Investment banking slump begins to bite

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The collapse in investment banking activity raises serious concerns over the ability of many investment banks in Europe to cover the huge cost bases they have built up through aggressive hiring in the past few years. Credit Suisse First Boston is understood to be laying off another 100 bankers across Europe, mainly in M&A, and speculation is rife that Merrill Lynch is also planning a cutback. Both firms declined to comment. Goldman Sachs said last week that market conditions were one reason why it was 'more aggressive than usual' in its annual performance review, which saw the departure of several hundred staff across the firm.

The head of European investment banking at one firm said: 'If activity does not pick up in the next few months, we could see the mid-sized banks being forced into wholesale layoffs. If it doesn't recover for a few quarters, then even the biggest firms will be forced into widespread redundancies.'

Firms such as Lehman Brothers and Commerzbank, which have more than doubled their investment banking divisions in the past few years, are seen as the most vulnerable to a slowdown. Mid-sized firms such as ABN Amro and Dresdner Kleinwort Wasserstein, which both recently announced poor investment banking results for 2000, are also particularly exposed to the slowdown. 'It could be a massacre if things don't pick up quickly,' said one senior banker.

M&A volumes in Europe dropped to $69bn (&euro76bn) in the first two months of the year, the lowest two-month period since the summer of 1999 and the worst start to a year since 1999. By number of deals, the 1,077 transactions were the lowest seen in any two-month period since mid-1999. The value of deals in the first two months of this year is down nearly a third from the start of 2000.

In equity capital markets, the volume of IPOs has fallen sharply, with just 20 deals in the first two months of this year. This is the worst start to a year since 1998 and is less than a third of the number of deals seen over the same period last year.

The Neuer Markt, the bellwether of the European technology market, has seen just three IPOs this year, which have raised less than 3% of the value of the 20 IPOs in the same period in 2000. While the value of equity-linked issues and secondary offerings is up, the market has been dominated by a few big deals that have been shared among a small number of players.

The slowdown has also taken hold in the US, where the new issue market is down one-third. So far this year, 43 companies in the US have withdrawn their IPOs only nine have successfully got away. Global M&A volumes are down two-thirds to $245bn. Last week, most of the Wall Street securities firms downgraded their profit forecasts on each other in expectation of a sharp slowdown in profits this year.

However, the collapse in the technology sector last year appears to have boosted the fixed-income markets - at least temporarily. Total international bond issuance by European issuers in the first two months of the year of $158bn is holding up well against last year's equivalent of $161bn. But volumes in February slowed by nearly 40% from January as the rush to market at the start of the year, encouraged by the surprise cut in US rates, stretched investors and spreads to their limits.

Many bankers remain cautiously optimistic that a recovery is on the horizon. One senior banker said: 'We are very busy in terms of pitching and preparation, but unless the climate picks up, many of these deals could be postponed. We are confident of a recovery in the second half of the year.' However, he admitted that the telecoms sector still casts a shadow over the entire market. The biggest problem for many mid-sized firms is that volumes in M&A, debt and equity are being driven by the small number of jumbo deals that are being shared between the largest houses. The IPO of Orange accounts for over 70% of the total value of IPOs this year and the secondary equity market has been dominated by a handful of multi-billion euro issues. In the debt markets, multi-billion euro deals from the likes of France Télécom and DaimlerChrysler have squeezed the lower end of the market, raising the cost of finance to prohibitive levels for smaller issuers. The head of equity capital markets at one firm said: 'This is an unsustainable position for many smaller firms. There is less business to go round and unless you can tap into that flow, you are in serious trouble.' The private equity market has also been severely hit. According to the Centre for Management Buy-out Research, the value of new investments is up some 15% so far this year, compared to 2000, although exits have fallen to almost zero. Many of the biggest firms, such as Morgan Stanley and JP Morgan Chase, have taken big write-downs on their portfolios. Several US houses are understood to be offering guaranteed returns to attract new investors to their funds.

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