Source: Zhitong Finance Author: Wei Haoming
According to two recent analytical reports, the M&A capital market is expected to take off in 2024 due to the resilience of the US economy and the expectation that the Federal Reserve will cut interest rates later this year. CFRA analyst Michael Elliott specifically pointed out that many investment banks were hiring senior staff on a large scale last year, “which shows internal expectations that the economy will recover soon.”
Prior to these optimistic indicators, there was a “drought” in mergers and acquisitions, which in turn weighed on demand for stock and bond issuance. According to Refinitiv, 2023 was a tough year for investment banks as global M&A activity fell 17%, the lowest level in 10 years. Although equity capital market (ECM) and debt capital market (DCM) activity barely achieved marginal increases of 7% and 6%, respectively, these returns are still low considering the already weak 2022 results.
Morgan Stanley also anticipates a rebound in mergers and acquisitions. The company's strategist and analyst, led by Andrew Sheets, wrote: “Our financial sector equity analysts expect global M&A volume to increase 50% compared to 2023, as leading indicators light up the green light, banks indicate that transaction pipelines are being built, and the negative factors of corporate confidence have abated.”
The Morgan Stanley research team said that by region, Europe and North America are expected to have “the most positive activity slant”; however, Australia, India, South Korea and ASEAN will also have favorable conditions. In Japan, the broader shift of companies to improving efficiency should drive mergers and acquisitions. From an industry perspective, strategists and analysts expect a resurgence in mergers and acquisitions in the healthcare, real estate, necessities, and tech sectors.
CFRA's Elliott pointed out that merger and acquisition activities have begun to heat up. He said that activity in January 2024 increased 15% year over year. “Continued strong economic and stock market performance should stimulate people's enthusiasm and drive deal conclusion and capital issuance; looking ahead to 2024, we believe improvements in the first half of 2024 will be moderate, then accelerate in the second half of the year.” This outlook is driven by two factors: (1) investment banking transactions take time, usually 6 to 9 months, or longer; (2) interest rate cuts are expected to begin in mid-2024.
Elliott anticipates that companies with a high concentration of investment banking business will be best able to handle the increase in M&A activity. He said,$Evercore (EVR.US)$,$Jefferies Financial (JEF.US)$und$Lazard (LAZ.US)$Investment banking business accounts for more than 50% of revenue in 2023. At the same time,$Raymond James Financial (RJF.US)$und$Stifel Financial (SF.US)$Investment banking revenue accounts for less than 17% of its total revenue.
Currently, the five companies have an average price-earnings ratio of 13.3 times, an expected price-earnings ratio of 10.7 times, while the 10-year average expected price-earnings ratio of the investment banking and brokerage industry is 12.6 times. Elliott notes that, based on expectations for 2025, this means a 15% discount, which means “investors may not be fully aware of the potential for profitable growth in 2025.”
Furthermore, he pointed out that the price-earnings ratio of these five companies has historically been higher than the industry average, “offering greater discounts.” For example, Evercore's 10-year average price-earnings ratio is 14.4 times, Jefferies's 10-year average price-earnings ratio is 14.2 times, and Lazard's 10-year average price-earnings ratio is 14.6 times.
edit/lambor