Analysis: Banks Profit from Incorporation and Dissolution

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Nov 16 (Reuters) – It’s a constant dilemma facing businesses; Are they acquiring or divesting businesses to increase shareholder returns? Investment bankers profit whenever the answer involves a deal, even if it represents a flip-flop for companies.

Last week’s announcements by General Electric Co (GE.N), Toshiba Corp (6502.T) and Johnson & Johnson (JNJ.N) on their plans to split off offer the latest examples of how some companies have spent money. hundreds of millions of dollars in investment banking fees to increase through acquisitions over the years, only to pay more fees to reverse them.

Some of the banks that worked in the preparation of these spin-offs – Goldman Sachs Group Inc (GS.N), JPMorgan Chase & Co (JPM.N) and UBS Group AG (UBSG.S) – advised on previous acquisitions which have taken companies in an opposite strategic direction.

Goldman Sachs, JPMorgan and UBS did not respond to requests for comment.

Business break-ups are on the rise amid a growing consensus on Wall Street that companies only perform better if they focus on adjacent areas of activity, as well as increasing pressure from activist hedge funds pushing them into this. direction.

Some 42 spin-offs with a total value of over $ 200 billion have been announced worldwide so far this year, compared to 38 spin-offs worth around $ 90 billion in 2020, according to Dealogic.

According to Dealogic, investment banks have raised more than $ 4.5 billion since 2011 advising on spin-off deals around the world. While that’s less than 2% of what they pocketed in transaction fees overall, this is a growing franchise; Banks have so far earned more than $ 1 billion on spin-offs worldwide this year, nearly double what they earned in 2020, according to Refinitiv.

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In GE’s case, financial advisers including Evercore Inc (EVR.N), PJT Partners Inc (PJT.N), Bank of America Corp (BAC.N) and Goldman Sachs are each expected to raise tens of millions of dollars. of their advice. roles on the dissolution of the company, according to the estimates of lawyers and M&A bankers.

Goldman Sachs had previously collected nearly $ 400 million in fees advising the company on acquisitions, divestitures and spinoffs over the years, making it GE’s best advisor based on fees collected, according to Refinitiv.

Industry-wide, Goldman Sachs has earned the most fees advising on business disruptions so far in 2021, followed by JPMorgan and Lazard Ltd (LAZ.N), according to Dealogic.

Yet while investment banking fees are secure, the outcome of trading for a company’s shareholders is far from certain. According to Refinitiv, shares of companies that have engaged in acquisitions or divestitures have had a mixed record, often underperforming their peers in the past two years.

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True, investment bankers argue that some combinations don’t make sense forever. Changes in a company’s technological and competitive landscape or in the attitude of its shareholders can push it to change course.

For example, GE shareholders were initially supportive of its empire-building acquisitions in businesses as diverse as healthcare, credit cards and entertainment, seeing them as a diversification of its revenue. When some of these companies started to underperform and GE’s valuation suffered, investors lost confidence in the company’s ability to manage disparate businesses.

Bankers also often argue that most businesses want to pay bankers to deliver transactions rather than advice on whether to complete a transaction in the first place. This prompts bankers to try and close a deal rather than the best outcome for their client which may not involve a deal.

It also offers ammunition for Wall Street critics who argue that companies cannot rely on banks for independent advice on whether to strike a deal.

“Businesses need to develop reviews in-house and with the help of impartial third-party advisers, whether or not they hire an investment bank,” said Nuno Fernandes, professor of finance at IESE Business School.

Reporting by Anirban Sen in Bengaluru and David French in New York; Editing by Greg Roumeliotis and Stephen Coates

Our Standards: Thomson Reuters Trust Principles.


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