The Best Investment Banks ’07

In our exclusive, inaugural survey, corporations and private equity firms rank their underwriters and M&A advisers.

Financial markets have rarely been more volatile and unpredictable than they are today. Though some big transactions are making it to market, many more have been sidelined amid a worsening credit crunch and worries about an economic recession. Activity in the bond, loan and M&A markets, which surged to record levels earlier this year, is off substantially as lenders and investors alike, burned by the subprime mortgage crisis, shrink from risk-taking while nervous CEOs feel understandably queasy about doing big mergers. In the third quarter investment bank revenues for debt capital markets business plunged by nearly half; while merger advice revenues eased by 11 percent, according to New York research firm Dealogic.

Amid all this uncertainty, one thing remains paramount: corporate America’s demand for first-rate advice and execution for the transactions it does decide to take to the markets. Choosing whom to rely on for that help is more important than ever. But doing so is no easy task. Current methods to identify the best firms all have their limitations. Private surveys are just that — private — and hence are less transparent. The most public of comparisons, the league tables that rank investment banks by their volumes of activity, long the industry’s standard measuring devices, do not distinguish between difficult and easy deals or indicate, in the case of multiple book runners and advisers, who is doing what or how well they are doing it.

We at Institutional Investor thought we would take a different, and more basic, approach to measuring investment bank excellence. We decided to ask the folks who ought to know best — the banks’ clients. Focusing on the most senior of corporate executives — those in the so-called C-suite — we solicited opinions on which banks provide the most outstanding overall service, as well as which perform best in a number of product categories, such as IPOs, high-yield bonds and M&A. Altogether more than 350 CEOs, CFOs and other senior U.S. corporate executives, as well as professionals at private equity investment firms, responded.

In what some will surely see as a surprise given common perceptions, the best overall bank according to these survey voters is JPMorgan Chase & Co. Formed six years ago by a merger that combined the debt capital markets, derivatives expertise and cachet of J.P. Morgan & Co. with the syndicated lending prowess of Chase Manhattan Bank, the firm has spent much of the time since that megadeal hiring and developing talented investment bankers to complement its huge balance sheet. Once thought of primarily as a commercial lender that could also handle high-grade bond offerings, JPMorgan now has highly regarded franchises in a broad array of products, including equity underwriting and M&A, rounding out its long-standing strengths in debt markets. That enables the firm to capably cater to just about any need a client may have.

“We try to take an intellectual-capital, idea-driven, problem-solving approach to our clients,” explains Douglas Braunstein, JPMorgan’s head of Americas investment banking (see box, page 40).

Following in a strong second place is Goldman, Sachs & Co., the institution most widely thought of as the industry’s premier player. Goldman’s abundant strengths are clearly evident in this survey: It dominates the most lucrative and prestigious corners of investment banking, securing top marks from clients in IPO underwriting and advice to both buyers and sellers in M&A — all areas that involve the ironclad CEO relationships that Goldman owns in spades. The firm’s strength in these areas brings big profits and plenty of prestige, but clients’ impressions of Goldman’s overall capabilities surely reflect its lack of emphasis on the broader array of banking products, such as bonds and loans.

Third-place Citigroup, despite the troubles with mortgage and corporate credit market write-downs that cost CEO Charles Prince his job last month, boasts JPMorgan-like product breadth and stands out, according to our respondents, as the best bond underwriter in the business. Also the product of a big merger between an accomplished investment bank, the former Salomon Smith Barney, and a commercial banking powerhouse, Citicorp, the firm has been less successful than JPMorgan in one key area: merger advice. JPMorgan ranks third in providing advice to sellers, whereas Citi fails to crack the top three in either M&A category.

The investment banking arm of Zurich-based UBS, which finishes fourth in our best overall ranking, has been beset by internal turmoil since our polling ended in July. Early that month UBS chief executive Peter Wuffli was ousted after a series of subprime-mortgage-related losses at an internal hedge fund, which he had created by carving out much of the investment bank’s fixed-income operations two years earlier. Huw Jenkins, the investment banking unit’s CEO, soon followed Wuffli out the door. And several top rainmakers, including investment bank president Kenneth Moelis and global co-head Jeffrey McDermott, have left the firm in recent months. (For more on Goldman, Citi and UBS, see boxes on pages 42, 45 and 46.)

The results of our inaugural survey suggest that universal banks such as JPMorgan, Citi and UBS, so called because of their ability to provide everything from loans and cash management to stock underwriting and merger advice, continue to gain an advantage over the more narrowly focused, traditional investment banks that have long dominated the business. Such renowned bulge-bracket firms as Morgan Stanley, Merrill Lynch & Co., Lehman Brothers and Credit Suisse — the latter a bank, of course — fare worse in overall rankings than their reputations might suggest, even though they do excel in certain individual product lines.

Consider Morgan Stanley, long preeminent in merger advisory and equity underwriting, which finishes eighth overall. The firm’s white-shoe franchise suffered under the reign of former CEO Philip Purcell, who deemphasized risk-taking on behalf of clients, precisely as that activity became more crucial. More than two years after Purcell’s ouster, Morgan Stanley still appears to be struggling to regain its footing with clients, following the departures of senior rainmakers like Joseph Perella and Raymond McGuire, both of whom decamped during the unrest that preceded Purcell’s leaving. (Perella started boutique Perella Weinberg Partners; McGuire now co-heads global investment banking at Citi.) Morgan Stanley is the second-best adviser to companies selling themselves, according to survey voters, but it fails to penetrate the top three in any of the other product categories. (For product breakdowns see table on page 47.)

Seventh-place Merrill is judged as one of the best equity underwriters, finishing at No. 2 in secondary stock offerings and first in convertible securities, which are handled by the equity divisions of most banks. Its army of approximately 16,000 brokers, the nation’s biggest retail distribution network, surely helps it in these categories. Indeed, it wasn’t long ago that Merrill was the most prolific underwriter of all securities, including bonds, and considered a premier merger adviser. But under recently ousted CEO E. Stanley O’Neal, the firm pared back its reach, seeking out the most profitable business instead of trying to win every deal, while aggressively embracing proprietary risk-taking to boost earnings. In our survey Merrill fails to register among the top three merger advisers to either buyers or sellers, or among the elite underwriters of bonds of all stripes.

Overall, Morgan Stanley and Merrill rank behind fifth-place Bank of America, which, for all of CEO Kenneth Lewis’s recent pronouncements about having had his fill of the volatile investment banking business, rode solid performances in lending, securitization and investment-grade bond underwriting to its impressive finish. BofA did particularly well among voters at smaller companies, as did UBS and JPMorgan (see table, below left). Sixth-place Lehman Brothers posted a strong showing in stock underwriting and M&A, finishing second to Goldman in providing advice to buyers. Bear, Stearns & Co. and Credit Suisse, in the ninth and tenth spots, respectively, round out the top ten in the overall rankings.

To arrive at the rankings, we asked survey voters to identify the top firms in a number of areas — Best Overall and in a series of product-based categories. Respondents were instructed to consider their experience with investment banks during the previous 12 months when completing the questionnaire. Firms were assigned scores in each category, with votes weighted according to place — first-place votes in a given category were worth more than second-place votes, and so on. The results for each category were tabulated and are presented separately; the Best Overall rankings, in other words, are not an aggregation of the product rankings. (For additional details on the rankings you see in these pages, please go to

The results of our survey also differ markedly from the volume-based league tables in several areas. In M&A, for instance, Citigroup ranks third in the U.S. through the first nine months of 2007 when counting the number of deals in which it acted as an adviser, according to Dealogic. But Citi fails to crack the top three in either M&A category in our survey. Conversely, some firms do better when judged on quality than they do when stacked up according to quantity. UBS, for example, finishes third in our survey among advisers to buyers in M&A transactions but registers just ninth when ranked according to volume. Goldman was only the seventh-most-prolific U.S. IPO underwriter during the first nine months of the year but is judged first in quality by our voters. Citi, the top IPO underwriter by volume, is not among the top three in our survey. Merrill and Morgan Stanley, second and third in quantity of IPOs underwritten, respectively, fail to crack the top three in our survey.

In addition to soliciting opinions on the best overall banks and the leaders in various products, our survey asked clients what they value most in an investment bank and individual bankers. Their answers underscore the intangible, hard-to-quantify nature of investment banking, with “quality of relationship,” “consistency of coverage” and “industry knowledge” ranking one through three. “League table position” was dead last (for the complete list see table at right).

The corporate executives and private equity officials who spoke with us about what they want from banks and bankers, on the condition we wouldn’t reveal their identities, provide a variety of opinions, but all agree that it’s people who matter most.

“It all comes down to people and relationships,” says the CEO of a big telecommunications equipment company. “Who’s coming in to see you regularly, do they know what they’re talking about, and can you trust them? Some know the industry, and some don’t. You obviously don’t want to be dealing with the ones that don’t. Even if they’re nice guys, smart guys, you wind up wasting a lot of time trying to bring them up to speed on things.”

Some clients want to do business only with firms that can handle all of their needs, such as putting on currency or commodity-price hedges as part of an M&A deal. And they prefer to have one lead relationship, which can result in more-senior attention and even friendlier pricing, rather than constantly shopping around. Such an approach tends to favor universal banks like JPMorgan, Citi and UBS because they provide everything from loans to securities underwriting and M&A advice.

“I think the universal bank model is the model of the future,” says a senior private equity firm executive. “There are a few of them out there now that have the intellectual capital to match the balance sheet, and that’s really the ideal for firms like ours, and even for a lot of the corporates out there too.”

Other clients, especially the biggest public companies, maintain dedicated transaction teams — often staffed by former Wall Streeters — and thus tend to select advisers on a transaction-by-transaction basis instead of favoring one bank for most everything. Says one large-cap industrial CEO: “We have such good internal capability that we don’t need big, broad-based relationships. So we look for specific expertise in an industry and trust of a person. You get a good gut feel for a person, and you get a good gut feel for a firm’s capability, and you lean into those two things.”

And despite the efforts of reformers like onetime New York State attorney general Eliot Spitzer — who’s now battling an investigation into his own conduct as New York’s governor — research coverage remains an important drawing card for investment banking clients, meriting a score of 3.01 on a 1 to 5 scale among survey respondents, who rank it eighth out of 14 attributes. Following the bursting of the tech-stock bubble and investigations showing that some investment banks used their research departments to boost investor interest in poorly performing companies that were banking clients, Spitzer and other regulators instituted reforms to separate research from investment banking. But clients have not made a similar division in their minds.

“You’re not supposed to say this out loud,” says a veteran private equity hand, “but research is absolutely one of the top two or three things we consider in an IPO underwriter. You’re trying to maximize the return on your investment. Naturally, you’re going to want to go with the firm whose analyst gets the company’s story and has the ear of the buy side.”

NOW MORE THAN EVER, WITH MARKETS topsy-turvy, clients need quality advice about potential transactions and, once they decide to do a deal, flawless execution. But the changing market and economic conditions also will affect what clients want from bankers and how firms will approach the business in the future.

If history is any guide, the downturn could benefit universal banks, which can use their lending prowess to help troubled companies restructure debt and pounce on opportunities to build relationships with clients of rival firms. This happened after the 2000 bursting of the tech and telecom bubble. Companies turned to firms like JPMorgan and Citi to help them through tough spells, then repaid them with higher-margin business during happier times. After the two big banks led an emergency financing package in early 2001 for Lucent Technologies, for example, the telecom equipment maker made them co-advisers on the $2.75 billion sale of its fiber-optic business later that year. Also in 2001, JPMorgan and Citi agreed to waive a loan covenant for longtime Goldman client Motorola so that the cell phone maker could refinance maturing debt in a rocky market. In July 2004, when Motorola spun off its Freescale Semiconductor unit in a $1.6 billion IPO, Goldman shared book-running duties with the two big banks.

Some universal banks also took advantage of the postbubble decline of 2001–’03 to build while rivals were retrenching. As bulge-bracket investment banks laid off thousands, firms such as JPMorgan and UBS invested in talent and clearly are reaping the benefits today.

Our rankings, based on polling that took place from late January through mid-July, reflect the state of competition at the peak of one of the biggest deal booms in history. Now that boom already is giving way to a deal drought, as banks struggle to unload hundreds of billions in LBO loan commitments that investors began balking at during the summer and as CEOs shun risky, transformational acquisitions.

“It’s hard to see how 2008 isn’t going to be a tougher environment for corporate finance products,” says JPMorgan’s Braunstein.

David Solomon, Goldman’s co-head of investment banking, concurs. “The implications of the credit crunch to the U.S. economy could be meaningful,” he says, “and to the degree that the U.S. economy underperforms current expectations in 2008, I think it’ll have an impact on the investment banking business.”

This down cycle, however, might be different from the one that began in 2001, which was fueled largely by the collapse of an overinflated stock market. Today’s market turmoil stems primarily from a credit bubble, the bursting of which is making banks extraordinarily reluctant to lend. That could diminish any potential competitive advantage for universal banks over their more-focused rivals.

Regardless of exactly how things play out, the leading banks are busy positioning themselves now for the rougher road ahead. JPMorgan, for instance, is creating a joint venture between its commercial bankers and investment bankers to target middle-market M&A. The firm is betting not only that smaller companies may have a tougher time steering through a hurting economy, and therefore may be more likely to sell to bigger rivals, but also that big companies will be more apt during uncertain economic times to make small acquisitions than to engineer megamergers.

Goldman has worked hard to protect itself from a U.S. downturn by building out globally. “In the past few years, we’ve continued to expand our footprint of client relations, especially as markets we traditionally haven’t operated in have opened up,” says investment banking co-head Solomon. He points to recent Goldman-led deals such as ICICI Bank’s $4.9 billion secondary offering, India’s largest-ever public offering; the merger between Emirates Bank International and National Bank of Dubai, on which Goldman was lead adviser to a joint steering committee with representatives from both banks; as well as the firm’s joint venture with National Commercial Bank, Saudi Arabia’s largest lender, as examples of expansion into markets where Goldman had little or no representation just a few years earlier.

“Seven to ten years ago, we didn’t have an investment banking presence in the Middle East or Russia, and our presence was much smaller in China and Brazil,” Solomon explains. “We had only a joint venture relationship in India. As client businesses and entrepreneurs in these markets have started to look more broadly around the world for investment opportunities, we have expanded with them so that we can provide them with all the talent, resources and expertise we have at our disposal.”

Citigroup, too, is focused on helping non-U.S. clients achieve their goals. Michael Klein, co-CEO of the firm’s markets and banking unit, believes that chief among these will be buying U.S. companies.

“Acquisitions of U.S. companies by buyers in emerging-markets countries, and even European countries, will continue to be an important source of deal flow as we look to 2008 and beyond,” he says.

Perhaps the biggest concern for investment banks is keeping their highly talented, highly compensated professionals motivated in down markets, even as layoffs and other cutbacks begin to accelerate. Because the business is so dependent upon people and relationships, sagging morale and rainmaker defections can quickly cause firms to lose their elite status as well as their traction with clients. Keeping an edge, many banking executives say, means finding a way to cut costs while still rewarding the most-senior and productive bankers with attractive pay packages.

Looking ahead to what will almost certainly be a weaker deal environment, UBS joint global head of investment banking J. Richard Leaman III says the way to keep bankers motivated is “continuing to pay for performance and showing everyone from analysts to managing directors that we will continue to win market share. If you show people you’re doing that, you make them feel like they’re playing for a winning team, and they will want to come in and work hard.”

Additional reporting by Dan Freed.

JPMorgan’s long climb to the top

Through several mergers and many ups and downs, JPMorgan Chase & Co. has spent years trying to build a topflight investment bank. Now, clients say, it has arrived.

It has been six long years since Chase Manhattan Bank acquired the venerable J.P. Morgan & Co. in one of several turn-of-the-century megamergers designed to create financial services conglomerates to serve clients’ every need. During that time, the new firm’s leaders have overcome clashing cultures, integrated several more acquisitions and filled gaping holes in their product line to establish what companies responding to this magazine’s inaugural survey rank as the country’s leading investment bank overall.

JPMorgan Chase & Co.’s top billing arises from its strength across numerous products. Second-place Goldman, Sachs & Co., by contrast, is ranked first in more product categories but lacks depth in areas like bonds and loans, in which JPMorgan shines. Goldman fails to crack the top three in these categories. JPMorgan’s bankers, executives say, aim to distinguish themselves by providing advice to clients without hawking products that play to the firm’s strengths.

“We try to take an intellectual-capital, idea-driven, problem-solving approach to our clients,” explains Douglas Braunstein, head of Americas investment banking, “It’s really asking, ‘What are the things that are worrying you?’ and ‘How can we be helpful?’ as opposed to product-pushing.”

JPMorgan can afford to do that today because of the strides it has made since the 2001 Chase merger, which produced a firm with enormous strength in fixed income, derivatives and leveraged lending that lacked top-tier stock underwriting and M&A advisory capabilities. Since then it has built credible M&A and equity businesses, ranking third in our survey for advice to companies being acquired, for instance.

So far this year the bank has taken public 11 companies from the portfolios of private equity firms, deals that a few years ago it couldn’t touch; it’s also book runner for LBO shop Apollo Management’s much-anticipated debut stock offering, slated for next year. Buyout firms once relied on JPMorgan for debt financing to back their purchases but rarely hired the firm to underwrite IPOs.

“Five years ago we had done none of that work, and today we do more of that work than anyone else,” says Braunstein, a former Merrill Lynch & Co. health care banker who joined Chase in 1997. JPMorgan built its equities platform through new hires and by reassigning talented executives from other businesses.

Now, with deal activity slowing amid credit market woes and economic worries, JPMorgan is focusing on smaller companies that it believes will seek refuge from hard times by being acquired. It thinks big companies will avoid megamergers but still make smaller, less-risky acquisitions. Hence the firm is launching a joint venture between its investment banking and commercial banking divisions to leverage its rich lending relationships with smaller companies into higher-value investment banking business.

“A big area of focus for us will be our middle-market strategic advisory business,” says Braunstein. “We have a very unique position inasmuch as we’re one of the country’s largest commercial banks, and we have wonderful historical relationships with thousands of middle-market companies in the U.S. We are very focused on combining those relationships with world-class investment banking. That is going to be a very active market in 2008.” — Dan Freed

Goldman’s elite force

Advising CEOs and private equity kingpins on the country’s biggest IPOs and takeovers continues to be the bread and butter of Wall Street’s most prestigious investment bank.

Goldman, Sachs & Co. has long made cultivating CEO relationships the core of its investment banking strategy, and the success of that approach is evident in the firm’s showing in our survey. Respondents rank Goldman tops in advising both buyers and sellers in M&A transactions, as well as first in underwriting IPOs. Going public and merging are transactions that require the involvement of chief executives, who often delegate less-sensitive deals such as bond offerings and loans to CFOs and treasurers. They’re also the most prestigious and lucrative services provided by investment banks.

Goldman’s elite bankers, however, devote less time and energy to the other corners of the business. They fail to register in the top three in any of the four debt categories on which we surveyed clients — one reason, perhaps, that the firm finishes second behind JPMorgan Chase & Co. overall.

Goldman’s focus on high-end clients and high-end products is also evident in what large-capitalization companies say about it. The firm claims first place in the overall rankings when counting only the votes of the very biggest corporate clients, those that are part of the Standard & Poor’s 500 stock index.

“One of the hallmarks of our culture is the collaborative teamwork and effort that goes into working across businesses and across expertise to bring our clients as broad an array of skills as possible so they can really excel at whatever they want to do,” says David Solomon, who joined Goldman from Bear, Stearns & Co. in 1999 and now co-heads the firm’s investment banking division with John Weinberg. “That collaboration continues to be one of the strengths of our organization.”

Goldman’s success has led to criticism over alleged conflicts of interest that have arisen as it has become increasingly involved as a principal in a vast array of transactions. The classic case: Goldman’s multilayered involvement in the 2006 acquisition of Archipelago Holdings by the New York Stock Exchange. Goldman initially advised both buyer and seller, owned a piece of Archipelago, was a major NYSE seat holder through its Spear, Leeds & Kellogg trading unit and had an alumnus, former co-president John Thain, sitting as CEO at the Big Board. More recently it has played multiple roles in big-ticket LBOs, including the takeovers of electric utility TXU Corp. and technology concern First Data Corp., earning fees for advice and financing while also joining the consortia of its clients that bought these companies.

Goldman officials rebuff the notion that their principal activities compromise their ability to serve clients effectively.

Looking to the coming year, the firm is directing resources toward financial companies grappling with credit market woes.

“One of the trends you might see in 2008 is a significant amount of activity with financial institutions, given the mortgage crisis and its impact on financial assets all over the world,” says Solomon. — D.F.

Think globally, win locally

Citigroup’s strong international presence has helped it win cross-border deals reaching into the U.S.

As national and regional economies intertwine and cross-border consolidation and capital raising become the norm, taking care of big U.S. companies increasingly requires first-class globe-girdling capabilities. Few institutions of any kind can match the scale or ambition of Citigroup, which ranks third overall in our inaugural survey of the country’s top investment banks.

Voters ranked Citi first in both investment-grade and high-yield bond underwriting and third in syndicated loans.

For all its highly publicized problems linked to subprime mortgage losses and poor risk controls, which led to the resignation last month of CEO Charles Prince, Citi has intensified its efforts to keep U.S. companies and private equity firms happy by helping them deal with globalization and hiring staff to expand its foreign exchange, commodities and international capital markets businesses. Those capabilities allow Citi to ensure that multinational corporations can hedge their exposures to fluctuations in currency and raw materials prices, as well as tap the cheapest pools of capital globally.

“Over the past several years, we have invested very heavily in intellectual capital to expand our capabilities in helping our clients manage issues like currency volatility, commodity volatility and shifts in available funding,” says Michael Klein, co-CEO of the firm’s markets and banking unit, who last month tapped one of his clients, the Abu Dhabi Investment Authority, to provide a $7.5 billion capital injection for none other than Citi.

The bank also has been working to improve coordination and communication between its notoriously unwieldy and oft-fractious business lines, linking its 100 offices around the world so that investment bankers can work more closely with colleagues in other fields throughout Citi’s vast organization. “We’ve taken the view that growth is not just in BRIC countries,” explains Klein, referring to fast-growing Brazil, Russia, India and China, “but also in other emerging-markets countries, and our ability to provide a window on those markets to our clients is one of our major strategic advantages.”

That global reach helped Citi win some big cross-border deals in 2007. It advised NYSE Group in its $25 billion merger with Euronext, and counseled Saudi Basic Industries Corp. on its $11.6 billion purchase of GE Plastics.

And Citi relied on its traditional strength in fixed income during the recent debt-financing and leveraged-buyout booms. It both advised and financed Kohlberg Kravitz Roberts & Co. and TPG Capital on their $32 billion LBO of electric utility TXU Corp. — D.F.

UBS reaps the fruits of a steady build

Now a first-class adviser to U.S. companies, UBS wants more large-cap mandates.

For years UBS has struggled to make it in U.S. investment banking. It appears finally to have made some headway, as companies in our inaugural survey of the best investment banks rate the Swiss giant, best known for its superlative wealth management business, fourth overall.

The good news doesn’t come in time for Huw Jenkins, who had been leading the attack but lost his job as head of the firm’s investment banking unit in October after UBS wrote down $3.4 billion in fixed-income securities. That hit followed an initial round of subprime-mortgage-related losses at internal hedge fund Dillon Read Capital Management in May. Those problems aside, companies surveyed say UBS is strongest in M&A advice, high-yield bonds and syndicated loans.

UBS made its big push into the U.S. market in 2001, just as the technology bubble burst. The timing was a mixed blessing: Though there was little business, rival banks were slashing staff. “We started adding good talent at the same time the Street was cutting,” recalls J. Richard Leaman III, joint global head of investment banking for the Zurich-based institution. “It gave us a unique opportunity to put people in place who were able to execute on our strategy.”

UBS has built a particularly strong franchise with middle-market corporations. Counting only votes from companies that are not part of the Standard & Poor’s 500 index of large-capitalization companies, UBS ranks first among all investment banks for overall quality.

Still, the bank’s recent difficulties, which included internal tussling over how much to lend to clients, could prove detrimental over the long haul. Leading rainmaker Kenneth Moelis left as president of the investment bank in June — as our surveying was winding down — to set up a boutique advisory shop, taking some top bankers with him. No sooner did Moelis leave than one of his best clients, Hilton Hotels Corp., hired him as a co-adviser, alongside UBS, on its $26 billion sale to Blackstone Group.

Leaman insists UBS is still going strong.

“Our business is up more than 50 percent year-to-date from where it was last year at this time, and our backlog for 2008 is 50 percent higher than it was for 2007 at this point,” he says. “Having said that, Kenny is a great banker and he did a lot for this firm.”

Now the bank is after bigger game. In the coming year UBS plans to hire about a half dozen senior bankers to cover large-cap clients. — D.F.