It may have been a sleepy three-day working week in Australia, but investment banks had a ball.
Led by major healthcare deals such as the $US46 billion ($49.6bn) bid for botox maker Allergan, $US100bn worth of mergers and acquisitions were announced around the world last week, for the second week in a row, according to Thomson Reuters.
Australian companies didn’t shy away, with Transurban leading a $7.1bn bid for toll road group Queensland Motorways and Stockland offering $2.4bn for Australand, the fifth and seventh largest deals globally last week.
Horizon Oil also revealed it was mulling a transaction.
The activity has pushed announced global mergers and acquisitions this year to $US1.1 trillion — just the third time it has topped $US1 trillion at this stage of the year since Thomson began recording the data back in 1980.
The spurt in deal flow is driving companies’ competitors to act for fear of being left behind, with competing bids globally the strongest since 2007.
In Australia, JPMorgan analyst Scott Manning said life was stirring in M&A and capital markets, pointing to the government’s recent decision to float Medibank Private.
Macquarie, the nation’s biggest investment bank, is tipped to next week post a bumper full-year profit of $1.2bn for the year to March 31.
“Returns for the ‘capital lite’ securities and capital divisions will be in focus, with each holding the potential to improve group return on equity — which remains subdued at about 10 per cent — given encouraging signs of deal activity and a robust IPO pipeline,” Mr Manning said.
Macquarie Capital, alongside Goldman Sachs and Deutsche Bank, won a coveted role managing the $4bn Medibank float.
The bank is also working with Goldman, UBS and Commonwealth Bank on the $754 million float of mortgage insurer Genworth Australia, with the banks to share in up to $26.5m in fees, according to a prospectus filed this week.
Goldman and Morgan Stanley will share $48m in fees underwriting Transurban’s $2.7bn equity raising to help pay for the purchase of Queensland Motorways. Citi, Merrill Lynch and UBS are advising Stockland, with Macquarie and Fort Street working for Australand.
“Capital market trends are improving. We forecast (Macquarie’s) advisory revenues to grow 22 per cent in full-year 2014 and 16 per cent in 2015 ... as the momentum gathers,” Merrill analyst Frank Podrug said in a recent note.
Brian Johnson, an analyst at CLSA, estimated Macquarie would receive $25m in fees for its work on Medibank, but warned this would be whittled down to $9m after the bank pays tax and bonuses.
“Improved operating earnings leverage likely flows more through to the tax man and the staff bonus pool than earnings per share,” he told clients.
To retain key bankers in tough conditions, Macquarie’s board has in recent years overridden the bank’s “profit share” formula to prop up the staff bonus pool, reducing shareholder returns.
Mr Manning said Macquarie’s compensation ratio would be closely watched, along with the group’s growing mortgage book.
While Macquarie is strongly leveraged to a recovery in corporate activity through securities, capital and fixed income, currencies and commodities, Mr Johnson warned upside would be constrained.
“The July 2007 onset of the global financial crisis with tighter debt, lower tolerable gearing and ever-increasing regulatory capital intensity sees the profitability of Macquarie’s market-facing (businesses) permanently lowered,” Mr Johnson said.