December 22, 2008 / 4:05 PM / 10 years ago

M&A fees fall 32 pct in 2008 as deals die

HONG KONG, Dec 23 (Reuters) - Fees from mergers and acquisitions, a major source of revenue for investment banks, fell by a third this year, as plunging global markets crippled financing for takeovers and led to a record amount of deals collapsing.

The picture for M&A fees in the first half of next year isn’t looking any brighter, investment bankers say, as few see any real recovery in global markets happening soon. Private equity buyers are still mainly on the sidelines, unable to get loans for big deals.

In a sign of the times, M&A fees for advising buyers and sellers of distressed companies and corporate restructurings are expected to increase as tough economic times continue.

That activity will keep fee streams flowing into banks, though the size of deals in this category are typically smaller than those reaped in heavy takeover periods.

“There is no single geography left untouched. Any entity anywhere with debt maturing may potentially be faced with liquidity issues. And if they are, then M&A is likely to become one of their strategic options,” said Matthew Hanning, Asia Pacific head of M&A and corporate advisory at UBS AG UBSN.VX.

In addition to distressed deals, countries such as China and Japan are likely to feed deal flow, as cashed-up companies there have shown an increasing appetite for overseas acquisitions.

Any way you slice the 2008 M&A fee table, however, it paints an overall grim picture of the current takeover climate.

Global M&A-related fees fell 32 percent this year to $34.2 billion, according to calculations by Thomson Reuters and Freeman & Co.

Goldman Sachs (GS.N) earned the most M&A fees, according to the data, taking in $1.58 billion. J.P. Morgan (JPM.N) ranked second on $1.32 billion and UBS third on $1.1 billion. Goldman raked in nearly $3 billion last year in M&A fees, the data show.

M&A fee tables are seen by some as more important than the overall advisory rankings, because fees translate to actual revenues for the banks. It’s fairly common to get credit but no money for advising on a deal.

(For FACTBOX on global adviser rankings, click [ID:nHKG168243])

Yet fee rankings are also inexact, because most agreements are negotiated in private. Freeman & Co. says it uses a proprietary algorithm to tally fees that aren’t disclosed.

For banks helping to sell a company, an upfront fee is usually paid, plus fees for completing the deal. Advisers defending an offer earn a payout if the hostile bidder fails.

For buyside advisers, some up front fees may be negotiated, but in most cases bankers get the lion’s share if their clients complete the takeover. Closing fees are, on average, around 1 percent of the total transaction.

More takeover offers fell apart this year than ever before.

Buyside advisers for miner BHP Billiton’s (BHP.AX) failed hostile offer for rival Rio Tinto (RIO.AX) were on the losing end of the largest ever withdrawn merger.

The all-share bid lost about two-thirds of its value in the months before it collapsed but was still worth $66 billion when BHP pulled out last month.

According to Thomson Reuters and Freeman, based on the peak offer, BHP Billiton’s advisers were in line to receive a total of $140 million in fees, an estimate that includes both upfront and closing fees. They’re likely to have made only $10-15 million.

The advisers were Citigroup (C.N), Goldman Sachs, UBS, Gresham in Australia, HSBC (HSBA.L) and Merrill Lynch MER.N as a corporate broker.


M&A fee totals are down 40 percent in the United States, 34 percent in Europe, and 11 percent in Asia, excluding Japan.

“Compared to other areas, like the debt and equity markets, deals and fees in the M&A space are holding up fairly well,” said Hanning, of UBS, who is based in Hong Kong.

For involvement on any Asia M&A deal outside of Japan, UBS ranked No. 1, with estimated fees of $120 million on 52 deals, according to calculations by Thomson Reuters and Freeman.

Asia, however, is the region most in need of big M&A fees to make up for equity capital market (ECM) losses.

ECM in Asia in the last two years generated around 70 percent of banking fees. By comparison, ECM in the U.S. generated around 25 percent of the fee pool, M&A around 50 percent, Freeman says.

ECM activity is all but dead across the globe, as investors are unwilling to put money into initial public offerings or other types of equity issuances, with a few exceptions.

In Asia, Credit Suisse CSGN.VX ranked second in M&A with $109.9 million in fees on 58 deals, and J.P. Morgan third with $108.7 million on 42 deals.

Morgan Stanley (MS.N), ranked No. 1 last year, fell to sixth place with $101.4 million in fees on 54 deals, according to Thomson Reuters and Freeman.

For more on global M&A activity, click [ID:nHKG263666] Editing by Lincoln Feast

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