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There would seem to be little in common between two of the past week's biggest deals – the $35-billion (U.S.) merger of two global advertising giants and the $2.5-billion takeover of a U.S. department store. Yet each of these seemingly very different transactions provides a useful window into the dynamics playing out in the new corporate finance landscape, where giant banks are facing off against boutique advisers.
Take the Publicis-Omnicom tie-up, the largest merger of the year. Two smaller firms, Rothschild and Moelis, scooped all the fees and bragging rights as advisers – a blow both to the bottom line and the egos of their larger rivals. What's more, the fees they will share – perhaps as high as $50-million according to Thomson Reuters/Freeman Consulting – required no capital or risk-taking. It's a stark reminder that size is no barrier when it comes to proffering advice.
Wall Street's behemoths aren't going hungry, though. Consider the potentially bigger payday on another deal unveiled this week, the takeover by Hudson's Bay Co.of Saks Inc. . The M&A tab may be less than half that of the ad merger. And it has to be shared, though not equally, among BofA Merrill Lynch and Royal Bank of Canada for Hudson's Bay; and Morgan Stanley, Goldman Sachs and Guggenheim Securities for Saks.
But juicy morsels unavailable to most boutiques will come from financing the arrangement. To pay for Saks, Hudson's Bay is raising $1-billion of common stock, $400-million of high-yield debt and borrowing $1.9-billion from banks. Factoring in fees of around 3 per cent for the equity, 2 per cent for the bonds and 1 per cent for the loans would yield around $57-million to share around – with BofA and RBC in pole position.
Smaller advisory firms portray their lack of financing activities as a virtue, saying it removes conflicts of interest from undermining advice given to clients. But as boutiques expand their market share, and the confidence of companies and their boards grows, it won't be long before they seek other ways to grow their businesses. Bankers, even boutique ones, aren't accustomed to walking away from money on the table.