How Do Banks Benefit From The Break-Up Of Large Companies

Investment banks earn billions from arranging deals, whether they are mergers and acquisitions, or sale and division.

With the giant American General Electric announcing plans to dismantle it into three companies, followed by the major Japanese company Toshiba, then Johnson & Johnson, the markets are trying to estimate the cost of the split and dismantling deals that the investment banks are handling the sale of divisions will get. Those large companies or put them on the market as new companies independent of the parent group.

It is always common knowledge that investment banks such as “JP Morgan”, “UPS”, “Goldman Sachs”, “Bank of America” ​​and others earn hundreds of millions of dollars from the advice that companies request to arrange mergers and acquisitions.

Investment banks also earn from the initial public offering of shares on stock exchanges, and from other investment advisory activities they often provide to companies. Paradoxically, just as those investment banks profit from making companies bigger through mergers and acquisitions deals, they also profit from dismantling and dividing those companies. According to an analysis published by Reuters on Tuesday, the profits of these banks double upon dissolution, perhaps from the same companies that gained from their expansion and inflation.

There is now an increase in the number of large companies seeking to dismantle themselves or reduce their business by eliminating some non-core activities. Often, these are activities that were joined to it through acquisitions and purchases in the past, in which investment banks were their advisors.

Banks Profits

Investment banks and consulting firms earn hundreds of millions of dollars advising large groups seeking to break up or downsize some of their sectors. According to a survey of the “Dialogic” company, which tracks transaction data in the market, this year has so far witnessed 42 dismantlings and disposal of companies from some of their activities around the world, with a total value of more than $200 billion. This is compared to 38 similar operations last year 2020, whose total value did not exceed $90 billion.

This means hundreds of millions of dollars for investment banks for their advisory services are in these operations. According to Dealogic’s data, these banks have received $4.5 billion in fees from dismantling and selling some parts of major companies since 2011. In this year alone, what these banks received from dismantling and curtailment deals amounted to up to $1 billion, which is an amount of approximately $1 billion. Double what they got from similar operations last year. Although these amounts represent only 2% of what investment banks and major banks obtain from their advice in completing transactions in general, it is a steadily increasing percentage.

Goldman Sachs is at the forefront of investment banks benefiting from advisory returns in these deals this year 2021 so far. It is followed by JP Morgan Bank and Lazard Bank Limited, according to Dealogic’s data.

Results Not Guaranteed

In the end, those big banks profit from the deals of growing companies and from the deals of shrinking them afterward. For example, Goldman Sachs has been the biggest beneficiary of advising giant General Electric on its acquisitions in recent years. The company has expanded from aircraft engine manufacturing to media and entertainment and healthcare technology to financial services and credit card issuance.

Then the company returned to get rid of the home appliance that was sold to a Chinese company, as well as the entertainment sector that was sold to the Comcast Group as part of its acquisition of NBC Network and Universal Studios. Even the light bulb industry, which is the basis of General Electric, which was founded by the inventor of the light bulb Thomas Edison more than a century and a quarter ago, was sold to an American company.

According to estimates by law firms of mergers and acquisitions, “Goldman Sachs” earned about 400 million dollars from advising the American group on those deals. Although the group has hired other investment banks such as Bank of America, Evercore, and BJT Partners, Goldman Sachs remains GE’s largest advisor in those previous deals.

Although these big investment banks get hundreds of millions of dollars from their advice on these deals, the results are not always guaranteed. In most cases, large companies use the services of these banks to complete the deals, and not to determine whether these deals are in the interest of the company in the first place or not.

So sometimes, despite all that a company spends on consulting and closing deals, it loses out of that process and its shares plummet in the market. The investment banks do not see anything wrong with that. In the end, they are entrusted with the work of completing a deal, whether it is a merger and acquisition or dismantling and division, and not an assessment of its usefulness to the company that buys its advisory services.