Continuing with the momentum that begun in later part of last year, 2021 is turning out to be a great year for investment banks as global merger and acquisition (M&A) activities continue at a record pace. Hence, investment banks like Goldman Sachs GS, Morgan Stanley MS, Moelis & Company MC, Evercore Inc. EVR and Jefferies Financial Group Inc. JEF are likely to post stellar profits this year.
1H21 Global M&A Insights
According to PwC’s latest report on Global M&A Industry Trends (that sourced information from Refinitiv, Dealogic and PwC analysis), the first half of 2021 witnessed record levels of deal making, with deal value and volume surging 135% and 30%, respectively, on a year-over-year basis.
The said period also recorded a large number of megadeals – those with deal value of more than $5 billion, with technology, media and telecommunications companies accounting for almost 33% of such transactions.
The very basis for such record levels of M&As seems to be the continued focus of the companies to adapt to the changing operating environment in wake of the coronavirus pandemic. As ambiguity gradually lifted following the vaccine discoveries and subsequent large-scale inoculations, companies and their management became more confident of strong economic rebound.
Other factors like ultra-low interest rates, abundance of capital, tightening regulatory scrutiny and potential capital gains tax hikes have also contributed to high level of M&A activity during the first six months of 2021.
Investment Banks Profiting From Global M&A Boom
If we check out the above-mentioned investment banks’ first-half results, M&As were one of the major contributing factors for their impressive performance.
Goldman’s total net revenues jumped 50% year over year to $33.1 billion. This Zacks Rank #3 (Hold) company’s top line was mainly driven by solid Investment Banking segment performance (debt and equity underwriting, and advisory services), which recorded top-line growth of 57% hitting $7.02 billion.
Another major global investment bank – Morgan Stanley’s – net revenues rose 30% from the first six months of 2020 to $30.5 billion. The top-line growth was primarily driven by solid investment banking activity, with the company recording 58% increase in investment banking fees to $5.4 billion.
Further, Moelis & Company’s top line surged 99% to $624.7 million during the first half of the year, while Evercore’s net revenues increased 45% to $1.35 billion. Out of this, investment banking fees totaled $1.3 billion, up 37% from the prior-year period.
Jefferies’ net revenues soared 75% year over year to $4.44 billion. This Zacks Rank #2 (Buy) company’s top line was largely backed by robust investment banking activity, with the company posting revenues of $2 billion from its investment banking business, an 105% jump from the first half of 2020.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Given the robust performance, investors are optimistic on these companies. This can be seen from the chart below:
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Road Ahead for Investment Banks
Outlook for the global M&As remains bullish for the second half of 2021. As the companies emerge from the pandemic-induced mayhem, drive for scale and changes toward digitization of operations are likely to result in more consolidation across several industries.
During second-quarter earnings conference call, Goldman CEO David Solomon stated that backlog of deals at the company is at record levels and said, “we observed certain secular changes driving strategic activity as our key clients emerge from the pandemic — the drive for scale, the push to achieve operating efficiency, the shift to a digital economy across a broader industry set.”
Similarly, Moelis & Company CEO Ken Moelis commented, “the pace of our new business activity remains high, and our pipeline is stronger than it has ever been.”
Deal making is, therefore, expected to continue at a faster pace and investment banks will surely gain from such favorable trends.
Even analysts are bullish on these stocks as evident from favorable earnings estimate revision trends. The Zacks Consensus Estimate for Goldman’s earnings of $15.72 per share for the current year has moved 16.7% north over the past month and suggests 113.1% jump from the prior-year reported number.
Similarly, Morgan Stanley, which currently carries a Zacks Rank of 3, has witnessed 4.2% upward estimate revision over the past 30 days. The consensus estimate of $7.42 for this year implies 12.8% rise. The Zacks Consensus Estimate for Evercore’s earnings of $12.73 for 2021 suggests 32.3% year-over-year growth and has moved 10.2% north over the past month. It is a Zacks Rank #2 stock.
For Moelis & Company, which also has a Zacks Rank of 2, the Zacks Consensus Estimate for earnings of $4.03 for 2021 has moved 16.5% upward over the past 30 days and suggests an increase of 38.5%. Also, Jefferies’ consensus estimate of $4.76 indicates 79.6% year-over-year surge for fiscal 2021. Estimates have remained unchanged over the past month.
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