Something’s stirring in the markets — and it’s good news for shareholders in Barclays (LSE: BARC) (NYSE: BCS.US), whose investment banking operation should directly benefit.
New issues
After a dearth of new issues, the market in IPOs has sprung into life. About £4bn has been raised so far this year on the London Stock Exchange, but companies worth a total of about £40bn are likely to come to market in the next 12 months, according to research by the Sunday Times. Apart from privatisations such as Royal Mail and Lloyds Banking (LSE: LLOY) (NYSE:LYG.US), Foxtons, Zoopla, DFS and House of Fraser are said to be looking at listing. Across the pond, Twitter will join Facebook on the public markets, and Hilton’s private equity owners are set to cash in. It’s a sure sign of increasing confidence.
M&A
There are indications that the M&A markets are coming back to life, too. The telecoms sector is leading the way with Liberty Global‘s acquisition of Virgin Media, Vodafone‘s deals, and Microsoft‘s purchase of Nokia. FTSE 100 firms have £166bn of cash idling on their balance sheets, a third more than five years ago. If just some of that went into M&A activity, investment bankers could be very busy.
That’s positive for Barclays, which has the biggest investment banking operation in the UK sector. Though fixed income business is its specialism — and that’s been suffering from lower volumes — it identified equity capital markets and advisory as two growth areas, and it has a significant presence in the UK and US, which are where the big fees are made. If these two trends point to a turning of the cycle in investment banking, then it will be a vindication of Barclays’ decision to buy Lehman’s US assets in the financial crash.
Rights issue
This could be a timely uptick just as Barclays is getting its house in order. Its cost-cutting programme is on track and the rights issue should remove any further fears over capital adequacy.
Contrast this to Lloyds, which is enjoying positive momentum buoyed by a strengthening economy, the rapidly inflating housing market and its progressive privatisation. That trend will likely continue for some time, but ultimately the bank has limited growth prospects and will face increasing competition from its own-spawned TSB, RBS’s spin-off, and other new entrants.
Barclays’ shares have now gone ‘ex-rights’ and are trading at 281p, around the theoretical ex-rights price. I calculate the price-to-book ratio for Barclays will be 0.7 after the rights issue is paid up — much cheaper than Lloyds’ 1.2.