Business Services Industry

Investment banks pay for the past - By the Numbers - 2003 off to a poor start

Chief Executive, The, April, 2003 by Daniel Tynan

After suffering through the worst equities market in more than 20 years, investment banks were hoping 2003 would be a year of recovery. The answer so far? Don't count on it.

According to IPO Monitor, the number of initial public offerings in 2002 declined to just 81--one-sixth the number at the market's height in 1999, and the fewest since 1979. This year may prove to be even more inhospitable to public debuts; the market had its first IPO-free January since the 1970s, while February brought just three new offerings.

"The IPO market is basically dead," says Richard J. Peterson, chief market strategist for Thomson Financial, a research firm. "There are no deals to be made."

The news is almost as bad for mergers and acquisitions. With the equities market in the doldrums, the total value of transactions in 2002 was one-fourth the value of the two previous years, according to data compiled by Thomson Financial.

Like their brethren in the accounting industry, the big banks have been tainted by the recent rash of scandals, which have damaged the M&A market in particular. "Firms like Tyco, Enron and WorldCom were big acquirers in the '90s, and lot of their acquisitions are suspect," says Peterson. "Even the most pious CEOs are shying away from doing deals, given the scrutiny of regulators."

Last December, the 11 biggest underwriters agreed to pay $1.4 billion in penalties resulting from the scandals, and many are bracing for thousands of investor suits. Salomon Smith Barney, for example, took an aftertax charge of $1.3 billion to cover penalties and legal settlements. Credit Suisse First Boston set aside more than $400 million. The result? Investment banking revenues for the top firms are down by as much as a third.

But don't feel too sorry for these financial giants. Thanks to serious belt tightening and the development of other sources of revenue such as asset management, many of them remain profitable. Take Salomon. Though its profits dropped 33 percent in 2002, Citigroup's investment banking arm still managed to rake in a $3 billion profit. It seems some firms are crying all the way to the bank.

IPOs a No-Show

The flood of dot-com-fueled IPOs has slowed to a trickle, forcing banks
to seek out other revenue sources

      # of IPOs  $ Billions

2000     422        $93
2001      91        $37
2002      81        $19

Source: IPO Monitor

Note: Table made from line graph

Losing the Urge to Merge

Banks are handling slightly more than half as many
merger-and-acquisition deals as in the boom years, but their dollar
value has shrunk even more significantly.

      $ Trillions

2000     $1.7
2001     $0.75
2002     $0.42

Source: Thomson Financial

Note: Table made from bar graph

Still in the Black

Overall revenues are down across the board, but some banks still managed
to post a profit.

$ Billions

                       2001   2002

Salomon Smith Barney  $20.8  $20.2
Goldman Sachs          $3.8   $2.8
CSFB                   $2.9   $2.8
Morgan Stanley        $11.6   $9.3
Merrill Lynch         $10.3   $8.4

Source: Websites for each firm

Note: Table made from bar graph