By: Caroline Humer

December 5, 2004, Reuters

NEW YORK (Reuters) - Investment banks are in the midst of the annual fight for bragging rights as the biggest dealmakers of the year, but this time the rankings -- a key factor in winning new business -- are under intense scrutiny.

In one big deal this year, for example, a financial services company acted as its own adviser. In other transactions, it wasn't clear which banks deserved the credit for making them happen.

Questions like these are paving the way for the introduction of measuring success by the merger and acquisition fees banks generate, not the size of their deals.

``That would be a prime indication of real importance in the M&A area,'' said Samuel Hayes, finance professor at Harvard Business School. ``I always say: 'Follow the money.'''

For years, banks have used the rankings by deal size as a marketing tool to try to convince customers to hire them.

But some critics question the rankings, saying they sometimes include deals where the advisers have done little or no work, but received banking credit in exchange for other business. For instance, it recently looked like Citigroup might gain credit for advising on Kmart Holdings Corp.'s (KMRT) planned acquisition of Sears, Roebuck & Co. (S) for $11 billion, even though The Wall Street Journal reported that it was added onto the deal after it was announced.

However, Thomson Financial and Dealogic, which put out the rankings known as league tables, said this week they would not give Citigroup credit for the transaction because the company didn't show that it had done the work.

Critics are also raising their eyebrows over the year's biggest deal, J.P. Morgan Chase & Co.'s (JPM) $58 billion acquisition of Bank One. The issue? The adviser was J.P. Morgan's own team of bankers.

Also included in Thomson Financial's rankings are plans by Royal Dutch/Shell Group to move to a single corporate structure from dual ownership, which critics say should not count. Four investment banks -- Rothschild, Citigroup, ABN Amro and Deutsche Bank -- had advisory roles in that deal.

But Dealogic will exclude the Shell unification from its tables because it does not consider such corporate restructurings as M&A work.

In addition, a takeover battle for Japanese bank UJF Holdings is complicated because Mitsubishi Tokyo Financial Group did not disclose the terms of its bid, while hostile suitor Sumitomo Mitsui Financial Group has offered $29 billion.

Dealogic and Thomson defend the league tables as reflecting the wishes of their clients, the banks. Both firms meet with the banks at the beginning of each year to discuss any changes to the criteria.

Wall Streeters have been coping with the tables' shortcomings for about two decades.

``I think the tables are intellectually bankrupt,'' said Sagent Advisors founder Hal Ritch, who previously helped oversee mergers and acquisitions at Citigroup.

``They were proxies for real market share back when many of the firms were private,'' Ritch said. ``But now most of the revenue market share data is public, and it's really kind of silly.''

Thomson Financial and Dealogic say changes are in the works. At the end of the year, Dealogic will publish tables based not only on the value of the deal, but also on the estimated fees the investment banks collect from them, according to Carlos Penalba, head of U.S. mergers and acquisitions analysis.

And while Thomson Financial has met resistance from its clients -- the investment banks that pay to be included in the rankings and receive the company's analysis -- it expects to produce fee-based analysis in the future, Research Director Mary Burke said.

That does not mean that the end of the league tables in their current form. Burke expects fee-based information to supplement, rather than replace, the deal-value charts.

But neither method gets at the real issue, according to Thomas Lys, mergers and acquisitions professor of Northwestern University's Kellogg School of Management.

"I would like to know who does the best deals,'' Lys said. "Who cares how many deals you did if they are all bad?''

For instance, Lys said, America Online's acquisition of Time Warner -- the world's biggest merger -- also proved to be one of the worst in history. But deal, worth $164 billion in stock, brought substantial credit to the banks advising on it.

Instead of the financial value of the deals, Lys said, banks should be measured by how investors react to the transactions, whether an acquisition is divested again and how long the integration takes.

Over time, the tables do show a consistency in the banks that are ranked near the top, although every system has its own problems, said Morton Pierce, head of mergers and acquisitions at law firm Dewey Ballantine.

``If I go by the size of deal, a deal may be aberrational,'' Pierce said. ``If I go by the number of deals, maybe someone who churns out high volume of low-value deals may somehow benefit.

``I don't know that there's a perfect system.''