A survey finds that middle market investment banking is likely to take on new prominence for Wall Street and the largest banks in the United States as financial service companies go down market to look for new sources of revenue to replace large corporate deal flow.
However, despite the huge potential profits to be made in advising mid-cap companies on mergers and acquisitions and initial public offerings, the middle market has proven very difficult nut for most banks to consistently crack, according to Greenwich Associates.
In short, few monoline investment banks are left and the universal banks and regional commercial banks have struggled to find the right model for sourcing and capturing the investment banking business of middle-market companies.
Approximately 15% of the companies surveyed say they are likely or very likely to hire an advisor on an M&A deal in the next two to three years and about 3% say they are likely or very likely to need a manager for an IPO.
What complicates matters from the perspective of banks hoping to win this business, however, is the fact that this deal flow will be spread across a huge number of companies of differing size, industry and location.
The biggest demand will come from the upper end of the middle market. Among companies with US$150 million to $500 million in annual sales, 16% expect to use an M&A advisor in the next three years and 5% expect to use an IPO manager.
The most promising industry for middle market M&A is tech/media/telecom, in which 22% of companies expect to hire an M&A advisor in the next two to three years. Close behind, approximately 20% of companies in wholesale durables say they plan to hire an M&A advisor in that timeframe, as do nearly the same proportion in machinery/metal fabricating, retail trade and energy/oil and gas.
“Beyond these select industries and segments there is little concentration in projected deal flows, which means there is no magic bullet for banks,” says Greenwich Associates consultant Jesse Neumyer. “With thousands of companies to cover across millions of miles in the United States, banks cannot hope to capture significant amounts of middle market investment banking business by focusing on a handful of industries. A serious commitment to this business requires banks to somehow locate and win deals as they emerge throughout this incredibly diverse universe of companies.”
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Citigroup Plans 52,000 Job Cuts
Citigroup is planning to slash 52,000 jobs over the next year as it deals with higher loan losses and a weakening global economy.
The breakdown of the cuts are as follows: 9,100 positions that the financial services firm started reducing last month, another 16,900 announced on Monday, and 26,000 through the sale of assets.
Citigroup is trying to get rid of its non-core assets. The company recently announced it would sell its retail banking operations in Germany.
Shares of the bank dropped to their lowest level in 12 years on Monday, closing at US$8.89, down from its 52-week high of $35.29.