Wall Street’s coming out on top in the latest slate of corporate divorces. A week for high-profile breakups with Johnson & Johnson’s split and General Electric Co.’s separation raises the likelihood of similar deals on the horizon and promises to generate even more fees for investment banks, including Goldman Sachs Group Inc. and JPMorgan Chase & Co. A flurry of splits stands to beef up an M&A market under threat by tighter regulations, further pressing executives to make a splashy move.
“You’re seeing some companies choosing to get bigger to create scale and others trying to become more focused and play to their strengths,” said Jason Goldberg, a bank analyst at Barclays Plc. “Both strategies have their merits and it’s kind of a company-specific situation, but to sit there and do nothing is no longer an option.”
Wall Street banks have reaped the gains of a record-breaking year for global dealmaking, with Goldman reporting all-time high advisory revenue in the third quarter. Now, corporate reshapings stand to benefit firms such as Goldman, JPMorgan and Bank of America Corp., as well as Evercore Inc. and PJT Partners Inc.
The breakups are “another sign that this M&A cycle could still have legs to run on,” said Jeff Harte, an analyst at Piper Sandler Cos. “Not only does it create some transactions that investment banks can get involved in and generate some fees, but it also suggests a market where it’s not so much a real frothy bidding-up of assets.”
The division of larger companies creates smaller firms that can be part of later deals, Marco Caggiano, the co-head of North America M&A at JPMorgan, said in an interview.
“When big conglomerates break up, it opens up the pathway to M&A for the smaller, more-focused businesses,” Caggiano said. “As a pure play, you can be a more attractive target, merger partner and acquirer of other companies in the sector.”
Some corporations seeking to get bigger could face a hurdle from U.S. President Joe Biden’s administration, which is pushing to crack down on anti-competitive deals. Companies often need a big move — rather than just a business-plan execution — to jump-start the stock price these days. The shadow of tighter regulation has left some firms thinking about how they can simplify through separations, then pile on with more acquisitions later.
Both GE and J&J had their own specific motives for the splits. GE’s sprawling conglomerate has been struggling for years with issues at its financial-services arm and power business, and Chief Executive Officer Larry Culp has announced a plan to separate the firm into three businesses: health care, energy and aviation.
J&J, which is splitting its drug and consumer units, has considered a breakup for years, CEO Alex Gorsky said. Covid-19 also played a role as digitalization efforts and e-commerce were magnified amid the shutdowns. Gorsky said that the pandemic brought about a “fundamental change” in how consumers think about personal care.
Over the past five years, both companies have lagged the S&P 500 Index. GE stock has fallen 54% in that period and J&J is up 39%, compared with the 116% surge by the S&P 500 Index.
For now, investment banks are enjoying the ripple effects of the M&A boom. After disclosing its breakup plans, GE announced a tender offer to buy back as much as $23 billion of bonds, with firms including BofA and JPMorgan working on that deal.
“M&A is, to some extent, an engine that, when strong, it can help drive the revenues across an investment bank’s franchise,” Piper Sandlers’ Harte said. “The big question facing investment banks, but specifically the M&A business, is — are they due for an encore?”