Bayer’s takeover of Monsanto has been a bright spot in a tough year for investment banking fees
In a year dominated by unexpected results to big events in the form of the UK’s vote on European Union membership and the US presidential election, most areas of dealmaking dipped in Europe.
That is set to hit investment banks where it hurts most – in their wallets. At the end of November, European investment banking revenues stood at just shy of $ 14.7 billion, according to data firm Dealogic, compared with $ 17.3 billion for the same period of 2015.
M&A: Low growth sent buyers searching
It might not have always felt like it, but 2016 was a year for the M&A history books.
The year saw the largest ever takeover of a US firm by a foreign buyer – Bayer’s agreed acquisition of Monsanto, valued by data firm Dealogic at $ 66 billion.
Other records set during the year include Qualcomm’s $ 47 billion purchase of NXP Semiconductor, the largest deal in which a US company has bought a European target, and China National Chemical Corporation’s $ 46.7 billion acquisition of Switzerland’s Syngenta – the largest ever outbound Chinese takeover.
Credit Suisse‘s head of M&A for Europe, the Middle East and Africa, Cathal Deasy, said: “Sources of growth remain front of mind for management teams, which has and should continue to underpin M&A activity. As a consequence, we have seen robust inbound and outbound activity in Europe. Intra-European volumes have been depressed but going forward will be less impacted as political uncertainty is accepted as being here to stay and steady economic growth is maintained.”
But these landmark deals masked a broader slowdown.
At the end of November, the $ 1.06 trillion of announced deals involving European companies in 2016 trailed the same period of 2015 by almost 17%.
In the UK, M&A was slow ahead of the EU referendum – and slow after. The value of deals involving British businesses halved year-on-year over the first 11 months of 2016. Bankers did their own mental mini-Brexit and focused on European deals.
David Lomer, co-head of M&A in Emea at JP Morgan, said: “It’s been an incredibly busy year in continental Europe. That’s been offset by a significant decline in UK volumes, so it’s been a disparate story across the region.”
He expects “more challenges” in 2017 “than perhaps we’ve seen over the last few years”, pointing to continued uncertainty over the implications of the UK leaving the European Union as well as elections elsewhere on the continent.
ECM: A slowdown amid uncertainty
An understatement from Achintya Mangla, JP Morgan’s head of Emea equity capital markets, who described 2016 as “the year of the unexpected”.
Equity capital markets activity dived in Europe during 2016. The value of initial public offerings across the continent had halved year-on-year to $ 32.5 billion at the end of November, according to Dealogic. Activity in the wider equity market – including not only IPOs but also follow-ons and convertibles – dropped by just over a third in the same period.
Craig Coben, Bank of America Merrill Lynch’s global head of equity capital markets, said the IPO slowdown is “a product of where we are with private equity exits”.
“We’d had a very strong line of private equity exits from mid-2013 through to the end of 2015. Now there are fewer,” he said.
The hope for 2017 is more activity driven by businesses reshaping. Coben pointed to deals such as the Frankfurt float of Innogy, a renewable energy business spun out of Germany’s RWE, as well as Siemens’ announcement in November that it might spin off its Siemens Healthineers business, as a fresh trend driving IPOs.
Coben added: “We’re going to see more spin offs, more divestments, more corporate actions. European companies are becoming very disciplined about capital allocation and deciding that certain of their businesses would operate best if they were standalone. That could spur some IPO activity.”
The BAML boss also highlighted M&A as an emerging source of ECM work. In October, Bayer priced a €4 billion mandatory convertible issuance, the largest ever such deal from a non-financial issuer in Europe, to help pay for its planned takeover of Monsanto.
DCM: Going larger and longer
Three cheers for the bond market. Europe’s bond bankers had a great 2016. While M&A and ECM activity fell, the value of European bonds issued in 2016 stood at $ 1.88 trillion at the end of November, driven by low rates, a touch ahead of 2015 – although it’s worth noting that 2015 was not a vintage year for bond issuance.
Jean-Marc Mercier, HSBC’s global co-head of DCM, said: “If you had two words for 2016 they were ‘size’ and ‘duration’. It was a defining year in that respect and we pushed the boundaries during the course of the year.”
Mercier pointed to a €13.25 billion issuance from beer company AB InBev, one of two bumper bonds issued to help pay for its SABMiller takeover, as a highlight – “we’d never seen that size done in euros from a corporate” – as well as a 70-year issuance from Austria, the longest tenor ever achieved by a European sovereign.
The year was shaped by the bond-buying programmes of the European Central Bank and the Bank of England, both of which were extended to corporate bonds.
Marco Baldini, head of European bond syndicate at Barclays, said: “If you look at the euro-denominated bond market, volumes this year  are going to be significantly up, especially on the non-financial corporate side. This surge in issuance is underpinned by these policy decisions, which have given confidence to the market and created an attractive backdrop for borrowers to sell bonds.”
But those policies have had more questionable effects, Baldini added, including the consequence that some investors may have found themselves crowded out of the market by the central banks.
Like peers across the industry, bond bankers are now preparing for what could be a rocky 2017 due to big political events with the scope for volatility. HSBC’s Mercier said next year could be “extremely volatile” and “an interesting year to navigate”.