One of the key roles of an investment bank, as a primarily sell side institution, is to advise firms who wish to be acquired by or merge with another company. An acquisition is when one company purchases most or all of a target firms share, allowing them to make key decisions and reap the benefits if there is success. A merger can be horizontal, such that the two firms operate in the same industry and position in the production line. Alternatively, a vertical merger involves the coming together of two companies who are at different stages of the supply chain, yet typically for the same common good or service. This article will explore which of the investment banks, bulge bracket or boutique, tops the rankings as the leader of this industry.
Before we look at this, let’s explore what makes an investment bank particularly strong in this area. The first factor is industry expertise, often derived from specialisation. Slightly smaller scale but still elite boutique investment banks such as Rothschild and co, Evercore and Houlihan Lokey have their niches in specific areas of financial advisory. The reason for this smaller focus is that it is very difficult for them to compete in both equity and debt capital markets with their relatively smaller size. Overall, they can get an edge over the bulge bracket names such as Goldman Sachs by using their narrow focus to provide better advice that is more tailored to the specific industry of interest. Furthermore, they can also have better reputation when it comes to client relationship management. This results in a higher level of trust and understanding between the two parties, which is imperative in often complex and sensitive M&A transactions.
According to Refinitiv, Houlihan Lokey was the No. 1 investment bank for global M&A transactions under $1 billion. It also ranked 2nd in 2022 investment bank deal count at 383, narrowly missing out top spot to Rothschild and co who managed 423 deals. Looking at the bigger picture, it is the big 4 accountancy firms that dominate deal counts but have significantly lower overall value of their deals compared to the bulge bracket banks. By removing the filter of deals under $1 billion, the top 3 spots for global deal value has gone to Goldman Sachs, JPMorgan, and Morgan Stanley, in that order, for two years running.
Looking towards the future, attention must also be drawn to the fastest climbers. Santander corporate and investment bank managed to climb from 42nd to 18th in the global rankings by deal value between 2021 and 2022. Whereas in the US, small scale boutique investment bank Allen and Co leaped from 59th to 17th in deal value over the covid period of 2020 to 2021.
Overall, M&A deal volumes have been significantly smaller over the last few years, given that Covid 19 resulted in the lowest levels of CEO confidence since the 2008 financial crisis. Many believe that these company directors have been waiting patiently for leveraged financial markets to ease up, and when this happens (expected soon), there will be a huge snapback of M&A volume. However, this reopening may be restricted by the US’s toughening of regulations against mergers due to competition, environmental and social issues that are now being heavily focused on. There is uncertainty over which banks will be hurt the most by these speculated regulatory changes.