LONDON (Reuters) - Rescues of troubled rivals are propping up investment banking revenues, but the deals are not generating enough business to offset a credit crunch-driven slump in global mergers and acquisitions that is unlikely to end soon.
The bail-out of insurer AIG AIG.N by U.S. authorities and Merrill Lynch's MER.N flight into the safety of Bank of America BAC.N added to the fee pool for the embattled industry in the third quarter, Thomson Reuters data showed.
But the feverish merger activity in the last few weeks came as the financial crisis wiped away banks at a dazzling speed -- culminating in Europe with the weekend nationalizations of Fortis FOR.BR and Bradford & Bingley BB.L -- while healthier deals remained subdued because of a freeze in credit markets and a cautious stance from firms.
"It is getting more challenging to get deals to the finish line. Given overall macroeconomic conditions and share price volatility, it is harder to make a firm assessment of what you're buying, value-wise," said Wilhelm Schulz, co-head of M&A for the EMEA region at Citigroup C.N.
In Europe, the picture had followed the traditional pattern of banks shying away from deals in a downturn unless they have to, because of the high risks involved, Schulz said.
But globally, financial institutions were the most targeted sector in M&A, the data showed.
“Quite clearly an industry that goes through the kind of stress that the global financial services are going through will feel the need to massively restructure,” said Alex Potter, a banking analyst at Collins Stewart.
Worldwide M&A volumes were down 25 percent in the first nine months of the year, Thomson Reuters data showed, but rose slightly in the third quarter compared to a year ago, when the credit crisis had already struck.
Brewer InBev's INTB.BR $52 billion purchase of Anheuser Busch BUD.N was one of the most prominent deals so far this year, highlighting the relative immunity to the credit crisis of sectors such as consumer goods and energy.
Energy and power, consumer staples, materials and healthcare were the sectors showing most merger activity so far, after the financial industry, the data showed.
Goldman Sachs GS.N topped the rankings as the world's largest dealmaker. The bank, with Morgan Stanley MS.N, is one of only two remaining large investment banks that have survived the credit crisis as independent units. But both have sought protection from U.S. finance authorities, subjecting themselves to closer regulatory scrutiny in exchange for access to central bank funding.
The sudden fall of so many banks that once played starring roles in the financial universe has led analysts to question the heavy use of risky and opaque financial instruments and the lavish bonuses for bankers who sell them.
But not everybody thinks the model is flawed.
“On a trend basis, ignoring the nastiness of the downcycle, I would say I want to be in investment banking now. I’m talking about proper investment banking like equity syndication and M&A advisory,” said Charles Dumas at Lombard Street Research.
“(But) you’ve got to see the other side of the valley and we’re not at the bottom of the valley (yet),” Dumas said.
Banks that pair stable retail or commercial banking operations with investment banking activities may well emerge least damaged from the landslide caused by the credit crisis.
British bank Barclays BARC.L scooped up most of the U.S. investment banking assets of Lehman, which filed for bankruptcy protection earlier this month.
Centerview Partners LLC, which has private equity as well as advisory units, rose to 10th spot in the European and U.S. M&A rankings in a sign of the rising importance of such boutiques.
The move is also a sign that private equity companies are increasingly seeking to diversify their business model after the credit crisis almost immediately put a halt to leveraged buyouts, their greatest source of gains.
Private-equity driven M&A was at a 4-year low, down 74 percent from a year ago, with the $3.8 billion buyout of Expro International Group the biggest deal.
Reporting by Douwe Miedema; editing by John Stonestreet
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