Best M&A house

JPMORGAN: The number one slot in the league table is filled by having more than lending muscle

In the 12 months from the start of the second quarter of 2008, JPMorgan opened up a big lead at the top of the global M&A adviser rankings. Measured by deal value, JPMorgan had a 14.5% market share, compared with Goldman’s 11.9% and third-ranked Morgan Stanley’s 11.1%. But hold on a minute. The M&A league tables are notoriously difficult to read because companies often hand roles to their bank lenders that sometimes require very little contribution. If Euromoney had a pound, dollar or euro for every time a rival investment banker said JPMorgan owed its position to its balance sheet and lending capacity and not to M&A skills, we could retire.

So let’s take a closer look at how this works in practice.

“The integrated model is what everyone at this bank has signed up to and believes in” Hernan Cristerna, JPMorgan

As M&A volumes declined markedly over the past 12 months, InBev’s $62 billion acquisition of Anheuser-Busch was the stand-out deal. It was big, the largest deal ever in the food and beverage industry, it was all cash, it saw a European-headquartered company take over an iconic US name, and it was distinctly unfriendly at the outset. Lazard is the long-standing lead adviser to InBev. The two had discussed the project conceptually for years. Lazard had worked for months on the Anheuser-Busch deal before JPMorgan was brought in as a second adviser last March. So is this one of those deals that unfairly boosts JPMorgan’s league table position, where it came in and did next to no work for the league table credit?

The US bank was asked to advise on three issues after the deal had limped to a standstill. First, InBev was concerned that iconic US companies had traditionally sold out at very high multiples of 15 or 20 times earnings, which it could not justify in prevailing market conditions. It wanted a second opinion on how to pitch any proposal to the board of the US company. It was not sure, amid the contagion in banking and financial markets, that any bid could be financed.

JPMorgan agreed that historical precedents on multiples were daunting but undertook an analysis of what any other strategic or financial buyer could manage to pay for the company, including on a break-up valuation basis. This suggested a price in the low to mid $50s per share and JPMorgan recommended offering a modest premium to this – as the likely real alternative for the target’s board – and not to offer any historical multiple. An offer in the low $60s would not be one the board could simply dismiss.

It guessed, however, that the Anheuser-Busch board would not welcome such an offer either and so investigated the company’s defence mechanisms and by-laws. It found that it was one of those US companies where a shareholder consent mechanism allowed for a simple majority of more than 50% of shareholders to come together and dismiss the board if they found it not to be acting in their interests. In addition, JPMorgan noted that rather than staggering director elections, the company re-elected all its directors every year.

So InBev pitched its offer. The Anheuser-Busch board rubbished it and questioned whether any deal could be financed given market conditions. Here JPMorgan stepped in. Yes, the deal could be financed. Indeed it was underwritten. JPMorgan would provide the finance. It subsequently arranged a $54.8 billion financing package, bringing in Santander as a partner. It later refinanced this with a series of transactions, including through the equity capital markets.

On the Monday after it launched the deal, Hernan Cristerna, head of EMEA M&A at JPMorgan, sat in the offices of a proxy solicitation firm as he received the news that about 55% of shareholders could be called on to support a motion to remove the board. While the board rubbished the bid, shareholders had been telling JPMorgan that they were delighted with it. The US bank’s strong presence in the equity markets and its contacts with all types of investing institutions – JPMorgan came within a short head of snatching the global best equity house award as well this year – is as important as its debt market strength to the M&A franchise.

The thought of rocking up in St Louis, waving a piece of paper and dismissing the board of Anheuser-Busch is an extraordinary one. The consent mechanism was the nuclear option. JPMorgan wanted it to be clear that its finger was hovering over the big red button.

InBev got its deal. Anheuser-Busch shareholders got a good cash price for their company. JPMorgan got a big M&A league table credit.

But it looks as if it maybe deserved this one.

Tell Cristerna that the firm wins M&A business unfairly on the back of the bank’s lending muscle and he laughs. “That is our business model,” he says. “The integrated model is what everyone at this bank has signed up to and believes in. Yes, the financing aspect is an incredibly important part of M&A. Whether we’re working on the buy side or the sell side, the ability to give clients an insightful read on financeability and likely reaction right across the capital structure – from equity markets, high-yield debt, investment-grade corporate bonds, to loans – is absolutely critical. That is just one way in which we differentiate ourselves, and clients find that very valuable.”