M&A Bankers Suffer 35% Drop in Fees as Deals Dry Up From Record

Mergers and acquisitions bankers suffered a 35 percent drop in fees during the first quarter, just weeks after cashing bonuses from a record year.

Advisory fees fell to about $8.7 billion from $13.4 billion in the first three months of 2007, data compiled by analysts at New York-based Freeman & Co. show. Executives at Lehman Brothers Holdings Inc. and Bank of America Corp. predicted in December that takeovers would decline about 20 percent this year.

``As recently as three months ago, we thought we had seen the worst and it was going to begin to get slowly better,'' said Eduardo Mestre, 59, the former head of Citigroup Inc.'s investment banking unit and now vice chairman of New York-based advisory firm Evercore Partners Inc. ``It only got worse.''

The collapse of the U.S. subprime mortgage market threatens to stifle economic growth and further curb corporate purchases. New York-based Goldman Sachs Group Inc., the world's leading M&A adviser, reported a 47 percent decline in revenue from providing takeover advice in the first quarter from the fourth.

The value of announced mergers and acquisitions fell to $656.2 billion this quarter from $971 billion a year earlier, according to data compiled by Bloomberg. January and March were the slowest months for takeovers since November 2004. Rising financing costs have hampered leveraged buyouts, which dropped to $60 billion in the first quarter from $201 billion a year ago, the data show.

Clear Channel

A record $4 trillion of takeovers was announced in 2007, including the $50.6 billion buyout of Montreal-based BCE Inc., Canada's largest phone company, by a group including the Ontario Teachers' Pension Plan, Providence, Rhode Island-based Providence Equity Partners Inc. and Madison Dearborn Partners LLC of Chicago. LBO firms announced an unprecedented $748 billion of acquisitions last year, Bloomberg data show.

``The first half of 2007 was very, very unusual,'' said Frank Aquila, 51, a partner at Sullivan & Cromwell LLP in New York, the top legal adviser on mergers last year. ``The private equity guys are smart. There was plentiful cheap credit so they took that horse and rode with it.''

Now even some announced deals are in doubt. Clear Channel Communications Inc., the biggest U.S. radio broadcaster, said on March 28 its sale to private-equity firms may collapse after banks backed out of financing the $19.5 billion transaction.

Clear Channel can't estimate a closing date for the sale, the San Antonio-based company said in a filing with the Securities and Exchange Commission. Bank representatives didn't attend a March 27 meeting scheduled to complete the deal, Clear Channel said.

Subprime Losses

Banks are reeling after $208 billion in credit losses and writedowns linked to rising mortgage defaults in the U.S. They're also stuck with $200 billion in loans and bonds from leveraged buyouts after failing to find buyers.

The near collapse of New York-based Bear Stearns Cos., the fifth-largest U.S. securities firm, and its Federal Reserve- backed takeover by New York-based JPMorgan Chase & Co. heightened concern that some of the nation's largest financial institutions are at risk.

``Everybody has been affected,'' said Frederick Lane, 58, co-founder of Boston-based advisory firm Lane, Berry & Co. and a former co-head of mergers at Donaldson, Lufkin & Jenrette Inc., which Zurich-based Credit Suisse Group bought in 2000. ``We are seeing a lot less confidence among the investment banking firms.''

Freeman estimates investment banking fees, including revenue from providing M&A advice, may drop 7 percent in 2008 to $90.4 billion. The Freeman estimates for first-quarter merger advisory fees reflect deals through March 27, and will be revised as more transactions are reported.

China to Persian Gulf

An increase in takeovers involving Asian and Middle Eastern companies has cushioned the slowdown in Europe and the U.S. China and Persian Gulf states have almost doubled their volume of acquisitions to $55 billion this quarter from a year earlier, Bloomberg data show.

China, through its $200 billion wealth fund and companies that raised $126 billion in stock sales last year, has been one of the largest investors. Shenzhen, China-based Ping An Insurance (Group) Co., the nation's second-largest insurer, agreed in March to buy half of the asset-management unit of Brussels and Utrecht, the Netherlands-based Fortis for 2.15 billion euros ($3.39 billion).

The Gulf states, flush with cash from burgeoning oil revenue, are buying overseas assets at a record rate. Kuwait Investment Authority, which manages an estimated $250 billion, invested $5 billion in Citigroup and Merrill Lynch & Co. in January.

Job Cuts

The interest among European bankers to move to the Middle East ``is considerably higher today than it was last year,'' said Shaun Springer, 52, chief executive officer of London-based recruiting firm Napier Scott Executive Search Ltd.

Those purchases have slowed, rather than halted, a slump in merger fees, which accounted for about 8 percent of the combined revenue last year at Goldman, Morgan Stanley, Merrill and Lehman, the four biggest New York-based securities firms.

Shrinking profit has led financial companies to eliminate more than 34,000 employees in the past nine months, the most since the dot-com bust in 2001. Job losses may surpass 100,000 in the next few years, said Jo Bennett, a partner at executive search firm Battalia Winston International in New York.

Bankers were being fired even as Wall Street's five biggest firms were paying out an estimated $39 billion in record bonuses from 2007.

Goldman's backlog of investment banking transactions fell in the first quarter to 2006 levels, Chief Financial Officer David Viniar told investors on March 18 after the biggest U.S. securities firm said earnings slumped 53 percent.

Slowing Economy

Erin Callan, Lehman's CFO, told investors the same day that announced mergers dropped 24 percent in the quarter from a year earlier amid a ``very challenging'' investment banking landscape. Profit at the firm sank 57 percent. Callan, 42, said on Dec. 13 that M&A may fall 20 percent this year.

Stefan Selig, 45, the New York-based global head of mergers at Charlotte, North Carolina-based Bank of America, predicted in December a 15 percent to 20 percent drop in deals this year.

``Investment banking activity has clearly been influenced by broader market disruptions and an unclear economic outlook,'' said Goldman's Viniar, 52.

The U.S. economy lost jobs in February for a second straight month and consumer confidence declined in March to the lowest in five years. The economy will fail to grow for the first time in more than six years in the second quarter, the Paris-based Organization for Economic Cooperation and Development said on March 20.

`Raise the Bar'

``In this environment, it's difficult to see how anyone is going to launch a big strategic bid,'' said Nick Page, 39, a partner at PricewaterhouseCoopers LP in London who specializes in banking transactions. ``Acquisitions of more than 10 billion euros are off the agenda.''

Wolseley Plc, the world's biggest distributor of plumbing and heating equipment, scaled back acquisition plans as a slowdown in U.S. construction spread beyond housing and extended to Europe.

``We are going to raise the bar,'' Chief Executive Officer Chip Hornsby said on a March 17 conference call after the Theale, England-based company reported a 68 percent decline in first-half profit. ``The acquisition situation will be more selective.''

`Cloudy' Outlook

London-based Anglo American Plc, the world's second-biggest mining company, delayed the sale of its construction materials unit Tarmac last month because of credit-market turmoil. Kaupthing Bank hf of Reykjavik, Iceland's largest bank, abandoned the 3 billion-euro purchase of The Hague-based NIBC Holding NV on Jan. 30, blaming ``instability'' in the financial markets.

``M&A is very quiet in sectors which have been affected the most in terms of confidence, such as real estate, construction and consumers,'' said Tom Cooper, London-based head of European mergers for UBS AG. ``It's a very patchy picture.''

The $147.1 billion hostile bid by Melbourne-based BHP Billiton Plc for London-based miner Rio Tinto Plc was the largest so far this year, and propelled Europe to the top region for deal-making with over $336 billion of announced transactions. The U.S. trailed with $245.5 billion, according to Bloomberg data. The largest deal announced in the U.S. was Redmond, Washington- based Microsoft Corp.'s $42.3 billion offer to buy Yahoo Inc. of Sunnyvale, California.

There have been 11 announced transactions larger than $5 billion this year, compared with 29 in the first quarter of 2007, and the slowdown doesn't look set to end soon.

``I do not think M&A volume will pick up significantly over the next six months because of the cloudy economic outlook,'' said Charles Geisst, 61, finance professor at Manhattan College in New York and author of ``100 Years on Wall Street.''