M&A advisers see green shoots amid fee slump; inflation and interest rate stability key to a turnaround

With investment banking fees falling 62 per cent, bankers are hoping deal activity will begin to thaw as expensive staff are being cut to reduce costs until a turnaround occurs.

With investment banking fees falling off a cliff since the end of the pandemic last year, bankers are hoping deal activity will begin to thaw in the second quarter of the 2024 financial year, but the increase will be marginal until interest rate rises stop, they say.

Swift increases in the cost of money to control the highest inflation in generations has dealt a blow to investment banks, with preliminary data from Refinitiv showing a 50 per cent fall in fees in the first half of the year to $US953m ($1.4bn).

M&A advisory fees plunged 62 per cent to $US267m compared with the first half of 2022, while fees from equity capital markets activity slumped 20 per cent to $US192.m over the same period, the data shows.

Buyers were missing certainty on a key piece of the puzzle when assessing buyouts, with interest rates expected to continue their ascent as central banks fight stubbornly high inflation, bankers said.

“With the cost of capital going up in such an aggressive way, corporates and private equity buyers are sitting on the sidelines waiting for that to transpire,” a senior banker who declined to be named said.

“There’s a lot of debate happening around boards about what assumptions to make about long-term interest rates at the moment, and it’s difficult for them to form a view on where the cost of capital is going to settle.”

Globally and locally, the downturn has led to lay-offs in the investment banking industry, with banks expected to continue shedding expensive staff to cut costs while they wait on a turnaround.

Gold giant Newmont’s $29bn takeover of Australia’s Newcrest Mining accounted for the bulk of deal volume. Picture: Bloomberg

Among the announced deals this financial year, the majority has involved the materials and mining sectors, with the largest – gold giant Newmont’s $29bn takeover of Australia’s Newcrest Mining – accounting for the bulk of the volume.

Newcrest was advised by boutique firm Gresham and JPMorgan, while Bank of America and Lazard worked for US-based Newmont on the deal.

Advised by UBS and Morgan Stanley, Australian lithium miner Allkem’s $US10bn merger plan with the New York-listed Livent also helped otherwise tepid M&A volumes. Livent was advised by New York-based Gordon Dyal & Co, which is headed by a former Goldman Sachs banker. Several announced deals appear to be fraught with uncertainty, but there is some optimism, as in­vestors begin to see signs of stability both in the economy and in markets.

“Companies are facing considerations such as declining pricing power with a weakening consumer, more persistent inflation with strain on key inputs including wages,” said Dan Janes, who heads investment banking for Bank of America.

“But there is an emerging view around boardrooms of greater clarity, or at least a more narrow spread, on how the next year is beginning to look.”

Bank of America is ranking third in the announced M&A league tables in the first half of this year, behind JPMorgan and Gresham Partners.

UBS is the top overall fee earner in Australia’s investment banking league tables.

With the Reserve Bank having raised the cash rate 12 times from near zero to 4.1 per cent in just over a year, markets expect the central bank to lift rates only a couple more times this year.

And if inflation continues to trend lower, there are hopes rates could even start falling next year.

Others point to the fall in market volatility as measured by the VIX index – which is down to 13 points, from 34 points a year ago – as another signal that the stability buyers and bankers crave is almost here.

Mr Janes said bolt-on acquisitions to secure growth and “increasingly all-share offers for more merger-style transactions, with a lens on costs” would be core themes into next year, and should support a turnaround in activity.

Advisers are an optimistic bunch, and they are working with an assumption that the first half of the 2024 fiscal year will bring more uncertainty.

“Despite decreased M&A activity in 2023 generally from the lofty heights of 2021 … we are still seeing a sustained level of interest in M&A from both sponsors and corporates,” said Anton Harris, who jointly leads Ashurst’s local corporate transactions practice.

“It’s hard to predict when and if the M&A market will return to bull market conditions, but clearly stabilisation of interest and inflation rates will provide buyers with more certainty and assist valuation exercises. This should drive more M&A.” So much so that the firm had hired four new partners to be ready for an increase in deals, he said.

But the jury is still out on how long it will take for M&A activity – and fees – to turn around.