Wall Street’s merger math
By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The numbers just aren’t adding up on Wall Street. To support the M&A ambitions of their clients, investment bankers routinely claim the sum of a deal will be greater than its parts. Yet in the three years or so since JPMorgan, Bank of America and Barclays bought Bear Stearns, Merrill Lynch and the U.S. arm of Lehman Brothers, respectively, each has shed, not gained, market share. These results undermine Wall Street’s deal math.
Though originally intended as a rescue of Merrill, BofA can comfort itself on the third anniversary of its deal that the Thundering Herd has propped up the bank’s results through its mortgage crisis. Barclays, meanwhile, has solidified a U.S. role by plucking Lehman out of bankruptcy. And Bear fortified JPMorgan’s prime brokerage.
But in dispensing advice to corporate clients, the deals have disappointed. At the end of 2007, Lehman sat in third place in U.S. merger league tables, with a little over 9 percent market share, according to Thomson Reuters data. Barclays, which had virtually no U.S. M&A presence at the time, has less than 6 percent share so far in 2011. On a global basis, BofA and Merrill commanded 8 percent between them before they merged. Together, the entity clocks just 6 percent today. JPMorgan and Bear boasted more than 9 percent when separate, but JPMorgan’s share is now just 8 percent.
Market forces and strategic decisions explain some of this. Boutiques, and some large rivals, capitalized on the disarray. BofA struggled to keep senior Merrill bankers, especially in Europe. Much of Lehman’s merger success was structured around leveraged buyouts, a business yet to recover. And after initially adding over 10,000 Bear employees, it took less than two years for JPMorgan’s investment banking headcount to become smaller than it was before the deal.
The mergers fell short of their potential in other ways. In stock and debt underwriting, none of the combined firms has gained business and in some cases they’ve lost significant market share. That doesn’t mean BofA, Barclays and JPMorgan will regret doing these deals. Their clients, however, should keep the outcomes in mind the next time they’re presented with a pitchbook professing that one and one make three.