The nuclear crisis in Japan, along with the continuing violence in the Middle East and North Africa, are causing investors worldwide to re-evaluate their perception of the global economy. The CBOE Volatility Index, the VIX, has spiked above 29, after being below 19 at the end of February. As fear continues to spread and uncertainty continues to rise, many business leaders may put plans for M&A on hold, and they are already delaying planned IPOs. This slowdown in capital markets activity is a stark contrast to the strength seen up until this point. This will negatively impact the investment banks, denying them lucrative fees from M&A and IPO activity until the markets stabilize.
The IPO market had seen an acceleration of business this year, helped in part by large private equity backed offerings earlier in the year from Nielsen (NLSN), Kinder Morgan (KMI), and HCA Holdings (HCA). Each company was able to raise billions for their private equity backers, and thus far in 2011 IPOs from PE firms have raised $10.86 billion, compared to $15.21 billion for all of 2010. On Friday Reuters reported that investment banking fees from IPOs totaled $533 million dollars this year, more than 4 times last year's totals in the same period. That makes the first 2.5 months of 2011 the highest grossing year for IPO fees since 2005. But things have changed since Japan's series of disasters.
Apollo, the private equity firm, has delayed its $500 million IPO due to uncertain market conditions, and plans to wait for a more stable market before selling shares. The IPO of Glencore, which could have been worth as much as $10 billion in a duel listing in London and Hong Kong, is also facing uncertainty due to market volatility. And in France, Lagardere cited the disaster in Japan and market volatility when it postponed plans for its IPO of Canal Plus France, which could have raised between $1.54 and $2.6 billion. A planned $3 billion Hong Kong IPO by Resourcehouse of Australia has also been postponed, once again blaming shaky market conditions for the delay. Clearly the IPO markets are being slowed by events in Japan, and markets will likely remain slowed until there is resolution to the crisis. While these deals will still get done at a later point in time, the postponement of these fees for investment banks could lower earnings near-term, while pushing earnings higher later in the year.
Merger activity is also affected by the volatility, although it is much harder to measure the effect compared to IPOs. The volatility causes uncertainty in the minds of CEOs and boards, making it less likely for them to risk doing acquisitions. Damage to manufacturing facilities for tech companies and questions about the direction oil prices are heading may force CEOs to look inward, rather than at acquisitions, as they plan for the future. Bloomberg reported last week that the co-head of Morgan Stanley's (MS) natural resources investment banking department cited low price volatility as helping drive the boom in the resources sector. GIven the whipsawing the market has done in the last 5 trading days, companies may slow down the rate of activity, until there is more clarity in the market regarding how the situation in Japan will play out.
While the increased volatility may help or hurt trading profits at the investment banks, it is clearly hurting IPO fees and possibly slowing M&A activity and the related fees. While this does not change the long term prospects for the industry, it could provide a hiccup going into the end of the first quarter. Should the crisis in Japan and the violence in Libya be resolved in the next few weeks, much of this activity being delayed now could work its way into the second quarter of 2011, boosting those numbers. Barring an escalation of either situation, the banks and investment banks will continue to perform as the capital markets heal. The first quarter may be a little weaker than was expected 10 days ago, but expect the delayed activity to occur in Q2.