Big Deal Banks - major players in the Latin American investment banking market

Latin Trade, April, 2000 by Michael Fabey

Goldman Sachs, Merrill Lynch and Credit Suisse First Boston are hot stuff thanks largely to one huge transaction

ABOUT THIS TIME LAST YEAR, when Spanish oil company Repsol bought its Argentine counterpart YPF for US$17 billion, the deal's bankers, Goldman Sachs, Merrill Lynch and Credit Suisse First Boston, were assured top spots in the annual ranking of advisers for mergers and acquisitions in Latin America.

More and more, investment banks are pursuing this sort of big deal to springboard to the top of the regional rankings. In doing so, they are challenging investment banks like regional leader Salomon Smith Barney and JP Morgan, which grind out a larger volume of comparatively smaller transactions.

"One or two big deals like these can skew the rankings," says Roger Ullman, managing director and head of Latin American M&As for Merrill Lynch, the region's No. 3 adviser of mergers and acquisitions.

Alberto Verme, head of the Salomon's Latin American investment banking division, says of the big-deal strategy, "Maybe that approach can turn out to be lucrative. But we started to build this up little by little."

The 20% drop in overall announced mergers and acquisitions in 1999 to just under $69 billion may have exaggerated the impact of a few transactions, but clearly "big deal" banks are gaining ground fast in the rankings. Goldman Sachs (No. 2 in 1999), and Credit Suisse First Boston (No.4), which were not in the top 10 a year ago, did more than $20 billion in transactions each last year thanks in large measure to one deal: Repsol-YPF. And if Goldman Sachs and other investment banks can close this year's big deal, Spanish telecom firm Telefonica's $21 billion acquisition of its Latin American subsidiaries, they will undoubtedly be on the top of the charts again in 2000.

Among the leading advisers of mergers and acquisitions last year, JP Morgan did 31 deals--50% more deals than any one of the top four banks--but its $7.5 billion in deals were equal to barely a third of the $20 billion-plus at each of the other four banks. Salomon Smith Barney, the region's top adviser for the second year running, only barely retained its title (see sidebar) even though it, too, conducted considerably more transactions than its rivals.

No easy deals. The reason for the close race was Repsol's hostile takeover of Argentina's largest publicly traded company, YPF. The Argentine government had sold a minority stake to private investors in 1993, but acquiring the remaining shares would prove a large, complex international transaction that in many ways reflects how difficult it is to bring home a megadeal.

Goldman Sachs took the lead on cutting through the cross-border legal maze for Repsol. "It was a very complicated transaction," says Martin Sanchez, Goldman's vice president for mergers and acquisitions in Latin America. "It required a $16 billion fully committed acquisition finance facility and coordination across three jurisdictions: Argentina, the United States and Spain. In addition, there was also some uncertainty as to how the new tender offer rules in Argentina would be applied."

In January 1999, Repsol bought 15% of YPF from the government for about $2 billion. It tried to woo the Argentine oil company's executives to support a full-blown takeover to no avail. After months of trying unsuccessfully to negotiate a deal to buy the company, Repsol made an unsolicited offer of $44.78 per share to gain control of 85% of the company for about $13.44 billion, or 25% more than the premium over the closing per-share market price at that time.

"The [deal's] size created a financial challenge for Repsol, which is almost the same size as YPF," says Roger Ullman of Merrill Lynch, which also worked on Repsol's behalf in the YPF deal.

But the Spanish company and its advisers put together a bid-funding package that included a $15.5 billion loan and $2.5 billion asset sale. Any opposing bid would have to be more than $47 per share, thanks to provisions made during the January deal between Repsol and the government.

The advisers still had to coddle the YPF management team. And they had to work out other deal mechanics. U.S. institutions held the bulk of the YPF shares as American Depositary Receipts, or ADRs, which is the case for many Latin American multinationals now. They had to walk the companies through the complex Argentine tender laws, deal with last-minute deadline changes, get approvals from the Argentine Securities and Exchange Commission and put together an international package that would satisfy a host of countries and companies.

Such complications are becoming the status quo for mergers and acquisitions in Brazil, Mexico, Argentina, and throughout the region. Many of Latin America's largest companies are now publicly traded, global concerns. Any takeover not only involves shareholders in various countries but also assets around the world. "There's been a change in the competitive landscape," says Eduardo Centola, an investment banking vice president for Goldman Sachs. "There are a lot more cross-border and complex deals."