And now, from the department of public yet mildly shocking information: J.P. Morgan Chase & Co. advised on eight of the world’s ten biggest corporate mergers last year. Sure, one was its own $58 billion purchase of Bank One Corp., but the firm still did far better than anyone would have thought when corporate lending king Chase Manhattan Corp. merged in 2000 with J.P. Morgan & Co. The idea that any commercial bank could be a lasting power in M&A or securities underwriting had long inspired little more than loud guffaws on Wall Street.
Lately, that cackling has sounded more like nervous laughter. Citigroup, the granddaddy of the so-called universal banks, took in more investment banking fee revenue than any of its competitors last year, according to New York research firm Dealogic. Right behind it was J.P. Morgan. Historic underwriting and advisory powers Goldman, Sachs & Co. and Morgan Stanley ranked third and fourth, respectively. Universal banks UBS, Credit Suisse First Boston and Deutsche Bank took the next three positions, besting old-line firms Merrill Lynch & Co. and Lehman Brothers (see table).
“We’ve had time to develop execution capability across the spectrum of investment banking services,” says Douglas Braunstein, head of investment banking coverage at J.P. Morgan. “We can look clients in the eye today and tell them we’ve got a world-class advisory capability.”
The big banks are chipping away at the notion that their mountains of capital are no match for the old-line firms’ brains and brand equity. But it’s a slow process. Some universal banks, for instance, rely heavily on simpler, lower-fee bond and loan underwriting and haven’t fully infiltrated the more lucrative M&A and equities fields.
Even J.P. Morgan still derives 26 percent of its investment banking revenue from arranging loans and 29 percent from bond underwriting. M&A accounts for a quarter of its fees (24 percent excluding the $40 million it paid itself on the Bank One deal), but the firm gets only 20 percent from equity offerings. Goldman, in comparison, generates 38 percent of its fees from mergers and 31 percent from stock deals.
“It takes time to build a brand,” concedes Braunstein. “We began building the strategic advisory practice earlier and have been focusing a lot over the past several years on building equities.”
Citigroup, which made its big move into investment banking by acquiring a top-tier firm, Salomon Smith Barney, in 1999, has fared better than other big banks. Half of its fees come from equities and M&A. UBS also appears to be a legitimate threat to the traditional firms, with 58 percent of fees coming from stock and merger deals.
When loan revenue is factored out of the rankings, Citi remains in first place, with $3.37 billion. Goldman and Morgan Stanley each move up a notch, and J.P. Morgan slips to fourth. UBS stays in fifth, but CSFB and Deutsche Bank slide to seventh and ninth, while Merrill and Lehman rise to sixth and eighth, respectively. By the same measure, in 1999, before the wave of deals that created the current crop of universal banks, CSFB, then a tech-banking powerhouse, ranked first, followed by Goldman, Morgan Stanley and Merrill. Citi (then Salomon Smith Barney) and J.P. Morgan were fifth and sixth, respectively.
Universal banks have gained ground in part by leveraging their lending relationships. But much of their success has been limited to bond underwriting. Companies often are more willing to throw plain-vanilla bond deals to their lending banks than merger or stock deals, which are far more significant events.
“On M&A particularly, I need to be working with an experienced banker that I trust,” says one large-cap industrial CEO, who declines to be named because of the sensitivity of the topic. “A big balance sheet means nothing to me in that situation.”
Raking it in Universal banks like Citigroup and J.P. Morgan Chase & Co. win the lion’s share of investment banking fees but tend to rely more on bonds and loans than do such old-line firms as Goldman, Sachs & Co. and Morgan Stanley. Below is a ranking of firms by estimated banking revenue in 2004. | |||||
| Rank | Bank | Revenue ($ billions) | Market share | Equity underwriting & M&A | Debt underwriting & loans |
| 1 | Citigroup | $3.96 | 7.4% | 50% | 50% |
| 2 | J.P. Morgan Chase & Co. | 3.76 | 7.1 | 45 | 55 |
| 3 | Goldman, Sachs & Co. | 3.20 | 6.0 | 69 | 31 |
| 4 | Morgan Stanley | 3.09 | 5.8 | 61 | 39 |
| 5 | UBS | 2.82 | 5.3 | 58 | 42 |
| 6 | Credit Suisse First Boston | 2.80 | 5.2 | 47 | 53 |
| 7 | Deutsche Bank | 2.71 | 5.1 | 40 | 60 |
| 8 | Merrill Lynch & Co. | 2.61 | 4.9 | 58 | 42 |
| 9 | Lehman Brothers | 2.41 | 4.5 | 50 | 50 |
| 10 | Banc of America Securities | 2.21 | 4.1 | 22 | 78 |
