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Big Banks Profit As M&A Activity Shifts Into High Gear

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The acquisition of Heinz (UNKNOWN: HNZ.DL  ) by Berkshire Hathaway (NYSE: BRK-A  )   (NYSE: BRK-B  ) hasn't only hogged headlines over the past week. It has also showcased the slow-but-sure resurgence of the mergers and acquisitions business, which had gone from a full-on gallop to something more like a stroll since the financial crisis.

So far, 2013 is a winner
The M&A business, once the bread and butter of U.S. investment banks, went into hibernation mode around 2008 and has only recently begun to show signs of life. And lively it is. According to Bloomberg, $94 billion in deals have come to light just this month, including the bid to take computer giant Dell (UNKNOWN: DELL.DL  ) private.

Things weren't always this sweet. Bloomberg notes that M&A activity has risen 27% when compared with the same time last year. Indeed, just a short time ago, big boys like JPMorgan Chase and Goldman Sachs (NYSE: GS  ) were reduced to scrounging for middling deals, commonly dispatched by smaller boutique firms. Beginning last November, though, the pace began to pick up.

The renewed activity has provided a nice boost to big U.S. banks this year, though there has been some rearranging of the ranks. JPMorgan has taken over the top advising spotfrom Goldman, which is now third, and Bank of America's (NYSE: BAC  ) Merrill Lynch division stands in second place.

In a heartwarming display of business symbiosis, the Berkshire-Heinz deal will also help Warren Buffett's favorite bank, Wells Fargo (NYSE: WFC  ) . Just as he did for the Burlington Northern railroad purchase three years ago, Buffett is involving Wells in the financing end of the current megadeal. Considering Buffett's hefty stake in the big bank, it makes perfect sense that he would give Wells an opportunity to make his investment more valuable.

Leveraged-loan funds make a killing, too
A nice little by-product of these M&A transactions is the risky -- but high-yielding -- loan debt. Bank of America analysts note that leveraged loan funds have grown by $3.3 billion in the first month of this year, and attracted over $900 million in the first month of February.

This surge is new, and probably reflects pent-up demand from yield-parched investors looking for returns. According to Barron's, the return on the leveraged loan market produced returns of 1.06% for January, compared to 1.38% for junk bonds. Because these loans are usually floating-rate, they are less apt to be affected by rising interest rates, another plus for investors.

A resurgence of the LBO boom?
While it's too early to say if the M&A business is making a comeback, things are certainly looking delightful at the moment. Big fees for advising and arranging financing is good for the banks and their investors, and the LBO boom seems to be reinvigorating the leveraged loan market, as well. As funds continue to seek out these products, analysts feel that banks will be glad to repackage them into the beloved collateralized debt obligations that will fuel profits even more. Too-big-to-fail banks have never looked better.

Warren Buffett's long track record of success has made him one of the best investors of all time. With the Buffett at the helm, Berkshire Hathaway has grown book value per share at a compounded annual rate of 19.8% for nearly 50 years! Despite an incredible historical track record, investors have to understand the key issues to watch moving forward. To help investors, the Fool's resident Berkshire Hathaway expert Joe Magyer has created this premium research report on the company. Inside, you'll receive ongoing updates as key news hits, as well as reasons to both buy and sell the stock. Claim a copy by clicking here now.

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  • Report this Comment On February 19, 2013, at 10:55 AM, BAndersen6 wrote:

    Good roundup of M&A activity , read a whitepaper about the importance of Post Merger integration ,that readers will find very useful "Strategic growth and the impact of an effective integration infrastructure " @

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9/30/2016 4:00 PM
BRK-A $216220.00 Up +920.00 +0.43%
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