On Wall Street: Look under the table

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There's little investment bankers like more than a good spat over league table rankings. Though they profess to pay them little attention, it is remarkable how hot and bothered they can get when they think a rival is wrongly getting credit for a deal.

The latest wrangle concerns Shell's move to merge its British and Dutch holding companies. Thomson Financial, one of the companies that compiles rankings of investment banking business, decided to award $80bn of credit in its mergers and acquisitions league table to the four banks working on the restructuring, Citigroup, Deutsche Bank, ABN Amro and Rothschild.

The decision made Shell's overhaul the largest M&A transaction of the year to date and transformed Thomson's rankings - catapulting Rothschild to the top in Europe and pushing Citigroup to second place globally.

Thomson's move was controversial partly because its rival Dealogic did not recognise the restructuring as an M&A transaction as it deemed there would be no “change of economic interest”.

Dealogic seems to have a point. Shell's restructuring is hardly a normal M&A deal. The stakes are not quite as high as for a $80bn acquisition and, presumably, the fees will be lower too.

Such discrepancies between the league tables may be irritating for analysts and journalists but, despite the huffing and puffing, the banks themselves, who pay for the tables to be compiled, tend to be more relaxed.

The banks use the data in marketing to potential clients and if one table doesn't show their performance in such a good light they can always chose the other that does. They frequently adjust the data themselves anyway.

But the discrepancies should remind clients that they need to be careful interpreting the tables. The most closely watched M&A league tables rank advisers according to the value of deals they have worked on. These give only a very rough impression of what the client is really interested in - which banks have been chosen for the biggest, most important, most difficult and most successful deals.

The league tables according to value give more credit to a bank that did little work on a very straightforward large deal than the bank that did a great job on a much tougher but smaller transaction where it got the client a much better than expected price. Some banks have become adept at persuading companies to name them as advisers on a deal on which they did little work merely to get league table credit.

In theory a better guide for potential clients would be the fees that the banks earn from transactions, since this should give a more accurate view of the value companies have placed on their advice.

Unfortunately, only the broadest figures for fees are disclosed by companies and the banks' shares are increasingly difficult to estimate. Thomson does not even try.

With other investment banking league tables, for equity and bond underwriting for example, the value rankings are less misleading and fees easier to estimate.

In the past it was easier to have a decent stab at M&A fees based on the size and nature of a deal. But fee scales have become much more flexible and the proliferation of advisers on a single deal makes it very tough to estimate how the cake is divided.

The market leaders, Goldman Sachs and Morgan Stanley, say the fee tables tend to understate their ranking because data collectors underestimate the premium they can charge for their reputation. But the banks are not about to start disclosing their fees which they say are highly commercially sensitive.

Journalists and analysts would love it if the companies were forced to disclose M&A fees and Wall Street critics sometimes argue it would put pressure on what they see as investment banks' exorbitant charges. But most shareholders would probably agree with managements that paying $20m or $30m for top advice on a $30bn deal is neither here nor there. And it is not clear why companies should disclose their M&A fees and not, say, how much they pay the people who water the plants.

So spats over individual deals will continue and the banks will continue to downplay the significance of league tables. But, when they do well, the banks will continue to plaster the results over their quarterly earnings reports.

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