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US Investment Banks: Hints of a Revival in Dealmaking Emerge

US investment banks see early signs of revival in dealmaking

On October 27th, major Wall Street firms noted a sluggish year in dealmaking, hitting a low point. Some companies are now considering mergers, raising hopes for a potential upturn in investment banking revenues following a lackluster third quarter. Dealogic data revealed a global 16% drop in investment banking revenue for the third quarter compared to the previous year. However, recent announcements of acquisitions by Exxon Mobil and Chevron, each exceeding $50 billion, have injected positivity into the transaction pipeline.

Lazard CEO Peter Orszag highlighted that this process may proceed in fits and starts, with not all discussions resulting in announcements, and not all announcements culminating in closures. He observed a notable shift compared to the situation six to nine months prior, indicating a potential bottoming out in the mergers and acquisitions (M&A) market. Orszag also noted more constructive client discussions in recent months.

Morgan Stanley’s incoming CEO Ted Pick expressed optimism, stating that the forward pipeline has consistently expanded month by month. He emphasized the attractiveness of mid-cap and large-cap M&A across various industry sectors in the upcoming cycle. Given the three- to six-month timeline for deals to conclude, the forward pipeline serves as a key indicator.

While Morgan Stanley lagged behind its peers in the third quarter, their recent results showed an improvement, with shares rising by 1%. Global investment banking revenue for the first three quarters of this year totaled $50 billion, a 20% decrease from the same period in 2022, as reported by Dealogic.

CONSERVATIVE PREDICTIONS

Projections for 2024 remain cautious due to economic uncertainties, including U.S. interest rates, inflation, and geopolitical conflicts. Analyst Mike Mayo from Wells Fargo anticipates a 5% to 10% increase in investment banking revenue for major banks next year, though activity is expected to remain subdued compared to the exceptional performance in 2021.

Citigroup CEO Jane Fraser emphasized the difficulty in predicting a sustained rebound in deal activity. The bank recently advised on Exxon’s acquisition of Pioneer Natural Resources. Fraser noted an uptick in leverage finance for key clients but expressed caution regarding the IPO outlook.

Activist investors have played a significant role in advocating for M&A in nearly half of the campaigns tracked by Barclays this year, despite a more challenging financing landscape. Last week, various firms, including Engaged Capital, Starboard Value, and Jana Partners, made recommendations for strategic moves in different companies.

At Bank of America, expectations held steady following a 2% growth in investment banking fees in the third quarter, supported by deals from bankers serving middle-market companies. CEO Brian Moynihan indicated plans to further expand the team.

Goldman Sachs CEO David Solomon maintained an optimistic outlook, foreseeing continued recovery in both capital markets and strategic activity, even with largely stable investment banking fees in the third quarter.

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