Thursday, January 10, 2013

Today's "Bulge Brackets"

Who comprises the Bulge Brackets of 2013?
"Bulge brackets" in investment banking was once an acclaimed list of investment banks that dominated most of the activity in the industry--from staid, conventional bond underwriting to mergers-and-acquisition advice to flamboyant IPOs.  "Bulge bracket" signaled dominance and prestige. It implied a bank was a major player. Statistics and market share determined who made the list or not, and it was often a moniker awarded to banks that finished in the top five in most finance categories.

Say "bulge bracket" and those who trade and do deals and those who follow the industry think immediately of Goldman Sachs and Morgan Stanley.  Just a few years ago, Lehman Brothers and Merrill Lynch were "bulge bracket" mainstays.  Go back decades, and banks such as Salomon Brothers, Drexel Burnham, First Boston, and DLJ might have squirmed their way into a top-5 listing. Often they did, back then. Today, they don't exist or were absorbed into oblivion long ago.

Over the years, MBAs in finance with eyes toward Wall Street often wanted to work at "bulge brackets," because they were movers and shakers, the behemoths that shaped, dominated and influenced corporate and municipal finance. They were the firms that generated the most revenues, carved out the greatest market shares, swept up much of the prestige in doing deals, and--to the delight of MBAs wanting to work there--paid the biggest bonuses.

The term is not used as much today. Some still use it, but the financial media don't flaunt it as much, if it all. That's likely because of (a) the disappearance of some of those storied names in American finance (Salomon and Lehman, e.g.), (b) the dominance of banks with commercial-banking heritages on current lists (JPMorgan, Citi, Bank of America, Deutsche and UBS, e.g.), (c) the continuing blending of traditional investment- and commercial-banking roles, and (d) the ongoing uncertainty of who will survive rapid changes in the industry. 

In the past and even today, if there were one list bankers wanted to dominate, it was often the list of M&A advisers. Mergers and acquisitions in investment banking has often been the heart, soul and core, not because they generated the most revenues, but because M&A bankers have a direct line to CEOs of the client companies.

M&A bankers strive to be the conscience guiding the CEO and board members on corporate strategy, business expansion, new investments and significant acquisitions. They steer CEOs, knowing that CEOs, too, can direct other business to the bank--business including bond underwritings, project finance, new equity offerings, and corporate lending.

The "bulge brackets" in M&A activity today include the same, familiar names (Goldman Sachs and Morgan Stanley). Meanwhile, institutions with traditions in commercial banking or foreign operations have shoved their way to spots near the top. After they decided in the late 1990s to exploit their large capital bases and balance sheets and thanks to loosened regulation, these institutions (the JPMorgans and Citis) earned lead roles in underwriting activity (especially in bonds and loans) and found a back door into strategic M&A. It also helped, too, when they raided other investment banks for top talent or acquired other established investment banks to propel them through M&A doors. 

In 2012, Goldman Sachs and Morgan Stanley were the top two M&A banks (according to Thomson Reuters), based on total deal value.  Not a surprise.  JPMorgan and Citi rounded out the top 5. Also not a surprise.  Barclays emerged as no. 3--a surprise leap, spurred mostly by a surge of activity in the U.S.  The M&A unit at Barclays, remember, includes bankers with old Lehman ties after Barclays acquired Lehman's U.S. broker/dealer during the financial crisis, 2008.

At Bank of America, its Merrill Lynch unit seems not to have had a similar influence--at least in M&A.  BoA slipped to 8th in recent lists.

Some juggling and repositioning should continue into 2013, because all of the above are scratching their heads figuring out the impact of regulation and straining to squeeze more revenue out of an uncertain business model. Even this week, Morgan Stanley hinted that it needed reduce the scale of its fixed-income unit.

All of the above, as well as Credit Suisse, Deutsche, and UBS (three more names also in the top 10), are major financial institutions, subject to tough capital and liquidity reforms called for by Basel III and Dodd-Frank. Hence, in 2013, all activities in investment banking--from trading to underwriting and strategic advisory--are on the table, subject to revamping if necessary to reach return-on-capital targets.

UBS is in a peculiar place. It claims to be doing now what other banks will need to do over the next two years--withdrawing from any investment-banking activity it can't rationalize. Nonetheless, in 2012, it ranked as a major investment bank--at least based on league tables. It placed 9th in M&A activity--garnering a notable share of deals, especially in Asia.  In late 2012, it made prominent announcements about vast reductions in investment-banking staff--especially in fixed-income markets.

It may still choose to support its mergers team, because M&A requires less capital and hardly needs use of the balance sheet. But trends today suggest that being big in all other investment banking units (including corporate lending, mezzanine financing, bond underwriting) helps drive M&A--not necessarily the other way around.

Meanwhile, don't discount the "boutiques."  They lack capital. They can't swing for the fences with big balance sheets, nor can they provide bridge loans or mezzanine financing to clench deals or get them done quickly. (Lazard and Evercore rank in the top 13 among M&A advisers.) Their bankers are the ones who whisper to CEOs they do deals without the blatant conflicts of interests the "bulge brackets" often have.

And just as important, because they are organized in simple structures without trading arms, lending units, and armies of industry teams, "boutiques" are not subject to the vast amounts of regulation, reform and re-engineering "bulge brackets" will encounter this year and the year after and the year after that.

Tracy Williams

See also:

CFN:  Morgan Stanley: Can It Please Analysts? 2012
CFN:  UBS Throws in the IB Flag, 2012
CFN:  Goldman Sachs: How Does It Do It? 2010
CFN:  Banking Boutiques: What Are the Advantages? 2009

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