Analysis-US investment banks see early signs of revival in dealmaking

By Tatiana Bautzer and Lananh Nguyen

NEW YORK (Reuters) – Major Wall Street firms said a dismal year of dealmaking appears to have hit a trough, and now some companies are looking to merge, offering hope that investment banking revenues could pick up after a disappointing third quarter.

Dealogic data showed that globally, investment banking revenue tumbled 16% in the third quarter from a year earlier. But lately, bankers have been sounding more positive on the transaction pipeline after Exxon Mobil (NYSE:) and Chevron (NYSE:) both announced acquisitions for more than $50 billion.

Those takeovers, alongside a nascent revival in initial public offerings (IPOs), should bolster investment banking revenues next year.

“This is going to happen in fits and starts a little bit, and so not all of those discussions are going to wind up in announcements, and not all the announcements will close,” Lazard (NYSE:) CEO Peter Orszag told Reuters in an interview. There was “definitely … some difference relative to six to nine months ago” and that for mergers & acquisitions (M&A) the “market is bottoming out,” he said.

“Client discussions have been turning more constructive over the past several months,” said Orszag, who took the helm earlier this month. The independent investment bank on Thursday missed Wall Street estimates for third-quarter profit, as its advisory business reeled from a prolonged slump in dealmaking.

Morgan Stanley’s newly appointed CEO Ted Pick, who takes up the role in January, was similarly upbeat, telling CNBC on Thursday the “forward pipeline has gotten sequentially bigger with each passing month.” He said mid cap and large-cap M&A across industry groups were “seen as the most interesting part of the next cycle.”

Pick noted that given the three- to six-month lag before deals close, the forward pipeline is the relevant indicator.

Morgan Stanley lagged its peers in the third quarter. The lethargic dealmaking disappointed investors, sending shares more than 6% lower when results were announced on Oct. 18. On Thursday, shares rose 1%.

Global investment banking revenue stood at $50 billion in the first three quarters of this year, 20% below the same period in 2022, according to Dealogic.

CONSERVATIVE PREDICTIONS

Predictions for 2024 remain conservative given an uncertain economic environment. Wild cards include U.S. interest rates, inflation and conflicts in Ukraine and the Middle East.

Investment banking revenue will probably rise 5% to 10% next year for the largest banks, according to Mike Mayo, an analyst at Wells Fargo. Still, activity will remain subdued relative to a blockbuster year in 2021.

“It remains hard to predict when deal activity will sustainably rebound,” Citigroup CEO Jane Fraser told analysts on a conference call this month. The bank advised Exxon on its acquisition of Pioneer Natural Resources (NYSE:), announced earlier in October.

“We have begun to provide more leverage finance for key clients,” and companies are becoming more active in issuing debt, Fraser said, but the IPO outlook appears more fragile.

In further evidence of deal flow, activist investors have pushed for M&A in nearly half of all campaigns tracked by Barclays this year, despite tougher financing markets.

Last week, Engaged Capital called on apparel maker VF (NYSE:), which owns The North Face brand, to consider selling non-core assets. Starboard Value recommended that News Corp (NASDAQ:) spin off its digital real estate division and Jana Partners called on Frontier Communications (OTC:) to sell itself.

At Bank of America’s earnings, expectations were broadly steady after investment-banking fees grew 2% in the third quarter, helped by deals from bankers serving middle-market companies.

“We basically doubled the size of that team, and we’ll double it again,” CEO Brian Moynihan told analysts, without specifying staffing numbers.

In Goldman Sachs’ recent earnings CEO David Solomon was more bullish than his peers, despite largely flat investment-banking fees in the third quarter.

“If conditions remain conducive, I expect the continued recovery for both capital markets and strategic activity,” he told analysts on a post-earnings conference call.