Investment banking

Waiting for the Big Deal

BerlinGalerie-Interfoto
At least Galeria Kaufhof will be changing hands.
  • Why it matters

    Why it matters

    Investment banking had long been the cash cow of the sector, but with revenues declining, personnel reductions might be in the offing for the first time.

  • Facts

    Facts

    • German takeover volume has declined by more than half, to $37 billion.
    • Some optimists hope that two major takeovers of retail chains Douglas and Kaufhof will turn things around.
    • Market players believe that a potential Greek exit from the euro zone has not negatively affected the business.
  • Audio

    Audio

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Life isn’t easy for investment bankers at the moment. It’s a business plagued by scandals, weak returns and constant attacks from regulators.

Now, a portion of their business that had seemed unsullied by all these problems is also weakening. Profits are declining in the lucrative consulting business.

From January to mid-June, fee income in German investment banking – for consulting services provided in conjunction with takeovers, bond and stock issues – has declined by 6 percent over the same period in the previous year, to €984 million ($1.12 billion). While this doesn’t seem that dramatic, it is the lowest value since the analytical firm Thomson Reuters began collecting the figures in 2000.

The main reason is that German takeover volume has declined by more than half, to just $37 billion, primarily as a result of a sharp drop in cross-border transactions. Even the announcements of multi-billion-euro takeovers of department store chain Galeria Kaufhof and the Douglas perfumery chain have not improved the semi-annual financial results for the German M&A market.

The weak first half flies in the face of so-called industry experts that had expected double-digit growth in mergers and acquisitions at the beginning of this year, primarily due to record low interest rates and the resulting favorable terms for getting takeovers financed. The expected boom has led many banks to hire new staff. But the expectations have been bitterly disappointed so far.

Even if there are gains in the second half, most investment bankers have now realized that it will hardly be possible to make up for the current deficit for the whole year.

Nevertheless, investment bankers remain notoriously optimistic, and experts say the banks aren’t expected to start cutting staff just yet.

“Banks are still actively recruiting and, in some cases, are paying significantly higher fixed salaries for investment bankers,” said Nils C. Wilm, managing director of the consulting firm Bankenwelt Executive Search.

But if it becomes clear that deals are not materializing, he added, staff reductions could begin by 2016 at the latest.

“Larger personnel adjustments are not to be expected in the short term, but neither are increases in expert staff. The M&A consulting business isn’t the same as the trading business, where banks can simply maintain capacities to be able to go along with cyclical upturns,” explained analyst Philipp Hässler of Equinet.

Other experts like recruitment consultant Ron Weihe of Russell Reynolds believe changes might have to be made earlier – the cracks are staring to show. “There is still excess capacity on the consulting side in M&A, because the overall pie has become smaller,” said Mr. Weihe.

Investment bankers like Berthold Fürst, head of Deutsche Bank’s domestic M&A business, are now hoping for a turnaround by New Year’s. He points to the Douglas and Kaufhof takeovers, which are both to take place in June. With a value of $3 billion each, they’re the biggest deals this year to date.

“We expect to see a noticeable revival of the market in Germany, especially with cross-border transactions,” said Mr. Fürst.

 

A Deep Slump-01 (2)

 

However, even if there are gains in the second half, most investment bankers have now realized that it will hardly be possible to make up for the current deficit for the whole year.

Dirk Albersmeier, co-director of mergers & acquisitions for Europe at JP Morgan, assumes that M&A volume in Germany for 2015 “will be significantly lower than in the previous year.”

Most market players believe that the talk of Greece’s possible exit from the euro zone has not negatively affected the business. Instead, they point to some high price demands from companies looking to sell.

“Prices are very ambitious, which is currently scaring away some potential buyers,” said an investment banker with a major bank.

The current investment environment also doesn’t help, he added, citing the example of family business owners who have sold their businesses but then found themselves with no place to invest the proceeds.

However, there is still a need to press ahead with strategic projects, irrespective of market conditions, said Wolfgang Fink, co-CEO of Goldman Sachs Germany.

The decline is more of “a question of the lack of opportunities at adequate prices,” explained Ken Oliver Fritz, co-head of Lazard Deutschland.

 

Peter Köhler heads Handelsblatt’s banking team in Frankfurt. To contact the author: koehler@handelsblatt.com

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