Bankers see healthy financial firm mergers ahead
Mergers and acquisitions involving US financial institutions are still on the increase, and Wall Street dealmakers say conditions are right for the pace to continue. Several trends are fuelling this market, bankers said.
Some investment banks are keen to add asset managers and hedge funds to their product mix. For example, Morgan Stanley said on Wednesday that its investment management unit had acquired a stake in London-based Lansdowne Partners, its third hedge fund deal in as many days.
Higher interest rates and increased competition are hurting mortgage firms and forcing some of them to seek mergers, bankers said. “In the mortgage space there are probably three to four sellers for every buyer out there,” said Eric Heaton, co-head of the Americas Financial Institutions Group at Merrill Lynch. Elsewhere, the October 17 announcement that Chicago Mercantile Exchange Holdings would buy crosstown rival CBOT Holdings for more than $8bn will speed up consolidation among financial exchanges and related firms, dealmakers say.
What’s more, large overseas financial institutions, especially in Europe and Japan, are interested in buying rivals in the US, investment bankers said.All of these developments have helped create a stimulating market.“These are the things that get bankers excited — and get them on red-eye flights,” Heaton said.
“In terms of the larger-cap activity, it is driven by when sellers decide to go and not necessarily when buyers are ready to buy,” Heaton added. “Buyers have been ready to buy for some time now, and I would say that for the most part they still are there.”
Uncertainty over the direction of interest rates is cooling some of the M&A interest from bigger firms, but Heaton said there were still more buyers and sellers in the banking industry overall.
“That’s why you see multiples at historic highs even though the operating environment is one of the most challenging I have seen in the last 10 years,” he said.
Announced mergers among US financial firms have reached $131.58bn so far in ’06, just above $131.4bn at the same stage of ’05, according to research firm Dealogic. Merrill Lynch leads the advisory rankings for this year’s US financial mergers, followed by Goldman Sachs, Lehman Brothers Holdings and Citigroup, Dealogic said.
This year’s biggest US financial deal came when California savings and loan Golden West Financial, which Lehman advised, agreed to a takeover by Wachovia for about $25bn. David Sherwood, Lehman’s global head of financial institutions, disagreed with any notion that all the big US bank deals have now been done. But he added: “With the bigger guys, there are fewer potential buyers for them.”
It’s clear there is no shortage of talks about potential deals. “The amount of dialogue that’s taking place with institutions has picked up,” Sherwood said. “Mortgage companies are feeling the pinch right now, and it’s causing a lot of them to think about what alternatives might be out there.”
Derek Kirkland, co-head of Morgan Stanley’s global financial institutions group, said some large European financial firms were thinking about buying companies “within their countries, across countries within Europe and in Asia and the US.”
By contrast, expansion plans for most US-based banks are typically much closer to home, he said.
“Aside from the very big banks like Citigroup, JPMorgan and Bank of America,” Kirkland said, “Most American banks are focused on the Americas and particularly the US.”
Ultimately, Kirkland sees the potential for 10 to 20 US bank mergers worth $5bn or more apiece. “In general, there is certainly more to come,” Kirkland said. “The US banking sector remains fragmented.”
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