Investment bank fees, especially those from M&A deals, are a major component of revenues and profits for investment banks. With the fluctuations in global markets in 2022, M&A revenues show divergent trends for different investment banks. Understanding M&A fees helps grasp the dynamics between investment banks’ business strategies and their hiring priorities. This article will analyze M&A fees from perspectives of fee structure, revenue impact, and hiring implications.
M&A fees have complex structures with variations across banks
M&A advisory fees often consist of retainer, success fee, and tail fee components. Retainer fee compensates the regular advisory service. Success fee, usually a percentage of deal value, rewards the successful completion of deals. Tail fee applies if the deal closes within a certain period after the engagement ends. Fee structures can vary significantly across different banks and deals. Large bulge bracket banks tend to charge higher percentages as success fees than boutique banks. The percentages also differ based on deal sizes, industries, and complexity of services required.
M&A revenues are major yet volatile contributors to investment banks’ profits
Despite the variations, M&A advisory fees are major revenue and profit drivers for investment banks, especially bulge brackets. However, being deal-driven, M&A revenues are also highly cyclical and vulnerable to market fluctuations. In 2022 Q1, while JPMorgan and Morgan Stanley saw strong M&A revenue growth of 35% and 37% respectively, Citi’s and Goldman’s M&A revenues declined substantially. The divergent M&A revenue results directly impacted their total IB revenues and profitability.
M&A teams are growth priorities amid shifts in banks’ business strategies
The importance of M&A revenues is prompting ongoing investments in M&A teams across banks, even as their broader business strategies may diverge. JPMorgan is aggressively expanding its M&A group to ride the M&A boom. Morgan Stanley’s strategy also focuses on boosting M&A along with equities. Goldman Sachs, despite IB downturns, wants to maintain M&A leadership. However, Citi signals less appetite for IB arms race and plans to grow other businesses. Hence, M&A, despite volatility, remains a hiring growth area.
Applicants should analyze banks’ M&A positioning when targeting jobs
In light of the dynamics between M&A and banks’ business strategies, applicants need to analyze each bank’s positioning and priorities when targeting M&A jobs, rather than applying broadly. Joining banks like JPMorgan and Morgan Stanley with M&A focus improves prospects of landing deals. While Goldman’s prestige remains, its slipping M&A strength should give pause. Citi may appeal less to purely M&A-driven applicants given its shift in strategic focus.
In summary, M&A fee structures and revenue contributions vary across investment banks. But amid 2022’s market volatility, M&A revenues remain vitally important and M&A teams are still hiring priorities at most bulge brackets, despite diverging broader strategies. Applicants should analyze each bank’s unique M&A positioning when targeting jobs.