JPMorgan Passes Goldman Sachs in Fees From Advising on Mergers

JPMorgan Passes Goldman Sachs in Fees From Advising on Mergers


Oct. 21 (Bloomberg) -- JPMorgan Chase & Co., which navigated the financial crisis without a quarterly loss, is now making more money advising more corporate clients on mergers and acquisitions than Goldman Sachs Group Inc.

Led by Chief Executive Officer Jamie Dimon, the New York- based lender took in $1.26 billion in advisory fees in the first nine months of the year, topping Goldman Sachs for the first time since 2000, when Chase Manhattan Corp. bought J.P. Morgan & Co., data compiled by Bloomberg show. The bank also extended its lead in underwriting equity and debt offerings, earning $4 billion in the same period, twice as much as Goldman Sachs.

JPMorgan, which posted net income of $8.45 billion for the nine months, and Goldman Sachs, with $8.44 billion, are the most profitable U.S. banks that have reported third-quarter results. The gains made by Dimon’s firm follow the 2008 acquisitions of Bear Stearns Cos., the fifth-largest securities firm at the time, and Washington Mutual, providing a West Coast presence.

“JPMorgan has done a wonderful job managing through the storm, and they were able to do what others wanted to do in the down cycle, which was acquire,” said Alan Villalon, senior research analyst at FAF Advisors Inc., the money-management arm of Minneapolis-based U.S. Bancorp that holds shares of both companies. “All the relationships they get from those platforms are going to prove to be huge opportunities for them.”

Investment Bank Profit

Bear Stearns, which had about 14,000 employees at the time of its demise, reported $828 million in advisory and other fees in fiscal year 2007, ending Nov. 30, according to a regulatory filing. It also had an equity prime-brokerage business, which JPMorgan lacked. JPMorgan declined to say how many Bear Stearns bankers are still at the firm.

Third-quarter profit at JPMorgan was $3.59 billion, compared with $3.19 billion at Goldman Sachs, the New York-based firm led by CEO Lloyd C. Blankfein, 55. JPMorgan is the second- largest U.S. bank by assets with $2.04 trillion, more than double Goldman Sachs’s $882 billion.

More than half of JPMorgan’s net income in the quarter, or $1.92 billion, came from its investment bank, headed until last month by Steven Black and William Winters. Both firms also posted revenue gains from trading, especially in fixed income.

“Although the company has certainly benefited from the strong trading environment, we believe that JPM has also taken considerable market share in investment banking throughout the crisis,” wrote John McDonald, a banking analyst at Sanford C. Bernstein & Co. in New York, in an Oct. 15 research note to investors.

‘Best Reputation’

Dimon, 53, has earned acclaim for managing the bank through the crisis, Villalon said. The lender has benefited from having fewer competitors, after Barclays Plc purchased Lehman Brothers Holdings Inc.’s North American investment bank last September and Charlotte, North Carolina-based Bank of America Corp. absorbed Merrill Lynch & Co. in January.

“They emerged from the financial crisis with probably the best reputation of any U.S. financial institution,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business. “You would expect them to come out of it a very attractive player, and you’d expect them to be hired by issuers.”

By deepening relationships with corporate clients, JPMorgan and Goldman Sachs may make it harder for other banks, including boutique advisory firms, to compete, said Matthew McCormick, a banking-industry analyst at Bahl & Gaynor Inc. in Cincinnati, which manages $2.5 billion.

‘Insurmountable Leads’

“They have captured share and will sustain a lead for a considerable period of time,” McCormick said. “It’s going to be very difficult for upstart or broad-based firms to come in and usurp what many believe are the insurmountable leads that Goldman and JPMorgan have over competitors.”

Morgan Stanley, which reports third-quarter results today, mustered $679 million in advisory revenue for the first half of the year. Bank of America’s fees from advising clients on deals in the first nine months were $807 million. Citigroup Inc. made $543 million in the first three quarters.

“What sets us apart is that we stay focused on our clients through all parts of the economic cycle,” Douglas Braunstein, head of investment banking in the Americas for JPMorgan, said in an e-mail.

Andrea Rachman, a spokeswoman for Goldman Sachs, declined to comment.

Fewer Deals

Wall Street firms are competing for fewer advisory and underwriting dollars, CreditSights Inc. analyst David Hendler wrote in an Oct. 15 research note to clients. The dollar volume of announced mergers and acquisitions this year through Oct. 15 was $1.24 trillion, 63 percent less than the same period in 2007, according to data compiled by Bloomberg.

JPMorgan has seen revenue from advisory fees increase relative to that of Goldman Sachs. In 2005, Goldman Sachs made $1.91 billion from advising on deals, 51 percent more than JPMorgan, data compiled by Bloomberg show. The firm led JPMorgan every year since, until now, when Goldman Sachs’s $1.22 billion in advisory fees for the first nine months trail those of its rival by $36 million.

JPMorgan also ranks first in the number of completed deals so far this year with 153, compared with Goldman Sachs’s 142, according to Bloomberg data. Goldman Sachs leads by dollar volume of completed transactions, while JPMorgan is No. 5.

The number of completed deals, the dollar volume of those deals and the advisory fees disclosed in quarterly reports don’t always correlate. There is no standard rate for advice, some merger work isn’t made public and banks often earn fees for deals that fall apart and aren’t counted as completed. While the rankings give credit to all named advisers, they don’t take into account that firms are paid different amounts for their work.

Embarq, Altria

Kurt Simon and Mark Solomons, investment bankers at JPMorgan, advised telephone-service provider Embarq Corp. on its $6 billion sale to CenturyTel Inc. in the third quarter, earning $20 million. A JPMorgan team including Charles Edelman and Thomas Cassin advised Altria Group Inc. on its $10 billion purchase of smokeless-tobacco maker UST Inc., sharing $40 million in fees with Goldman Sachs and Centerview Partners LP, according to an estimate by Freeman & Co.

Goldman Sachs dropped to No. 2 among advisers on M&A deals announced so far this year, behind Morgan Stanley, for the first time since 2000, according to data compiled by Bloomberg. JPMorgan ranks third. Some revenue from those deals won’t show up until future quarters.

Underwriting Fees

JPMorgan extended its advantage over Goldman Sachs selling debt and equity for corporate clients. In 2006, JPMorgan underwrote 27 percent more than Goldman Sachs, and it has widened the gap every year since. In the first three quarters of 2009, JPMorgan had $4.02 billion in underwriting revenue, 107 percent more than Goldman Sachs’s $1.94 billion.

Last month, Dimon shuffled top executives, naming asset management head Jes Staley as CEO of the investment bank, replacing Black and Winters. Black will remain as executive chairman until the end of next year, and Winters left the firm.

Investment-banking results also include income from trading for both clients and for the firm’s own account. JPMorgan’s investment bank had net revenue in the third quarter of $7.51 billion. Goldman Sachs reported that it pulled in $10 billion from trading and $899 million from underwriting and advisory in the quarter.

‘Die Is Cast’

Goldman Sachs made about $30 million advising the independent directors of biotechnology firm Genentech Inc. on the $46.8 billion sale in March to Swiss pharmaceutical company Roche Holding AG of the 44 percent of the shares it didn’t already own. Bankers were expected to earn a fee of $47 million for advising specialty-chemical manufacturer Rohm & Haas Co. on its $16.5 billion sale in April to Dow Chemical Co., Rohm & Haas said in a filing last year.

Pent-up demand will create the need for more financing and merger-related advice, according to Richard Bove, a banking analyst at Rochdale Securities LLC in Lutz, Florida.

“The opportunities in the capital markets arena may only grow,” Bove wrote in an Oct. 14 research note. “There is likely to be a surge in underwriting and merger and acquisition activity.”

The addition of Bear Stearns will give JPMorgan an advantage in investment banking in coming years, according Michael Holland, who oversees more than $4 billion at Holland & Co. in New York, including shares of JPMorgan.

“The die is cast in terms of the haves and have-nots in the business,” Holland said. “The perception is not going to disappear when things go back to a more normal situation.”

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