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It may be comforting to reflect that disruption is not always harmful.
The reputations of the global investment banks as trusted advisers to their clients were largely shredded by the financial crisis and the subsequent misdeeds that came to light. A generation of top bankers quit the big firms, opened their own small, independent advisory outfits and set out to garner for themselves the advisory revenues they once brought to the big banking dinosaurs. There have always been boutiques, but in recent times they have multiplied and thrived. Much longer-established and larger independent firms such as Lazard and Rothschild have thrived too.
Take a look at the M&A adviser revenue ranking in the US, the biggest M&A market, for 2015, when a rush of very large, strategic deals broke out. The boutiques and large independent firms took home 20% of that revenue. That’s roughly double their average market share in the years before the crisis. Look at the global adviser ranking as measured by volume of announced M&A deals last year. Of the top 15 global advisers, six are boutiques or independent firms. In the US they make up half the top 20.
The market appears to be splitting. On the morning in June when news of Microsoft’s $26.2 billion all-cash bid for LinkedIn broke, Euromoney was sitting with the chief executive of the bulge bracket investment bank that is exclusive adviser to Microsoft. We didn’t tell James Gorman that the most eye-catching thing about the deal was the advisers on the other side: Frank Quattrone’s boutique Qatalyst Partners, and Allen & Co.
This does not look terribly comfortable for the established order.
But speak to senior M&A bankers at the biggest firms and the unacknowledged truth is that they are quietly pleased. The emergence of new independent competitors has boosted margins. In previous M&A booms, such as that driven by leveraged finance before the crisis, whenever headline deal values grew, companies clamped down on advisory fees as a percentage. This time, not so much. “You’re asking me if the economics of the M&A business have deteriorated?” says the head of investment banking at another bulge-bracket firm. “No actually, it’s gotten a little better.”
He explains: “A benefit to us of the growth of advisory boutiques and the independent firms is that they have led clients to reassess the value of strategic advice, and clients are actually prepared to pay more for it.”
Disruption isn’t always harmful to the established players. Sometimes it helps them to focus on what they are actually good at.
The independent firms, especially the privately owned ones, talk a lot about paying well for talented advisers in lean years, as well as in good, by retaining earnings in M&A booms. That doesn’t work as easily at publicly owned companies with rules against earnings smoothing, shareholders baying for payouts and analysts crawling over the cost-to-income ratios.
So, if fewer of the universal banks can compete on pay and job satisfaction for top advisers with the independents, that’s no bad thing if they were only ever there as expensive marketing for the finance and hedging banks are actually good at.
“We can confidently advise bidders on the banking and capital markets capacity to fund strategic deals,” he says. “That helps them to keep deals confidential. It also helps them negotiate good terms.”
Precisely how good, Euromoney wonders?
“Well look, these deals don’t go away because of 50 basis points here or there on the financing,” he admits.
No wonder the bulge bracket firms aren’t unduly worried about advice like that on takeover financings coming in at several tens of billions of dollars a time.
Self-awareness remains elusive
Euromoney always loves talking over contested M&A deals with investment bankers. One regales us with his latest war story. “I have to say, the adviser on the other side was incredibly aggressive,” he says. “I can’t say I’m surprised because they don’t lead with intellectual capital and they don’t really have many good M&A bankers. We saw them kicked off another deal recently because of mishandling a conflict. But I was disappointed that they should rely on personal attacks instead of the numbers and investment thesis. We would never just slag off the competition like that.”
“No we wouldn’t,” his second-in-command confirms. “That kind of behaviour is just not part of this firm’s culture.”
Long may it remain so.