The quarterly consensus from executives at the world’s largest investment banks – and some smaller ones, too – is that the deal environment is “healthy,” if unspectacular in comparison to the previous two years, though a murkier timetable on expected tax reform and other policies could lurk as a potential drag.
Commentary on earnings conference calls in July was generally positive, with a tinge of caution:
“Broadly, M&A volumes remain healthy,” said Morgan Stanley CFO Jonathan Pruzan during the company's call. “The fundamental drivers of activity, including challenging organic growth, remained in place, encouraging client engagement,” he said. However, Pruzan noted a decrease in “larger, transformational deals” compared to a year ago, and said “uncertainty over taxes, regulatory reform and the broader political landscape will likely weigh on activity.”
At Goldman Sachs, CFO Martin Chavez characterized US corporate CEOs as “confident,” with strategic M&A conversations “happening all the time,” especially in the technology and consumer retail sectors. In Europe, discussions have been focused around natural resources, he said, and while Brexit has made predictions more difficult, there is “healthy” activity. In Asia, “we’re still seeing the trend of Chinese buying international assets,” Chavez added.
Executives at Citigroup touted the firm’s best investment banking quarter in seven years, with revenue up 22 percent from a year earlier, citing strength in equity underwriting and M&A, along with “continued momentum” in debt underwriting.
Similar to Citi, it was a strong quarter for Bank of America’s IB business, with “record” M&A fees driving total IB fees up 9 percent to $1.5 billion, and “finishing strong in the last few weeks of the quarter,” CFO Paul Donofrio said. Asked about the bank’s own M&A intentions, CEO Brian Moynihan shot down any speculation. “We don’t think about M&A in the context of capital strategy. We are organically growing this company…we just don’t need the distraction,” he said.
Meanwhile, JPMorgan finance chief Marianne Lake told analysts and investors “sentiment remains positive and the M&A backlog is healthy,” with dealmakers generally staying focused on their business objectives. While possibilities for reform and the potential impacts have been “part of the dialogue,” Lake said, if a client has a compelling strategic deal, “they are pretty much just getting on with it, which is why we’re seeing solid growth.” She also noted “continued momentum in global issuance, especially IPOs,” buttressed by “a strong market backdrop and supported valuations.”
Among the smaller deal players, Houlihan Lokey CEO Scott Beiser said most of the executives his firm speaks with still feel optimistic about their business, while they also acknowledge it’s becoming more difficult to sustain earnings increases or boost growth at a particular rate. “I think that tends to sometimes encourage people to do M&A activity to try to bolster growth.” He also backed up the view expressed at JPMorgan, noting that overall, “we just don’t see any abatement in people’s interest and actual activity in doing M&A.”
Merrill Corporation, which facilitates the sharing and disclosure of financial information, has had similar experience with the deals it supports. Over the first half of 2017, the number of US and Canadian deals increased. Although there have been fewer ‘mega’ deals, there has been a substantial increase in middle-market -- and particularly lower middle-market -- deals. In terms of industries, there has been a notable increase in healthcare and oil & gas activity, while there have been fewer materials and technology deals.
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