An Investment Opinion
Investment Banks in a League of Their Own
Last month, America Online (NYSE: AOL) and Time Warner (NYSE: TWX) shocked the world by announcing plans to merge. What was even more shocking was that AOL was, in fact, acquiring Time Warner in what appears to be the first case of a "New World" (i.e., Internet) company acquiring an "Old World" (i.e., traditional) company.
While the $130 billion AOL-Time Warner deal was talked about as the biggest deal in history, it was soon upstaged by the announcement of the $181 billion acquisition of German wireless operator Mannesmann by Vodafone Airtouch (NYSE: VOD) of the U.K.
And on the IPO slate, there's the much-anticipated tracking stock of AT&T's (NYSE: T) wireless communications business.
What is especially interesting about these deals is what they say about the investment banking industry. The mergers and acquisitions (M&A) market is booming, and that means hefty fees for the banks that advise on and actually execute the deals. In fact, the AOL-Time Warner deal and the Vodafone-Mannesmann hook-up are harbingers of more merger activity to come in the Internet space and the telecommunications market. Plus, the IPO pipeline also remains robust.
So which are the investment banks to watch for 2000?
Let's start with the AOL-Time Warner deal. Advising Time Warner was M&A heavy hitter Morgan Stanley Dean Witter (NYSE: MWD), which was ranked No. 2 in M&A advisory in 1999 behind rival Goldman Sachs (NYSE: GS), which came in first. In AOL's corner was Salomon Smith Barney, a unit of financial services giant Citigroup (NYSE: C).
On the Vodafone-Mannesmann deal, the winners are Goldman and UBS's Warburg Dillon Read, which could each earn fees of $75 million, according to The Wall Street Journal. Goldman has ramped up its European presence in the past decade and is the top M&A advisor in Germany. Interestingly, Mannesmann took Goldman to court to bar it from representing Vodafone because of the investment bank's prior dealings with Mannesmann (the case was thrown out, and the court ruled there was no conflict of interest).
As for the bankers for Mannesmann, Morgan Stanley, Merrill Lynch (NYSE: MER), J.P. Morgan (NYSE: JPM), and Deutsche Bank also stand to collect sizable fees for their advisory roles.
Not only that, but the bragging rights in the investment banking business lie in what are called league tables, which rank performance in a variety of categories. The amazing thing here is that league tables aren't based on fees collected, but rather on the size of the M&A deals. In the Vodafone-Mannesmann case, the six banks involved on the two sides of the deal each will be credited with $181 billion for league-table purposes.
For Warburg Dillon Read, that alone exceeds the $168.1 billion it had last year that ranked the bank No. 10 in M&A, according to CommScan. The deal should also give a boost to J.P. Morgan and Deutsche Bank, which weren't in the top 10 for 1999.
For Goldman, Morgan Stanley, and Merrill (which were No. 1, 2, and 3, respectively, in this area last year), the Vodafone-Mannesmann deal gives them a running start. Of course, Morgan Stanley is in a particularly good position, having advised on the two biggest deals to date -- Vodafone-Mannesmann and AOL-Time Warner. Those should be enough to put Morgan Stanley atop the M&A league table -- at least for now.
As for the IPO of AT&T's tracking stock, The Wall Street Journal has reported that Goldman, Merrill, and Citigroup's Salomon will be the global book runners on the offering, meaning they will be the well-paid lead managers. The IPO, expected to take place in April, will involve the offering of some $10 billion in shares of a tracking stock that will solely reflect the performance of AT&T's wireless business.
For 1999, Morgan Stanley, Goldman, and Merrill were the top three underwriters, in that order, of U.S. IPOs, according to CommScan. The AT&T IPO bodes well for Salomon, which ranked ninth last year in domestic IPOs. Salomon and Merrill were no doubt chosen, at least in part, for the reach they have among retail investors through their extensive brokerage businesses.
The race for investment banking deals for 2000 has begun in full force. So as more mergers and acquisitions and IPOs are announced, pay attention to who's actually advising or underwriting the deals. The horse race may give some indication as to who will be the winners this year in the investment banking industry.
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