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Inversion rules will hit boutique M&A advisors hardest

NEW YORK (IFR) – Boutique advisory firms will lose out on millions of dollars in fees if the US Treasury Department’s latest proposed rules on tax-avoiding corporate mergers causes more M&A deals to fall apart.

The clamp down – aimed at curbing deals in which companies move overseas to cut taxes – threw a number of corporate mergers into question this week, and pushed Pfizer to cancel its US$160bn acquisition of Botox maker Allergan.

Around US$600m in fees are at stake if all seven pending inversion deals, including the proposed US$16.5bn merger of Johnson Controls with Ireland-based Tyco International, are also canceled in the wake of the Treasury’s plans, according to Freeman Consulting.

Although that US$600m represents only a fraction – 2% – of the total fees collected by M&A advisory firms last year and excludes fees bankers would still collect even if deals fall apart, it makes up a large part of the overall M&A fees earned by boutique firms last year.

The league table rankings of firms like Lazard and Centerview Partners surged last year after some won advisory positions on a number of high profile deals. Guggenheim scored a coup advising Pfizer.

“Boutiques in particular have been winning market share, getting on 70% of US$10bn-plus deals in the US last year,” said Jeffrey Nassof at Freeman.

Shares of boutique firms took a hit in the aftermath of the Treasury’s plans – which took market participants by complete surprise – and their league table rankings could now be under threat.

In the first quarter Lazard ranked ninth among M&A advisers, according to Thomson Reuters data – but its position would drop to 12th excluding pending inversion deals.

Centerview, which is not publicly traded, would drop off the list of top advisers excluding inversion deals from 17th in the same scenario. Evercore would gain a spot, moving to 22nd. Among the bulge and bracket banks, Barclays would slip to ninth from seventh place in the quarter.

Given the sheer volume of deals in 2015 the league table would be unaffected if inversion deals were excluded.

“The boutique firms are more exposed to anything negative concerning M&A, and inversion deals have been some of the larger deals in the last several years,” said Morningstar analyst Michael Wong.

BIG LOSSES

If all pending inversion trades are undone, it would also hurt top advisors like Morgan Stanley, JP Morgan and Goldman Sachs who stand to lose US$100m, US$90m and US$80m of fees respectively, Freeman said.

Guggenheim and Lazard, meanwhile, face US$65m and US$60m in lost fees respectively.

The advisors for Allergan – Morgan Stanley and JP Morgan – were expected to share US$142m in fees, according to data from Freeman. The advisors to Pfizer – Guggenheim Securities, Goldman Sachs, Centerview and Moelis – were set to share a total US$94m in fees.

But the big banks, which have more diversified global businesses, may not feel the sting quite as much as the small boutique firms.

Goldman earned US$2.8bn in fees from M&A last year, while Morgan Stanley and JP Morgan earned US$2bn and US$1.8bn respectively. Lazard earned US$900m and Guggenheim US$200m, according to Freeman.

Goldman topped the global M&A table in 2015, having advised on 415 deals including three inversion deals with Allergan among them – valued at roughly US$1.737trn.

Excluding inversion deals, Goldman would have remained atop the league table followed by Morgan Stanley, which advised on three inversion deals, and JP Morgan, which advised on four.

Goldman also led the table in the first quarter 2016, followed by JP Morgan – and those positions would not be altered if tax inversion trades were excluded.

It looks tough though for all involved in this business because the Treasury proposals come at a time when competition to win advisory positions in a lukewarm M&A environment has intensified this year.

The number of global M&A deals fell nearly 10% – while the total value dropped 18% to US$699bn in the first quarter, compared to the year ago quarter, according to Thomson Reuters.

“It’s (Q1) going to be a brutal quarter and this doesn’t help sentiment at all,” said Chris Wheeler, an analyst at Atlantic Securities in London.

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