More Companies Choosing In-House M&A Teams

A new report by US research firm Freeman Consulting has found that an emerging trend among businesses is likely to result in loss of revenue to investment banks. In its analysis, the New York based Freeman Consulting found that almost one third of all M&A transactions in Europe and U.S. this year were done in-house. The figures are a cause of concern for investment banks which are already under the microscope of regulators to maintain higher capitals levels and shrink the size of balance sheets. The year 2012 represents the largest proportion of corporate deals without involving investment banks in the US in almost a decade. For Europe, it’s the most since 2004.

Reasons Companies Choose Internal Teams Over Investment Banks

Data from Bloomberg shows that large investment banks operating globally lost 48 percent of revenue from advisory work in the first nine months of 2012 compared with the same period in 2007. Richard Jackson, who is the head of the Europe, Middle East and Africa M&A practice for consulting firm Bain & Co says companies are nowadays very sophisticated about M&A and feel confident in getting an objective and independent perspective around transactions through their internal teams. Another reason companies choose not to engage investment banks is the distrust among companies with financial institutions. The British Chambers of Commerce published in a recent report that half of UK companies are skeptical of engaging investment banks for advisory work. It should be noted that though investment banking revenue from advisory work accounts for only around 5 percent of total revenue, advisory work often leads to more profitable businesses such as deal financing and handling future debt and equity sales.

Image: FTSE Global Markets

Recent M&A Transactions Without Investment Bank Participation Among companies that used internal teams this year for M&A transaction was the French firm PPR SA, which owns Gucci. It did not use an investment bank to handle its stake sale in African distributor CFAO in August. Group managing director Jean-Francois Palus explained that its internal mergers and acquisitions team was well equipped to advise on the transaction. Recently in September, London based BP, which is also Europe’s second-largest oil company used its 30 member in-house advisory team when it sold its Gulf of Mexico oil and gas properties for $5.55 billion. When asked to comment on why the firm didn’t take outside help from investment banks, BP spokesman Robert Wine said that the company still prefers to do internally on acquisitions without banks.

Trend is Negative For The Job Market

The increase in companies opting for internal advice in M&A deals will have a direct negative impact on revenues of investment banks. With companies getting sophisticated about M&A transactions, it is unlikely this trend will see reversal any time soon. The result is lower advisory revenues for investment banks, and lesser incentive for hiring M&A advisors.

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