Since the beginning of the year, investment banks in Germany have delivered a classic false start. In the first quarter, their earnings sank to the lowest level since records began at the turn of the millennium.
In comparison to the super year of 2000, results have more than halved. Back then, the financial institutions raked in $923 million in the first three months. There is no chance of this happening during the first quarter of the current year.
According to calculations prepared exclusively for Handelsblatt by financial data provider Thomson Reuters, all the banks together took in only $411 million through fees for consulting services involving mergers and acquisitions, for the placement of new bonds as well as loans and stocks.
Up to now the worst first quarter had been in 2013, when banks took in significantly more with $569 million.
It was above all the bond business that was responsible for the decline at the beginning of 2015.
Financial institutions traditionally derive around two fifths of their revenues from the placement of securities. In the current year, fees in this area have fallen by a whopping 14 percent. Because of favorable market conditions, German companies financed too much in advance last year.
The weak start this year is no reason for bankers to despair. Admittedly, investment bankers are professional optimists. But they have valid arguments when they say they expect the rest of the year to be profitable — especially with regard to initial public offerings.
After all, in comparison to last year, a significantly higher number of large-sized candidates are planning to venture out onto the market floor. Up to now, Handelsblatt has identified 13 potential stock-market launches for 2015. Martin Steinbach, an expert in capital markets at the consulting firm Ernst & Young, even speaks of “15 stock-market candidates in Germany.”
With respect to more than half of these, financial-market professionals expect a volume of at least €500 million. The overall volume could be as high as €11 billion. This would make 2015 the second-best year in history.
Up to now, the record year for IPOs was 2000, when issues totaled €25.6 billion.
The conditions for exits are superb. This year we will see numerous launches as well as sales of portfolio firms on the market if framework conditions remain so favorable.” Ralf Huep, Director of German operations, Advent
Banks are putting great hope in the pharmaceutical company Bayer, which intends to spin off its plastics division Material Science. By the end of August at the latest, the division is scheduled to be standing on its own legs legally. Then there will not be a long way to an initial public offering.
The analysts at Equinet estimate the value of Material Science, including debts and pension obligations, to be as high as €10 billion. The plan is to go public with 20 percent to 30 percent, i.e. €2 billion to €3 billion.
Another large nugget is Deutsche Pfandbriefbank, which must be sold by the end of the year.
During the financial crisis, the European Commission had authorized Germany to rescue the firm’s predecessor, Hypo Real Estate, only under the condition that the bank be re-privatized by the end of 2015.
The sale should generate proceeds of €2-3 billion. And if Deutsche Bank decides during its restructuring to float a part of Postbank, it would be the third candidate for an issuance worth billions.
A decision is supposed to be made in April by the heads of Deutsche Bank, Anshu Jain and Jürgen Fitschen, as to how the financial institution will proceed.
There are also plans by a series of financial investors to sell portfolio companies. One is the perfume-store chain Douglas, in which the private-equity firm Advent has a stake.
Ralf Huep, director of German operations for Advent, is enthusiastic with regard to the stock-market situation: “The conditions for exits are superb. This year we will see numerous launches as well as sales of portfolio firms on the market if framework conditions remain so favorable.”
In any case, there is no lack of potential buyers. “Institutional investors are under considerable pressure with regard to assets and performance; they are looking for new investment opportunities,” said Achim Schäcker, who is responsible for initial public offerings at HSBC Trinkaus.
He believes that large investors, because of a situation in which there are no “risk-free interest payments but only interest-free risks, have no choice other than stocks.”
And there is an abundance of liquidity. In the two last months alone, around $40 billion has gone into European funds, said Christian Gärtner, who heads the business in stock issues at Bank of America Merrill Lynch.
He reports that U.S. investors in particular have had a change of heart and are once again pinning their hopes on Europe. “Germany is particularly benefiting from this,” he said.
As a rule, approximately 70 percent of an IPO goes to investors in Britain and the United States. The share of large German investors is normally between 15 percent and 20 percent.
Even if a boom is expected in stock-market launches, investment bankers are not putting all their eggs in one basket. The financial professionals likewise expect a recovery in the mergers and acquisition business, even if the volume in the first three months of 2015 has fallen by half (to $17.2 billion) in comparison to the previous year.
The biggest deal was the takeover of Conwert Immobilien by Deutsche Wohnen in February, with a value of $2.84 billion.
For Rainer Langel, the head of German operations at Macquarie, it is clear despite the disappointments at the beginning of the year that “in 2016 at the latest, we will reach the record level of 2007 in Germany and Europe in terms of M&A.”
According to calculations by Thomson Reuters, the figure for Germany was $142.5 billion. Mr. Langel expects that growth will be based primarily on transnational mergers and acquisitions.
Berthold Fürst, responsible for the German M&A business at Deutsche Bank, acknowledges that in a historical comparison, the current valuations of companies often appear ambitious, but he points out that the sustained slump in interest rates must be taken into consideration: “Companies are acting from a position of economic strength and can handle large acquisitions.”
Around one-fifth of M&A orders come from financial investors, according to Jens Maurer from Morgan Stanley.
He expects volumes to continue to rise here. The investment banker cites real estate, industrial goods, pharmaceuticals, telecommunications and the chemical industry as particularly active M&A sectors in Germany.
Peter Köhler covers the financial industry for Handelsblatt, Robert Landgraf is the deputy head of the papers’s finance desk in Frankfurt, Susanne Schier covers investment banking. To contact the authors: [email protected], [email protected], [email protected].