Let's make a deal

Investment banking, after five long, hard years of negative or anaemic growth, job cuts, pay cuts and public lashings, is on the verge of a comeback. Really, it is - if the data can be believed.

Yet Bank of America's top investment banker is guarded in his forecast, and he isn't alone.

"I hesitate to be the one that says 2013 will be the year, because invariably it may not," says Christian Meissner, the bank's head of global corporate and investment banking.

"But I think that we're pretty close to it changing."

The past five years have not been kind to investment bankers. M&A deal volume fell off a cliff after peaking at US$4.1 trillion in 2007, according to data compiled by Bloomberg.

Last year, it dropped 8.7 per cent to US$2.2 trillion after an early resurgence fizzled along with projected growth rates in emerging economies.

As 2012 proceeded, there was reason for hope. The Greek and Italian bond markets did not melt down like they did in 2010 and 2011. The US did not almost default on its debt. Yet corporate chieftains continued to hoard their cash.

"Boards weren't ready to do a lot of bold strategic deals last year," says Michael Cavanagh, co-chief executive of JP Morgan Chase's corporate and investment bank.

JP Morgan was No1 in the Bloomberg 20, Bloomberg Markets' ninth annual ranking of the best-paid investment banks measured by the fees they earn. The largest US lender took in US$3.97 billion in fees last year, a 24.8 per cent increase over 2011.

JP Morgan has topped the ranking in four of the past five years, and last year it was the top investment bank in debt and equity fees as well as overall. Goldman Sachs ranked No2, after scoring the No1 spot for 2011. Goldman led for M&A fees, as it has every year since the Bloomberg 20 began.

While fees for M&A and equity issuance fell for 2012, total fees rose 3.7 per cent, to US$50.9 billion, driven higher by a surge in the refinancing of corporate debt.

A single soured 2012 deal put a chill in the market. Morgan Stanley managed the initial public offering of Facebook in May - and faced withering criticism when the Nasdaq listing was marred by technical difficulties and the stock, by September, had fallen more than 50 per cent below its US$38 opening price.

Facebook shares have since rebounded to US$27.25 as of Thursday. Even as the Dow Jones Industrial Average topped 14,000 for the first time since 2007 on February 1, corporate executives remained skittish. Chief executives are choosing to conserve their cash as a result, bankers say.

"Much of M&A and capital markets activity is based on psychology," says Mark Eichorn, who was appointed global co-head of investment banking at Morgan Stanley in November.

Corporations around the globe were sitting on a record US$1.5 trillion in cash as of September 30, according to data compiled by JP Morgan Chase, even though bankers say their balance sheets have never been stronger.

The Federal Reserve has held benchmark interest rates near zero for more than four years and injected trillions of dollars into the US economy. Markets are liquid and stable, and investors are desperate for higher-yielding assets.

"If you look at the statistics, in terms of the drivers of M&A activities, you'd think that this would be the busiest M&A market, but it isn't," Meissner says. "Many CEOs are comfortable waiting until some of the systemic risk recedes."

Bank of America Merrill Lynch fell one spot to No5 in the Bloomberg 20 list with US$3.16 billion in fees last year.

Warren Buffett and Michael Dell aren't waiting.

Dell and private-equity firm Silver Lake Management agreed early last month to take Dell private for US$24.4 billion in the biggest leveraged buyout since 2007. Then a week later, Buffett announced he would partner with Brazilian billionaire Jorge Paulo Lemann to buy HJ Heinz in a US$23 billion deal.

Other big February transactions included the US$11 billion merger of bankrupt AMR Corp, parent of carrier American Airlines, with US Airways, and Liberty Global's plan to buy British cable operator Virgin Media for US$23.3 billion. That would be the biggest media company deal since a US$17.4 billion merger created Thomson Reuters in 2007.

That brought total announced deals as of February 15 to US$288.2 billion, compared with US$246.6 billion for the same period in 2012.

"Make no mistake, we are seeing movement," Cavanagh says. "As we speak to company directors, it is clear that much of last year's uncertainty is gone for the moment."