4 investment banks benefiting from record mergers and acquisitions activity
Mergers and acquisitions activity was intense in 2021. According to data from Refinitiv, as reported by Forbes, M&A transactions in the first six months of the year totaled $ 2.82 trillion, an increase of 132% over the same period in 2020.
As a result, investment banks are set to post record profits in 2021, with companies like Jefferies (NYSE: JEF), Moélis & Co. (NYSE: MC), Goldman Sachs (NYSE: GS), and Evercore (NYSE: EVR) leading the charge. Let’s find out a bit more about these four investment banks and what M&A activity brings them.
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Mergers and acquisitions are proceeding at a record pace
According to Refinitiv, global M&A activity in terms of number of deals also hit a record high in the first half of the year – 28,175 globally, a 27% year-over-year increase. The even greater increase in their total value has been brought about by mega-deals – deals worth $ 5 billion or more. According to PwC, there have been 54 mega-deals until June 1, which is equivalent to the number of mega-deals concluded during the whole of 2020.
Analysts say this unusually high M&A activity can be attributed to several factors. On the one hand, regulators and central banks have supported the markets. The Fed’s lax monetary policy, which keeps benchmark interest rates close to zero, offers companies ultra-low borrowing costs.
Not only that, but private equity firms have for years been sitting on “dry powder” – cash reserves they are finally deploying. And even in the wake of the hustle and bustle of the first half of the year, these private equity firms still had nearly $ 3.3 trillion in dry powder as of June 30. Additionally, a shift in consumer preferences is prompting companies to look for ways to digitize their business. Finally, the high level of M&A activity can also be attributed to a changing regulatory landscape. Many companies are looking to strike deals before the end of the year before changes to the capital gains tax go into effect.
Take advantage of the boom in mergers and acquisitions
Jefferies’ second-quarter revenue increased 70% year-over-year to $ 1.95 billion. This is due to record investment banking activity in the areas of debt underwriting, advisory services and stock underwriting, with the company posting record revenues of $ 1 billion in its business. investment banking segment, an increase of 227% compared to the second quarter of 2020.
Goldman Sachs second-quarter revenue increased 16% year-on-year to $ 15.3 billion, with revenue in its investment banking segment increasing 36% to a record $ 3.6 billion. This came after a strong first quarter, when its investment banking segment generated revenue of $ 3.77 billion, up 73% year-over-year.
Another investment bank that posted exceptional second quarter results is Moelis & Co. – its revenue increased 126% to $ 361 million for its second-highest quarterly revenue on record. In the first half of the year, the company posted revenue of $ 625 million, up 99% from the first half of last year.
Meanwhile, Evercore had a record second quarter, with revenue increasing 36% from a year ago to $ 688 million. The company’s revenue grew 45% in the first half to reach $ 1.35 billion.
Potential hot spots
Investors in any of these investment banks will want to pay close attention to a few factors that could be slowing down the closing of transactions. On the one hand, an increase in benchmark interest rates, whether from the Federal Reserve or the European Central Bank, would make financing conditions less favorable, which could lead to a decline in transactions.
A strengthening of regulatory oversight could also have an impact. In recent months, the Biden administration has stepped up federal oversight of mega-mergers and Special Purpose Acquisition Companies (SPACs). A mega-merger between the insurance giants Aon and Willis Tower Watson – which would have created the world’s largest insurance brokerage firm – was called off after the Justice Department sued to block the combination, calling it anti-competitive. The Securities and Exchange Commission also warned the SAVS. SEC Chairman Gary Gensler said the agency was devoting significant resources to addressing emerging issues in SPAC. Transactions involving these “blank check companies” slowed in the second quarter.
However, according to PwC, trading activity is expected to remain high for the remainder of the year. Goldman Sachs CEO David Solomon noted that the company’s backlog is at an all-time high and told investors: Operational efficiency, the shift to a digital economy in a broader set of industry.”
Moelis & Co. CEO Ken Moelis said that “the pace of our new business activity remains high and our pipeline is stronger than it has ever been”, and also said it has had “never been so optimistic about our business.” He went on to say that mergers and acquisitions have entered a phase of secular growth with vast cash flow in private equity and other alternative investments.
Mergers and acquisitions have been intense this year, and investors should expect investment banks to continue to generate windfall profits in the coming quarters as they continue to close deals.
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Courtney Carlsen has no position in the stocks mentioned. The Motley Fool owns stock and recommends Jefferies Financial Group Inc. The Motley Fool has a disclosure policy.
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