Analysis-Banks that helped GE, others bulk up now profit from break-ups

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(Businesshala) – Some of the Wall Street banks that helped General Electric Co., Toshiba Corp and Johnson & Johnson become massive conglomerates through acquisitions over the years are now benefiting from their break-ups, a Businesshala analysis said. found out from

FILE PHOTO: The Johnson & Johnson logo is displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York, US, May 29, 2019. Businesshala/Brendan McDermid/File photo

The three companies, which in recent days announced plans to separate divisions, paid hundreds of millions of dollars in fees to banks, including Goldman Sachs Group Inc., JPMorgan Chase & Co and UBS Group AG, to pay them over acquisitions over the years. advice can be given. , Now, those same banks are being paid to undo the results of those deals.

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

While it is not uncommon for an investment bank to advise a company on spin-offs after having previously worked on a company acquisition, the practice of high-profile spin-offs by companies in recent times sheds new light on the practice.

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.

Investors in those companies are not assured of equal funding. According to Refinitiv, stocks of companies that engage in acquisitions or disinvestments have a mixed track record, often underperforming over the past two years.

Eric Gordon, a professor of law and business at the University of Michigan, said banks typically don’t break any rules when working these deals because they are fulfilling the wishes of their customers. But he added that this does not give banks the responsibility of advising them against a deal that they do not believe to be in the company’s long-term interest.

“If bankers deserve criticism, it’s not to hold back against a CEO who makes a bad deal,” Gordon said.

In GE’s case, Goldman Sachs was one of the banks, along with Evercore Inc., PJT Partners Inc. and Bank of America Corp., to collect millions of dollars from advising on the company’s break-up, according to M&A estimates. was standing. Lawyer and banker.

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According to Refinitiv, Goldman Sachs has collected approximately $400 million in fees advising the company on acquisitions, divestments and spin-offs since 2000, making it GE’s top advisor.

According to Refinitiv, JP Morgan, which advised J&J on their planned break-up, had previously earned $206 million in fees since 2000. UBS, which worked on Toshiba’s break-up, collected $12 million in fees, Refinitiv data shows.

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.

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. Investment banks have collected more than $4.5 billion advising spin-off deals globally since 2011, as DeLogic data shows.

Graphic: Top 5 Corporate Spinoffs in the past decade:

independent advice

Investment bankers often argue that companies don’t necessarily get it wrong when they initiate deals they later reverse, because 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 the 1990s across businesses as diverse as healthcare, credit cards and entertainment, viewing them as diversifying their 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 argue that most companies want to pay bankers to deliver deals, not to advise them on whether they need to make deals in the first place. This creates an incentive for bankers to try to achieve a transaction that may not involve a deal, rather than encouraging a better outcome for their customer.

But 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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