Why the Investment Banking Industry Will Be Happy

There's a lot of change in the economy still to come and, as I written before, I think there's going to be a huge amount of mergers and acquisitions (M&A) over the coming quarters. The investment banking industry will surely be pleased.

"The Wall Street Journal" reported that pharmaceutical giant Pfizer, Inc. (NYSE/PFE) has been talking to Wyeth (NYSE/WYE) about a potential acquisition. Wyeth is much smaller than Pfizer, but its current stock market capitalization is well over $50.0 billion.

The pharmaceutical industry is ripe for consolidation for two reasons: the availability of capital is scarce right now; and most of the big players in the industry face a lot of patent expirations over the next three years. Really, it's the patent expiration glut that will be the driver of consolidation in the pharmaceutical industry.

Credit is tight and the stock market is down, so raising money to expand in the current environment is more difficult. So, the answer is to merge with your rivals and consolidate your operations so you can better weather the economy and the patent expiration storm. If you're a large-cap pharmaceutical company and you can't grow your revenues, you might as well merge to get bigger and shed jobs to grow your earnings. It's a time-tested strategy that mostly works in all industries.

This trend will certainly help Wall Street, which, as an industry, is really in need of some new business. With capital markets around the world in turmoil, there are not as many fees coming into what's left of the investment banking industry. The shine has been taken off of Wall Street's shoes of late and, with the hedge fund industry also in turmoil, there isn't enough trading revenue to go around.

M&A will be Wall Street's savior over the next couple of years and this is good news for an industry that's been beaten up. It will also be good news for the consulting industry and, of course, it will be good news for the lawyers.

The only bad news about industry consolidation in pharmaceuticals is that we'll lose some solid dividend-paying companies and there will be less competition in the marketplace. Wall Street won't be the only beneficiary of new M&A activity. No doubt the antitrust folks in government will be getting busier.

Profit Confidential

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