2014 outlook for investment banking

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A much more positive tone is revealed in the fifth Outlook for Investment Banking Services, the annual survey of corporate decision-makers from Thomson Reuters and Freeman Consulting Services.

Compared to last year’s survey, which was conducted during a period dominated by headlines about the European debt crisis, the optimistic mood for 2014 shows a change towards a period of expansionary plans, increased volumes – particularly in the financial sector, moving away from the cost-cutting and fee structure focus of 2013.

Full details can be found here in the report, which includes regional and sector breakdowns for responses on a range of investment banking questions. Key highlights follow below.

Spending Cash Reserves: Record cash holdings to support dividend increases in 2014

• In both US and Europe, dividend increases were cited as a top priority for spending cash by 12% more respondents in this year’s survey vs. last year’s

• M&A remains primary use of cash, but cited almost -10% less frequently this year vs. last year. As loan markets reopen, less cash and more debt likely to be used to fund M&A bids

Selecting a Bank: IB clients now looking beyond fees when selecting an advisor

• As in all previous surveys dating back to 2009, respondents value detailed industry knowledge above all else, including existing relationships, fees, and quality of execution

• Percentage of respondents citing competitive fee structures as a key criterion fell from 45% last year to 31% this year – the lowest level in our entire 5 years of surveying. In a major trend reversal, Asian firms are far more fee-sensitive than American or EMEA counterparts

M&A Objectives: Expansionary goals replace cost synergy and valuation-driven ones

• 44% of respondents globally cited product line expansion as a key goal, up from 32% last year, evincing willingness to pursue a high-risk acquisition outside their core markets

• The rush to buy undervalued assets is over – at least in Americas and EMEA. This objective was cited as an M&A driver by just 22% of respondents vs. 31% last year

M&A Deal Volume: Volume forecast to rise +17% in 2014, with growth in every sector

• Respondents’ +17% forecast would push global volume to highest level since 2008

• The Financial sector – 2013’s worst performing sector – forecasts +34% deal volume increase in 2014, as revenue improves and PE searches for deals

• Pressure to match acquisitive competitors seen as top 2014 M&A driver, particularly in Americas, where it was cited by two-thirds of respondents

• Crisis of confidence in Asia? In Asia, management’s confidence in future growth was cited as an M&A catalyst by just 36% of respondents, down from 60% last year. However, in Americas and EMEA, the figure rose to 48% from 21%

Debt Capital Markets: Post-crisis record year seen for bond and loan markets, despite rising rates

• Bond and syndicated loan deal activity each expected to rise +17% in 2014, which would represent an all-time record year for bonds, and the best year for loans since 2007

• As US Fed tightens monetary policy, 61% of Americas respondents see rising interest rates on corporate debt in 2014, vs. 39% in EMEA and 47% in APAC

Equity Capital Markets: Demand for capital to fuel growth creates favorable IPO environment for 2014

• Resurgent IPO activity likely to continue into 2014. 61% of respondents believe companies will use share offerings to fund growth

• European respondents see share offerings used to boost liquidity and deleverage

'Thomson Reuters’ fifth annual survey of corporate decision makers paints a cautiously optimistic picture for deal making in 2014. Credit issuance is expected to grow to record levels despite expected interest rate rises and this in turn will drive M&A funding. The appetite for transformative M&A growth is increasing and expectations are for a superior IPO environment, which suggests improved confidence in macro-economic conditions', said Leon Saunders Calvert, Thomson Reuters’ Head of Banking & Research for EMEA.

'The defining factor for companies in choosing investment banks remains the ability to demonstrate detailed industry knowledge. This is reflected in the market by the growth, over the past few years, in the size and number of advisory boutiques, who do not have an equivalent balance sheet to deploy on their clients’ behalf, but who define themselves by their sector expertise. This trend is likely to continue as the investment banking and advisory market continues to adapt to the post-crisis environment'.

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