M&A advisers: tight money leaves specialists starved of deals

It is just as well that most footloose deal bankers snagged guarantees when they switched team jerseys in 2021. Last year set a record in mergers and acquisitions propelled by low interest rates, soaring equity markets and a post-vaccine economic boom. It has been followed by a dire slump.

In the third quarter, global M&A volume fell to $650bn after a string of $1tn quarters. The rest of the year looks just as bleak.

This is a tough time for US-listed advisers focusing on M&A such as Evercore, Lazard, Moelis, PJT, Houlihan Lokey and Greenhill. Their stocks have dropped on average by 34 per cent this year.

The shares of Morgan Stanley and Goldman Sachs are down by just a fifth. The hiatus in equity and debt underwriting has hurt them too. But there are two key differences. First, the pair have resilient trading businesses. Second, their share prices are higher than they were at the end of 2020, unlike nearly all the boutiques.

Tight money may be the most important factor in predicting dealmaking. High interest rates lower the valuations sellers can expect to get. Few acquirers want to pay premium prices heading into a downturn. Boutiques will feel the impact of scarce transaction fees in 2023, when fees earned in boom times will have fully rolled off. The median estimated drop in 2022 earnings is a dispiriting 41 per cent for the half dozen specialist advisers.

Banker pay, in the short to medium term, is mostly a fixed cost. That kind of operating leverage stings the bottom line. Remuneration soars from, say, a target of 55 per cent of firm revenue to sometimes more than 70 per cent.

The speed of this boom-to-bust makes mass lay-offs tricky and unwise. Instead, shareholders are left to guess when the bottom is plumbed, while hoping economies of scale provide a lift on the upside. Wise bankers who were lucky enough to secure years of guaranteed pay will have saved some of their first instalments for the rainy days ahead.