Analysis-Banks profit from building up and breaking up companies

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(Businesshala) – This is a constant dilemma facing companies; Do they acquire or shed businesses to boost shareholder returns? Investment bankers profit every time the answer involves a deal, even if it represents a face for companies.

FILE PHOTO: The logo of American conglomerate General Electric is pictured at the site of the company’s energy arm in Belfort, France February 5, 2019. Businesshala/Vincent Kessler/File photo

Last week’s announcements by General Electric Co., Toshiba Corp. and Johnson & Johnson offer the latest examples of their plans to sabotage how some companies have spent hundreds of millions of dollars on investment banking fees through acquisitions over the years, only to give them Pay more fee for reversal.

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Some of the banks that worked on crafting these spin-offs – Goldman Sachs Group Inc., JPMorgan Chase & Co and UBS Group AG – offered advice on past acquisitions that steered the companies in an opposite strategic direction.

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

Corporate break-ups are on the rise amid a growing consensus on Wall Street that companies perform best when they focus on adjacent business areas, as well as mounting pressure from activist hedge funds pushing them in that direction.

According to Dealogic, about 42 spin-offs worth more than $200 billion have been announced globally so far this year, up from 38 spin-offs worth about $90 billion in 2020.

According to Dealogic, investment banks globally advising spin-off deals have collected more than $4.5 billion since 2011. Although this represents less than 2% of the total deal fees in their pocket, it is a growing franchise; According to Refinitiv, banks have made more than $1 billion on spin-offs globally so far this year, almost double what they earned in 2020.

For an interactive graphic, click on this link: tmsnrt.rs/3cgKJ9M

In GE’s case, financial advisors including Evercore Inc., PJT Partners Inc., Bank of America Corp. and Goldman Sachs stand to collect tens of millions of dollars from their advisory roles over the company’s break-up, according to estimates by M&A lawyers. and banker

According to Refinitiv, Goldman Sachs previously collected nearly $400 million in fees to advise the company on acquisitions, divestitures and spin-offs, which makes it GE’s top advisor based on fees collected.

In the industry, Goldman Sachs has so far made the most in fees from advising on corporate break-ups in 2021, followed by JPMorgan and Lazard Ltd, according to DeLogic.

Yet while investment banking fees are safe, the outcome of the bargain for the company’s shareholders is not certain. According to Refinitiv, stocks of companies engaged in acquisitions or disinvestments have had a mixed track record, often underperforming over the past two years.

independent advice

Certainly, 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 prompt 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 diversifying its income stream. When some of these businesses began to perform poorly and GE’s valuation suffered, investors lost confidence in the company’s ability to run different businesses.

Bankers also often argue that most companies want to pay bankers to deliver deals, rather than advise whether they need to make deals in the first place. This creates an incentive for bankers to try to make a transaction, not the best outcome for their customer, that may not involve a deal.

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

“Companies should develop valuations in-house and with the help of unbiased third-party advisors, whether they also hire an investment bank or not,” said Nuno Fernandes, professor of finance at the IESE Business School.

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

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