In the current flurry of deal making, the hottest commodity is old-fashioned advice.
As mergers and acquisitions roar back to life around the world, smaller firms that specialize in counselling executives on how to strike a deal are flourishing.
Unlike major banks, these “boutique” investment banks aren’t facing intense regulatory scrutiny or pressures to raise capital. Their business – advising on deals in exchange for fees – doesn’t require an enormous balance sheet or elaborate infrastructure.
Since the financial crisis in 2008, such firms have doubled their market share of U.S. merger-and-acquisition revenues, to 16 per cent from 8 per cent, according to data provider Dealogic. The boutique banks are benefiting from an appetite for conflict-free advice and a steady migration of talent away from larger banks.
“Our brands are getting better known and theirs have been damaged” in the wake of the crisis, said Scott Bok, chief executive of Greenhill & Co., a boutique investment bank. “The only thing we do is advice. [Clients] don’t have to worry, ‘Is there any hidden motive here?’”
The desire for expertise is so strong that some seasoned deal-makers are plying their trade with little more than a desk and a phone. In February, for example, Comcast Corp. announced a blockbuster merger with Time Warner Cable Inc. for $45-billion (U.S.). One of the deal’s advisers was PJT Capital LLC – a firm that consisted solely of Paul J. Taubman, a former senior banker at Morgan Stanley.
Meanwhile, in Europe, two brothers – Michael and Yoel Zaoui, veterans of Morgan Stanley and Goldman Sachs, respectively – opened their own advisory firm last fall. Since then, their 10-person outfit has worked on some of the region’s biggest transactions, including the $50-billion merger of France’s Lafarge SA and Holcim Ltd. of Switzerland.
These embryonic firms – which some have dubbed “kiosks” rather than “boutiques” for their small size – are launching into the best market for deals since prior to the financial crisis. This year’s crop of global mergers and acquisitions, worth $1.6-trillion, is 41 per cent larger than the same period last year, according to Dealogic.
Boutique investment banks are “uniquely positioned to benefit from this point in the cycle,” wrote Brad Hintz, a senior analyst at Sanford C. Bernstein & Co. in a note earlier this month. Such firms “are also benefiting from a secular shift toward independent advice.”
Boutique investment banks come in different stripes. Some are large, some are tiny; some are publicly traded and others are privately held; some focus on a particular industry while others are generalists. They include firms such as Lazard Ltd., Centerview Partners LLC, Allen & Co., Perella Weinberg Partners LP, Evercore Partners Inc. and Moelis & Co.
During previous waves of deal-making activity – in the technology boom, for example, or in the pre-crisis credit bubble – large blue-chip banks had an upper hand. Their ability to sell shares or provide an exotic form of financing played a role in winning advisory business. That’s much less true today.
“Right now, the central qualities are, what is your judgment, and what is your ability to get it done if it makes sense to do it,” said Antonio Weiss, global head of investment banking at Lazard.
Some companies may be wary of the leviathan-like structure of today’s megabanks, which offer a large number of services but also carry various possible conflicts.
“These big banks are driven by their big balance sheets and getting a return on the balance sheet. They’re big, complicated places that need to cross sell products to make their businesses work,” said Mr. Bok of Greenhill. “People have really woken up to it. They see the problem we’re solving.”
Another factor driving demand for boutique services consists of executives and boards of directors who want to make sure they’re not rushing into major transactions. Hiring an independent adviser or two, even to provide an additional opinion, is a form of precaution.
In some ways, the boutique firms are a throwback to what companies such as Goldman Sachs and Morgan Stanley used to be, before they turned their focus to market making and proprietary trading. While those big-name firms remain M&A powerhouses, such fees are a small proportion of their overall revenues.
“The art of being an adviser has been devalued at those places,” said one executive at a prominent boutique firm. But he also noted that the growth potential of boutiques may be limited, because their product relies on a finite resource – talented bankers.
Meanwhile, the contest for business remains fierce. “There has been a certain amount of turmoil that has reshuffled things, but we still have good competition to the left and the right,” said Mr. Weiss of Lazard.