By Anirban Sen
NEW YORK (Reuters) – Investment bankers are changing the way they charge for their fees in an effort to preserve and boost the fee income they generate from advising companies on mergers and acquisitions, as more high-profile deals face regulatory challenges.
Many of these fees aren’t paid until after a deal closes. Bankers have been pushing for their money even when a deal is thwarted by regulators, and they’re getting paid more for services regardless of whether the deal closes, interviews with more than a dozen dealmakers show.
Banks’ tactics include taking a larger share of the breakup fees the buyer pays to the target for failing to close the deal, and charging more for the “fairness opinions” they give to companies on whether they should sell themselves.
At stake now are the dealmaking revenues earned by the biggest investment banks in North America and Europe. While listed banks don’t detail the source of their fees in their investment banking revenue disclosures, dealmakers said fees paid even when deals go wrong have helped boost profits this year amid a flat M&A market and rising deal challenges.
U.S. antitrust regulators filed 50 merger enforcement actions in the 12 months through the end of September 2022, marking the highest level of enforcement activity in more than 20 years, according to the latest data published by the Federal Trade Commission and the U.S. Department of Justice.
In Europe, the European Commission issued two blocking decisions in 2022 and one in 2023 against deals, compared with none in 2021 and 2020. “The European Commission is more likely than ever to block any merger,” White & Case lawyers wrote in a note to clients earlier this year.
Political opposition amid rising economic protectionism is also a growing risk, and has, for example, led U.S. officials to cast doubt on whether Japan’s Nippon Steel can complete its $14.9 billion takeover of U.S. Steel amid opposition from U.S. labor unions.
Major investment banks, including Goldman Sachs, JPMorgan Chase and Morgan Stanley, are seeking up to 25% breakup fees on some deals, depending on the size of the transaction, according to dealmakers interviewed. That’s higher than the historical average of receiving about 15% breakup fees, they said.
Goldman Sachs, JPMorgan and Morgan Stanley declined to comment.
Investment banks also have been pocketing about 20% to 25% of the advisory fees they charge companies that sell themselves on the condition that they provide honest opinions, which are paid even if the deal doesn’t go through. These fees, referred to in the industry as “advertising fees,” are higher than the average 5% to 6% of total advisory fees over the past decade, according to several brokerages and regulatory filings.
Spirit Airlines, World Bay
If JetBlue’s $3.8 billion takeover bid for the company fails, Spirit Airlines (NYSE:) Spirit’s advisers, Barclays and Morgan Stanley, negotiated a cut of about 25% on the termination fee JetBlue paid to Spirit when regulators rejected the deal earlier this year, according to people familiar with the matter. In deals of similar size, banks were paid less than 20% of the termination fee a few years ago, the people said.
Barclays and Morgan Stanley declined to comment on the matter.
In another example, private equity firm GTCR’s $18.5 billion deal to buy a majority stake in the merchant services business of payment processor Fidelity National Information Services, Worldpay’s lead advisers, JPMorgan and Goldman Sachs, received about a 25% share of the total fees in advertising fees, the sources said.
In deals of similar size, banks were getting about 5% to 6% of the advisory fees as advertising fees a few years ago, the sources added.
JPMorgan declined to comment, and Goldman Sachs did not respond to requests for comment on the matter.
“Increased scrutiny of transactions by antitrust regulators and uncertainty about how antitrust laws will be applied have led to significant changes in the way M&A agreements are negotiated,” said Logan Breed, global co-chair of the antitrust, competition and economic regulation practice at law firm Hogan Lovells.