David French and Anirban S

(Reuters.) – Companies face a constant dilemma. Do they purchase or lose businesses to improve shareholder returns. The answer is always a win for investment banks, regardless of whether it means a change in the company’s direction.

The announcements from last week by General Electric (NYSE:) Co, Toshiba (OTC:) Corp and Johnson & Johnson (NYSE:) of their plans to break up offer the latest examples of how some companies have spent hundreds of millions of dollars on investment banking fees to bulk up through acquisitions over the years, only to pay more fees to reverse them.

These banks were some of those that prepared these spin-offs. Goldman Sachs Group Inc (NYSE:), JPMorgan Chase & Co (NYSE:) and UBS Group AG (SIX:) – advised on previous acquisitions that took the companies in an opposite strategic direction.

UBS, JPMorgan, Goldman Sachs and JPMorgan did not respond when asked for comment.

The rise in corporate bankruptcy is due to Wall Street’s growing belief that businesses perform better if they focus on similar business areas. There has also been increasing pressure from activist hedge fund managers pushing for this direction.

According to Dealogic, 42 spinoffs totaling more than $200 billion were announced so far in 2018. This is up from 38 spinoffs that are estimated at $90 billion for 2020.

According to Dealogic, investment banks have earned more than $4.5 Billion in global spin-off advisory fees since 2011. Although this is only 2% of their overall deal fees, this is still a lucrative business. Banks have already earned nearly double the amount in 2020 from spin-off deals globally.

For an interactive graphic, click on this link: https://tmsnrt.rs/3cgKJ9M

In the case of GE, financial advisors including Evercore Inc, PJT Partners (NYSE:) Inc, Bank of America Corp (NYSE:) and Goldman Sachs each stand to collect tens of millions of dollars from their advisory roles on the company’s break-up, according to estimates from M&A lawyers and bankers.

According to Refinitiv, Goldman Sachs was GE’s most trusted advisor based upon the amount of fees it had collected in the past for advising them on acquisitions and divestitures.

Dealogic reports that Goldman Sachs, JPMorgan, and Lazard (NYSE:) Ltd have earned the highest fees for advising on corporate restructurings so far in 2021.

Investment banking fees can be secured, but the outcomes of deals for shareholders are not certain. The track record of shares held by companies who have engaged in acquisitions and divestments has been mixed. They often perform below peers during the last two year, according to Refinitiv.

INDEPENDENT ADVICE

Investment bankers are certain that there is no one right combination. A company can be pushed to change its course by changes in its competitive and technological landscapes or the behavior of its shareholders.

GE shareholders, for example, were supportive at first of the acquisitions it made in order to build an empire. These purchases included businesses like entertainment, credit cards, and healthcare. They also saw them as diversifying GE’s earnings stream. Investors lost confidence in GE’s ability manage disparate businesses after some of the businesses began to fail and GE’s value declined.

Many bankers also believe that companies prefer to pay banks for their services than to get advice about whether they should do the deal. It encourages bankers to seek out the best deal for their clients rather than clinching a transaction.

This also gives ammunition to Wall Street critics, who claim that banks cannot provide independent advice regarding whether companies should pursue a deal.

Nuno Fernandes from IESE Business School is a professor of finance. He said, “Companies should prepare valuations in-house with the help of unbiased third party advisers.