Investment banking revenue: M&A fees plummet … to pre-pandemic levels

Data InsightDealspeak 7 March

Investment banking revenue: M&A fees plummet … to pre-pandemic levels

Wall Street banks have been cutting costs, after 2022’s slump in dealmaking led to plunging revenue. Goldman Sachs started handing out 3,200 pink slips last month, while the likes of JPMorgan Chase, Citigroup, and Jefferies Financial are reportedly slashing bonuses.

How bad is it? Investment banking fees from North American clients plunged 48% to USD 39.9bn in 2022 from USD 76.5bn in 2021, according to Dealogic data*. That is the steepest drop on record, and worse than the 37% drop during the Great Financial Crisis between 2007 and 2008.

Those figures include work on mergers and acquisitions (M&A), debt capital markets (DCM), syndicated lending, and the equity capital markets (ECM).

Revenue from advising on M&A took the lion’s share, generating USD 19.6bn in 2022, a drop of 29% year-on-year (YoY). ECM desks saw revenue tank 78% YoY to USD 4bn, debt capital market bankers saw revenue shrink 47% to USD 8.4bn and IB fees on syndicated lending contracted 46% to USD 7.9bn.

But context is required. The plunge comes off 2021’s record highs when soaring stock market valuations, low interest rates, liquid borrowing markets and dry powder all combined to drive dealmaking and pushed banks on a hiring spree to service the M&A boom. Revenue levels in 2022 are actually much closer to levels seen in the pre-pandemic era.

Swings and roundabouts 

While M&A in North America sank 42% year-on-year to USD 1.6tn in 2022, fees from advising on those deals dropped a more modest 29%. Part of that is explained by the way Dealogic calculates fees: it recognizes 10% of the expected fee upon announcement of a deal, and the remaining 90% upon its completion. That means a strong M&A market in late 2021 would have been reflected in 2022’s fee data.

It also means large deals announced in early 2022 – for example, Microsoft/Activision Blizzard and Broadcom/VMware – could positively impact fees in 2023, provided they close this year. Conversely, lackluster dealmaking in 2H22 will have a dampening effect on 2023 fees.

And the winners are…

Fees from M&A were split roughly equally in 2022 between those with strategics and those with a financial sponsor’s involvement. The technology sector continued to generate the most in M&A fees, with bankers earning USD 4.9bn, followed by healthcare (USD 2.7bn) and financial institutions (USD 2.6bn). The top five M&A earners were Goldman Sachs (USD 2.8bn), JPMorgan (USD 1.7bn), Morgan Stanley (USD 1.6bn), BofA Securities (USD 1bn), and Evercore (USD 850m). The first two declined comment, the rest did not respond to a request for comment.

Future fees

With valuations down, many firms are facing pressure from activist shareholders.

While seller expectations are dropping more in line with what buyers are willing to pay, the high interest-rate environment and the hawkish regulatory tone set by President Joe Biden’s administration should keep a dampener on mega deals, particularly in the technology sector. 

Many tech firms have undertaken layoffs in recent months as macroeconomic uncertainty continues and are expected to shed or reorganize non-core assets in 2023.

Tech targets topping Mergermarket’s watchlist include Smartsheet [NYSE:SMAR], Workiva [NYSE:WK] and Splunk [NASDAQ:SPLK], as well as Blackbaud [NASDAQ:BLKB] and Blackline [NASDAQ:BL].

In healthcare, many biotech firms have depressed valuations but could be pushed into selling given the closed market for IPOs and venture capital prevents many from raising cash. Doctor groups continue to see activity with CVS Health’s [NYSE:CVS] acquisition of Oak Street Health [NYSE:OSH], the latest deal there. Everside Health, Marathon Health and Premise Health are seen as potential targets for big strategics like CVS, Humana [NYSE:HUM] and UnitedHealth[NYSE:UNH].

*Dealogic Revenue Data: Dealogic uses a proprietary revenue model to estimate investment banking fees across four key products: M&A, equity capital markets (ECM), bonds or debt capital markets (DCM), and loans. Dealogic awards M&A fees 10% upon deal announcement and 90% upon completion. In this instance, fees represent M&A revenues generated by North America-based clients.

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