Two lead field in mergers, acquisitions

Goldman, Morgan Stanley extend reign to 3 years

`Difficult to break that duopoly'

In all, investment banks did $1.2 trillion in unions

January 02, 2004|By BLOOMBERG NEWS

NEW YORK - Goldman Sachs Group Inc. and Morgan Stanley extended their lead over the world's largest financial institutions in the global mergers and acquisition business by arranging last year's biggest takeover - the $48 billion purchase of FleetBoston Financial Corp. by Bank of America Corp.

Investment banks arranged $1.2 trillion of acquisitions in 2003, up from $1.12 trillion in 2002, the worst year for mergers since 1997.

Rising stock markets and improved confidence among chief executives may encourage more buying this year, said Robert Kindler, 49, global head of mergers and acquisitions at J.P. Morgan Chase & Co., which ranked No. 4.

Goldman Sachs and Morgan Stanley have been the No. 1 and 2 merger advisers respectively since 2001. Goldman Chief Executive Officer Henry Paulson steered the 134-year-old firm through the departure of a lieutenant, former investment banker and co-President John Thornton, and a shift of power to the traders that generated 65 percent of 2003 revenue. Morgan Stanley was the top adviser to banks, the most active sellers of the year.

"It will be very difficult to break that duopoly," said Michael Holland, founder of Holland & Co., which manages $500 million, and former chief executive of First Boston Asset Management Corp.

Goldman Sachs and Morgan Stanley "never put themselves in the position where one group of people is in the ascendancy and they could take off and go to a rival," Holland said.

Goldman Sachs' merger bankers, led by Gene T. Sykes and Jack Levy, advised on the highest value of acquisitions - $316.5 billion - earning fees of $1.13 billion, Bloomberg data show. Morgan Stanley advised on $225 billion of transactions, taking in $925 million of fees.

Goldman Sachs' market share rose to 26.3 percent from 25.1 percent, and Morgan Stanley's rose to 18.7 percent from 17.1 percent.

Merrill Lynch & Co. advised on $185 billion of transactions, moving up from sixth in 2002. J.P. Morgan advised on $183 billion of deals, up from fifth in 2002 and 2001. Credit Suisse First Boston tumbled to 10th from third, measured by the value of transactions, while earning the fifth-highest amount of fees.

Merger advisers competed for about $10.1 billion in fees in 2003, according to Bloomberg data. Morgan gleaned $855 million, while No. 5 Citigroup Inc. made $861 million and CSFB took in $777 million.

Goldman Sachs advised Bank of America and Morgan Stanley advised FleetBoston in the year's biggest deal, which at $48 billion was almost twice as big as the second-biggest, Olivetti SpA's $28 billion purchase of Telecom Italia SpA in March.

Goldman advised Telecom Italia with Lazard, while J.P. Morgan and Merrill Lynch represented Olivetti, which renamed itself Telecom Italia.

Merrill's biggest transaction was its work on General Motors Corp.'s spinoff of Hughes Electronics Corp., valued at $16.8 billion.

The rebound in mergers and acquisitions - which along with equity sales is one of Wall Street's most profitable activities, in part because firms put no capital at risk - still leaves bankers much less busy than during the boom years of 1999-2001.

"It's premature to call it a turnaround," said Yoel Zaoui, co-head of European M&A at Goldman Sachs. "Relatively speaking, this year has been good. The market is healthier than it's been for the past two years, but activity is still relatively volatile."

Other concerns include whether corporate mergers make sense at all. Of the 277 deals done between 1985 and 2000, 64 percent hurt shareholder value, according to a study by Boston Consulting.

"I see several catalysts for M&A activity in 2004," said Steven Baronoff, head of M&A at Merrill Lynch. "CEO confidence is improving. The cost of capital is low and makes deals attractive. Corporations are willing to sell assets because valuations from financial sponsors and corporates are attractive. There will be more cross-border deals because the falling dollar makes U.S. assets more affordable."

Michael Zaoui, a senior banker in the strategic engagements group at Morgan Stanley and Yoel Zaoui's brother, said, "Three years of downturn is the longest we've ever seen. I don't see that going on."

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