal’s calculation, these three failed deals alone represent more than $300 million in lost advisory fee revenue for Wall Street bankers, to say nothing of the loss of associated banking fees from related financing activity.

As if the $300 million in lost fees isn’t bad enough, there’s additional concern that the pace of large mergers will inevitably slow down in the face of these highly visible busted transactions. We’ve noted before on the blog that, as proposed mergers have grown in scale and ambition, there’s been a significant ratcheting up in the level of regulatory scrutiny, including antitrust review as well as efforts to curtail corporate inversions. Given the high level of business risk and disruption attendant upon all merger activity, it’s not hard to imagine that corporate boards will be increasingly concerned about the potential downside associated with mega-deal making.

Following the abysmal quarter for investment banks around the globe, which saw salary cuts across the board as a result of sliding revenues in virtually all product areas, the next logical step is major layoffs of some of the world’s highest paid employees. Indeed, a number of leading investment banking giants are laying off staff either through public announcements or discreetly. Just last week, Bloomberg reported that Goldman Sachs has been cut investment banking jobs in the last few weeks. The investment-banking cuts represent a reversal from 2015 for a unit that was the top-ranked merger adviser during that near-record year and produced the most profit among Goldman Sachs’s four operating segments.

But, one relatively bright spot for M&A deal making recently has been the high level of activity among Chinese companies looking to make overseas acquisitions. So far this year, according to Dealogic there have been $119 billion of announced acquisitions by Chinese companies of offshore companies, compared to only $107 billion in overseas acquisitions for all of 2015. Among other factors, no doubt the quickened pace of Chinese deal making has been spurred by the huge credit expansion unleashed this year by the Chinese government as it has been hoping to stave off a hard landing for the world’s second largest economy.

Not that the prospect of more Chinese companies on the prowl for acquisitions in the U.S itself isn’t without considerable risk (at least for potential targets) inasmuch as proposed purchases by Chinese buyers are subject to an additional level of scrutiny by CFIUS – the Committee on Foreign Investment in the United States. For companies in technology or other strategic sectors, CFIUS reviews have often proved an insurmountable barrier to tie-ups with a Chinese acquirer.

And yet, as reported by the Wall Street Journal recently, American companies are showing increasing willingness and ingenuity in how they approach such opportunities by requiring Chinese suitors to post letters of credit or establish offshore escrow accounts sufficient to cover breakup fee payments and/or guarantee deal financing. If nothing else, it shows the resilience of dealmakers and the deal economy, in finding new paths to pursue high-risk transactions, even as the regulatory and financial obstacles continue to mount.