Wall Street's New World Order - Who Will Clean Up ?

A new report from Greenwich Associates helps large US companies sort through the drastic changes sweeping through the world's investment banks. Here's the press release:

'The CEOs and CFOs of large US companies do not have the luxury of waiting for the dust to settle in the current financial crisis. They are acting now to secure the credit that will keep their operations running, to raise the long-term capital needed to preserve their balance sheets and to position their companies to survive and hopefully even grow in what could be a painful recession. In many cases, these efforts will require the assistance of advisors on mergers & acquisitions and underwriters on capital markets transactions.

Utilizing its proprietary data on the market share and service quality standards of all the major investment banks used by US companies, Greenwich Associates has compiled a picture of Wall Street as it existed at the end of the first half of 2008, and projected how failures, mergers and other tectonic shifts will change the composition of the US investment banking industry in the months to come.

BofA / Merrill Lynch

From the perspective of companies in need of capital markets assistance and M&A advice, the seminal event to date in the dramatic remaking of the US investment banking industry was the multi-billion emergency acquisition of Merrill Lynch by Bank of America in September. At the end of June, approximately 40% of large U.S. companies used Bank of America as one of their top five investment banks and roughly a quarter used Merrill Lynch in that capacity. In a pro-forma analysis that adds the two relationship bases together, Greenwich Associates shows that the merged entity could have 'top-five' investment banking relationships with roughly 55% of large US companies. It could also hold the title of lead investment bank to approximately 20% of companies.

That combination would vault the merged firm into the very top ranks of the US investment banking industry alongside market leaders JPMorgan and Goldman Sachs. Bank of America / Merrill Lynch would rank second only to the combined JPMorgan / Bear Stearns in terms of top-five relationships - 'more than 60% of large companies name the aggregated J.P. Morgan / Bear Stearns as a top-five investment bank. In terms of lead banking relationships, the new Bank of America / Merrill Lynch would rank third behind only Goldman Sachs and J.P. Morgan/Bear Stearns, which are used as lead investment banks by more than a quarter and 22% of large U.S. companies respectively. 'Never before have three banks dominated corporate investment banking relationships to the extent that this troika could', says Greenwich Associates consultant Jay Bennett.

There are several other contenders for the investment banking business of large U.S. companies, namely Citi and Morgan Stanley, each of which is used as a top-five investment bank by approximately 40% of large U.S. companies and as a lead bank by roughly 12%. Among the other options for companies in need of investment banking services are Credit Suisse and the merged Barclays / Lehman Brothers, each of which is named as a top-five investment bank by about a quarter of large US companies. Also in this group: UBS and Deutsche Bank, which are used as a top-five bank by approximately 20%. 'Any one of these banks has the potential to capitalize on the huge dislocations in this market to dramatically expand its investment banking franchise in the United States', says Greenwich Associates consultant John Colon.

What Type of Service Quality Can Companies Expect From Investment Banks ?

It is important to remember that the market penetrations presented in the research for recently merged banks are projections that aggregate the existing relationships held by the individual firms, taking into account overlaps. In such a tumultuous market, however, it can safely be assumed that clients will be lost and gained as banks work through overlaps and companies shift their investment bankers.

One factor that will play a key role in determining the sustainability of existing relationships is the quality of investment banking service the merged banks are able to deliver to companies. As of June, US companies were unequivocal in naming Goldman Sachs and J.P. Morgan / Bear Stearns as the highest quality investment banks - a ranking that takes into account banker, M&A, and equity capital markets capability. Both firms score far above the industry average on the Greenwich Quality Index, which compiles quality ratings awarded to banks by their corporate clients in a variety of investment banking service categories.

The merged Bank of America / Merrill Lynch has the potential to establish itself alongside Citi in a close second tier in terms of service quality - 'if management was to execute the combination in a way that preserved the strongest features of each bank.


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