After seeing a drop in advisory revenues during 2016, the largest U.S. investment banks are hopeful that revenue from M&A picks up in 2017.
Combined total advisory revenues fell 6.2% year over year in 2016 for Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley. But during recent earnings conference calls, executives such as JPMorgan CFO Marianne Lake expressed optimism about the outlook for M&A this year.
"The fundamentals for a solid M&A year are there," Lake said, according to a conference call transcript.
Early indications have shown some pick up in global M&A this year. As of Jan. 26, the total transaction value of global M&A announcements is up 20.8% year over year, according to S&P Global Market Intelligence Senior Director Richard Peterson. Much of the increase has been driven by activity in Europe, which has seen a 45.9% year-over-year jump in total announced transaction value. That significantly outpaces the 2.2% year-over-year increase in North America, Peterson noted.
Goldman Sachs President, co-COO and CFO Harvey Schwartz said dialogue in corporate boardrooms about deals remains quite high. However, he added that moving deals from the discussion phase to announcements could take longer than normal because of the administration change in Washington.
"Any time you have a shift in administration, which may present new policies, that can have an impact on timing of transactions," he said during Goldman's earnings call.
One looming policy question that will have a direct impact on M&A in the U.S. is how President Donald Trump's administration will view large mergers. Major investment banks often have exposure to the biggest M&A deals, in part because those transactions tend to require financing.
The recent court rejection of Aetna Inc.'s proposed $35.47 billion acquisition of Humana Inc. has helped rekindle discussions about the government's stance on large mergers. Compass Point Research & Trading LLC analyst Charles Peabody said in a note that the decision on Aetna's bid for Humana could slow the pace of deal announcements until the market has a better grasp on how mega-mergers might be viewed under a Trump presidency.
Peabody added that companies may also avoid announcing deals until they have more clarity on corporate tax reforms. "In short, there could be a temporary lull in M&A activity in [the first half of 2017]," he said.
Just about any new administration can make policy changes that lead to uncertainty and cause a pause in M&A activity. But Nomura Instinet analyst Steven Chubak said some ideas from leading Republicans in Washington could have a negative impact on M&A.
He said policies stemming from President Trump's protectionist stance could slow cross-border deal activity. Chubak added that acquisition financing costs could increase as a result of an elimination of the interest expense deductibility, which is a provision in the tax reform plan of House Speaker Paul Ryan, R-Wis.
Chubak also said he doubts economic expansion could offset the policy changes. His models predict that global M&A revenues would decline in 2017 and 2018 even if 100 basis points were added to Nomura's economic forecast, which already calls for about 2% GDP growth in each of those years.
"We remain skeptical M&A fee pools could rise further even with better economic growth in the U.S.," Chubak said in a Jan. 5 report.
Other observers are more optimistic about M&A prospects. JMP Securities LLC Devin Ryan said in recent years many companies have pursued M&A in an effort to generate growth in the anemic economic environment.
"That's not really a healthy M&A backdrop," he said.
A more healthy environment exists when companies are confident about their businesses and want to invest. The M&A environment could improve if the new administration's plans for tax reform and deregulation end up being positive drivers for the economy, Ryan said. He added that investment banks, and their clients have been expressing "cautious optimism" that the M&A cycle would start to accelerate again.
Dykema Gossett PLLC Partner Thomas Vaughn, whose areas of focus includes M&A, said he expects M&A levels to remain about the same in 2017 compared to 2016. But Vaughn added that he anticipates Trump's policies will have a positive impact on M&A.
Vaughn said some of his clients are anticipating tax changes that would make M&A more favorable. He said normally when companies have pending deals they want the transactions to close before a year ends. But during December 2016, some of his firm's clients were less concerned about closing deals.
"This was the first year in a very long time where we had clients that wanted to defer their deals into 2017 because they are hopeful there will be tax changes," he said.