“Sorry, we’re not selling it this month, maybe next,” quips John Herrmann, head of investment banking boutique The Bridgeford Group, as he comes to the telephone, aware only that Euromoney is calling to discuss boutiques.

His reaction typifies the current excitement surrounding investment banking boutiques in New York. What used to be dismissed as vanity shops for dealmakers who disliked being accountable to management committees have acquired respect. Two of the better-known firms, Gleacher & Co and Wolfensohn Inc, sold themselves within the last year for sums which woke the investment banking world with a jolt. NatWest Markets North America, part of the UK-based National Westminster Bank, paid $135 million to have Eric Gleacher and a dozen of his associates join the company in October 1995, while Bankers Trust announced in May that it was paying $210 million for the 55 professionals at Wolfensohn.

The excitement is over who will be next. Foreign banks are circling. Boutique owners are acting coy. The dining room of the Four Seasons hotel on New York’s 57^th Street is a prandial casting couch. Everybody is having lunch.

Herrmann is a step removed from the courtship. He founded his boutique with $50 million of capital from the Industrial Bank of Japan in 1990, giving the Japanese concern ownership of Bridgeford. That has not stopped four or five institutions approaching him about a business combination. But does the loss of independence for some of the leading boutiques mean the concept is waning? Not at all says Herrmann: “It just shows how valuable these things are.”

Boutiques thrive because advisory mandates are won on the back of relationships, not products. That they have become a more visible part of the investment banking landscape over the last five or six years is mainly due to the M&A cycle. Dealmakers at bulge bracket firms were able to build up enough transaction experience and personal credibility during the last merger wave to leave their employers and take their clients with them. That left chief executives with a choice between institutions with analytical firepower or individuals they knew and whose judgement they trusted. Says Peter Solomon, who set up the firm which bears his name in 1989: “It’s hard for a CEO to call up even the best 40-year-old partner at Morgan Stanley and say I want to approach this company. He doesn’t know that CEO. He doesn’t have the access.”

A common misconception is that the boutiques serve middle-market companies which cannot afford the services of the bulge-bracket banks. While that may be true for regional firms, the New York boutiques boast impressive Fortune 100 names in their client lists. “It’s like retailing,” says Bruce Wasserstein, who co-founded what has become the largest of these operations, Wasserstein Perella & Co: “There is always a spot for premium-level attention.” Solomon puts it differently: “We walk the dogs, we wash the windows and we do weekends. We provide old-fashioned investment banking.”

That dedication may lead to mandates, but larger firms are rarely excluded. Most of the companies hiring boutiques as idea shops will also be in search of underwriting strength or spreadsheet processing power. “We’re not displacing someone, we’re adding another dimension,” claims David Offensend, a partner at Evercore Partners in New York, the firm founded by former US deputy treasury secretary Roger Altman. Three of Evercore’s clients employ JP Morgan, Goldman Sachs and Lehman Brothers on Evercore assignments.

Whether sharing fee income or not, the economics of boutiques is compelling. A firm earning $50 million in revenue would probably have employee, occupancy and communications costs of around $10 million. If, as could typically be the case, the firm had five partners, they are left with $8 million each at the end of the year.

But if the numbers are so attractive, why would boutiques trade their independence?

First, because the numbers offered by acquirers are even more attractive. On the day last October that NatWest announced it was paying $135 million for Gleacher & Co ­ over $4 million for every partner, secretary and junior analyst in the building ­ Euromoney happened to be interviewing dealmakers at some of the other boutiques, all of whom found it difficult to contain their excitement about the valuations the deal implied for their own firms. Peter Hall, chief executive of NatWest Markets North America, has drawn a lot of criticism over the price: “People who speculate that we’ve paid too much for the business simply don’t know how profitable it is,” he responds.

Other reasons to sell, according to those at boutiques, include the frustrations that are the downside of life at a small firm. According to Paul Volcker, former chairman of the Federal Reserve Bank who served as chairman of Wolfensohn Inc: “There is a natural tension. A boutique implies a certain limited size. That puts constraints on growth. There’s no doubt that tension existed at our firm.” Around 40% of the deals Wolfensohn worked on had a non-US element, but a boutique trying to expand into Europe and Asia needs capital, both human and financial.

The focus that boutiques brag about is also a handicap, in that having advised a firm to raise capital, most boutiques are not in a position to assist. Solomon, for example, claims he is a net recommender of business to other Wall Street firms. To rainmakers it is galling to see fee income disappear because their boutiques cannot handle underwritings or bridging loans. Says Solomon: “I estimate for every dollar of business I generate I am unable to take advantage of another dollar of business. I just gave a $2 million fee to First Boston to do a bridge financing.”

Dealmakers who are worth the large sums being paid are unlikely to surrender independence lightly. In the wake of Bankers Trust’s acquisition of Wolfensohn, nine of the boutique’s partners are joining the bank’s partnership, an entity for the top managing directors, while Volcker will serve on the main board. Of the nine partners, three will join Bankers Trust’s management committee. Says one of those three, Glen Lewy: “I don’t think it would have appealed to us to have been a box in the lower left-hand corner of somebody’s organizational chart.” In the Gleacher transaction, Eric Gleacher became chairman of NatWest Markets North America, serving alongside CEO Peter Hall.

Some commentators warn against trying to extrapolate a trend from the two deals seen to date. “There are idiosyncratic phenomena involved in each of those,” says one boutique founder, who prefers not to be identified. “The first is that Jim left and, though Wolfensohn is an excellent firm, Jim’s involvement in it was extremely important. He was the dominant rainmaker.” James Wolfensohn left the firm he founded to take on the presidency of the World Bank in 1995. The implication that the boutique had to seek a combination because Wolfensohn had left is flatly rejected by partners at the firm. “We were not shopping the company,” says Volcker. “But I’m not saying we were never approached by other companies.”

The second phenomenon the source notes is that the Gleacher boutique had by far its best year immediately prior to the sale, increasing the valuation range a potential acquirer would have to pay. “If you were ever going to do anything like that, doing it in a hot M&A market off a high [earnings figure] is a good time to do it and Eric is a smart guy,” he says. Gleacher counters: “In the first six months that we were together with NatWest we did more business than we did in any year of our independent existence.” He cites the addition of a financing capability as the reason.

A need for relationships

More important than any desire on the part of owners to sell has been the interest shown by acquirers. But why are the deals happening now? “The banks haven’t solved the M&A problem well,” says Solomon. “The foreign underwriters haven’t done it at all.” Non-US institutions have long recognized that for talk of a global presence to be meaningful they need to have a US investment banking capability. A lack of credibility in merger and advisory services can often hand not only the merger mandate but also underwriting and other fees to a rival institution. And in an era when banks are trying to cement long-term relationships with companies, advisory links to the CEO are worth more than links a commercial bank’s relationship manager has to the CFO or treasurer.

While the theory has been understood for some time, the means of achieving such relationships has remained illusory. Some European institutions, including the former SG Warburg, spent millions in the US trying to build a presence piecemeal. When the M&A market was quiet, it was not clear whether such a tactic was working. With the boom of the last three years, it is clear that it has failed. The US firms have broken into Europe in a way that European firms have failed to do in New York.

In the US itself, moves towards relaxation of the regulatory separation of commercial and investment banking activities ­ first in the form of the Leach Bill, which attempted to repeal many provisions of the Glass-Steagall Act, and more lately the Federal Reserve Bank’s proposal to increase the revenue limits imposed on commercial banks’ securities subsidiaries ­ have led to an environment where banks are considering how they should best move toward being full-service financial institutions. Even if boutiques themselves have no underwriting or high-yield bond capabilities, which in some cases they do, there is, in one banker’s words, “nothing like the M&A business for leads to the underwriting business”.

Finally, the strength of the deal business over the past three years has attracted new players. “We have not seen the last of these NatWest-type investments,” says Martin Wade, managing director at Salomon Brothers in New York. “The big guys have the cashflow that they want to deploy into a higher-margin or faster-growing business. Plus they get the added benefit of instant visibility.”

In the case of Bankers Trust, the need was clear. Says CEO Frank Newman: “We had some M&A, but it wasn’t world class.” In a presentation to the board at the beginning of the year, Newman set forth his strategic objectives for the firm. They included having a credible M&A capability.

One senior Wall Street figure points out that Bankers Trust bought more than advisory relationships. Citing the difficulties the firm has had with law suits over derivative products and a recent scandal involving tape recordings of its bankers, the source argues that the most valuable part of the deal was the addition of Volcker to the bank’s board. Says the source: “Paul Volcker spends time at the bank, he meets with corporate clients and says, ‘I don’t know what they were doing here before, but I can tell you from having been the most prestigious central banker in the world, this place is absolutely fine.’ What is that worth? How much money can be generated if the corporate community comes back to Bankers Trust?”

Newman, a former CFO of BankAmerica who replaced Charles Sanford as chief executive of Bankers Trust at the beginning of the year and as chairman on April 16, recognizes there were problems: “Clearly at Bankers Trust we were in a stabilization and rebuilding mode for various reasons,” he says. “We went through very difficult years in 1994 and 1995. I could see the potential for the company, and I had a vision of rebuilding and demonstrating publicly ­ and to our own people ­ that the company was once again turning out respectable performance and building from that to the point where it would be easier to do a combination with somebody.” Conversations with Newman’s long-time acquaintance Volcker led to that combination earlier than he had envisaged.

Bankers Trust will not be the last of the buyers. Gleacher claims to have been approached by a handful of institutions before siding with NatWest. Herrmann talks of a similar number of approaches. Chase Manhattan Bank is known to have discussed possible combinations with two boutiques. Observers say Union Bank of Switzerland, Citicorp, Swiss Bank Corporation and Barclays Bank are all looking to increase their US presence. JP Morgan is also rumoured to be a buyer ­ but of a larger organization. Says one banker at a possible target: “What will Dresdner do here? Maybe they are satisfied with a European presence. I doubt it. They’ll find it will be hard to compete by the year 2000 just having a European merchant bank.”

There may be interest, but many buyers may already be late to the trough. The problem with boutiques, according to Eric Gleacher, is that “there aren’t very many of them ­ you’re hard pressed to put a list together. Then, at the next level, which ones have the capacity to amalgamate with a large financial organization and create a successful more diverse business?”

The idea that talent should be acquired as part of a firm, and not by hiring individuals, has led some analysts to question whether an acquisition premium should be paid for human capital. For some banks, according to Steve Schwarzman, chief executive of The Blackstone Group, there is no other choice: “It’s the ability to attract people where they couldn’t be attracted at all before,” he says. The dearth of rainmakers confounds the problem. Says Herrmann: “For the experienced production talent, there’s not a price at which you can hire them, so you buy their firms.”

One bank which has turned away from buying a boutique is Deutsche Bank North America, which inherited, through its acquisition of Morgan Grenfell in 1990, a fee-sharing relationship with Gleacher & Co. That the bank did not acquire Gleacher surprised many. A source at Deutsche Bank however describes NatWest’s acquisition of Gleacher as “very rich”. He adds: “Reporters like to play it as if we are splashing money around left right and centre, but this is still a very conservative bank.” Without acquiring a boutique, the bank has had difficulty making its presence felt in the US merger market, advising on only two deals of note ­ chemical company Mearl’s acquisition of Engelhardt and Pure Software’s acquisition of Atria. Says one observer: “They may be trading a lot of bonds, but they’re not making any inroads into this business.”

For those banks torn between buying a boutique at a premium and cherry picking bankers from different organizations, Schwarzman has some advice: “There’s a huge difference in the value that really first-rate people, first-rate people and second-rate people can bring to an organization,” he says. “I’m not surprised to see the amounts being paid.” Newman at Bankers Trust, having spent $210 million of his shareholders’ money on a firm with 10 partner-level dealmakers, is adamant that hiring individuals would have been a false economy. “There’s tremendous value,” he says, “in the smooth functioning of an existing firm. Hence the premium.”

For those banks still interested in paying that premium, here is Euromoney‘s guide to the boutiques that just might still be for sale.

PETER J SOLOMON CO

Just how much could one man be worth?

“When you start a business as I did, people think you’re a one-act play,” says Peter Solomon, the former chairman of Shearson Lehman’s merchant banking division who now heads boutique Peter J Solomon Company. “Eric, Jim and Johnny have demonstrated that we are serious business guys, here for the long term with people under us.” The references to boutique owners Gleacher, Wolfensohn and Herrmann, who have sold to larger institutions, is a sign to many that Solomon is keen to sell the firm he founded seven years ago, while interest in boutiques is high. The boss himself does not want to look too keen. “The only reason to do it is to institutionalize your business. Everyone says you’d do it for money; well, it’s true, but you’d have to see real advantages,” he says.

One disadvantage Solomon faces is the firm’s high degree of specialization. Solomon’s father was an executive with the Federated Department Store chain. When he was growing up, Solomon got to know Federated’s management trainees, who went on to run some of the largest retailers in the US, hence his first-rate contacts within the retailing sector. Says a colleague from his Lehman Brothers days: “He’s very specialized, but he does real business in his area.”

Despite Solomon’s 30-plus years of experience, buying Peter J Solomon Co does not solve the corporate advisory equation for a would-be full-service bank. According to Solomon, that has not stopped people approaching him. But despite his protests that his partners handle an increasing amount of the business, Solomon is still considered by those who know him well to be the sole provider of business at his firm. Says another former colleague from Lehman: “Peter is as good a banker as there is on the face of the earth. But there’s a difference between building a firm and having a one-man presence who is the best at something. How do you capitalize one human being when he’s almost 60 years old?”

GREENHILL & CO

Speculation surrounds nascent boutique

The most recent investment banking boutique to be formed ­ at least until his former Morgan Stanley colleague Steve Waters sets up shop ­ is Bob Greenhill’s Greenhill & Co. Already rumours abound that Greenhill is planning a combination with Deutsche Bank North America, in whose building Greenhill has taken offices.

Early infusions of capital are the norm rather than the exception in the early days of boutiques, allowing founders to hire talent while waiting for the fees to role in. Eric Gleacher sold a 25% share of his firm’s fee income to Morgan Grenfell on founding Gleacher & Co in 1990, while in its first year Wasserstein Perella & Co sold 20% of itself to Nomura for $100 million. For the moment, however, Deutsche Bank is playing down a possible combination. Says a spokeswoman: “Bob Greenhill is leasing space in our building. He has friends in the bank, he needed space. There’s no business connection, it’s a friendly connection.” Greenhill declined requests for an interview for this article.

Whereas most investment bankers have launched their boutiques to a fanfare of publicity after a number of good years at a bulge-bracket firm, Greenhill is starting his after failing to move up the management ranks at Morgan Stanley and a troubled time running brokerage house Smith Barney. But most senior dealmakers rate Greenhill’s chances of success as high. Says one seasoned boutique owner: “Bob is an absolutely first-class major-league M&A talent. He will get business. But Bob couldn’t manage his way out of a paper bag. The fact that he couldn’t run a wire house with 10,000 people, why would he be able to do that? The deal business is a different business.” Adds another: “Let’s assume Bob Greenhill works on five transactions a year at $5 million a pop, which he’ll get if he’s lucky, and a bunch of smaller ones which he’ll have junior people do. He’ll be very successful.”

EVERCORE PARTNERS

Small and young, but with some powerful friends

The wave of interest in boutiques has come too soon for newcomer Evercore Partners. Founded last autumn by former deputy US Treasury secretary Roger Altman and three partners, the boutique is already beginning to resemble a baby Blackstone, which is perhaps not surprising given that Altman and co-founder Austin Beutner served as partners at the Schwarzman and Peterson firm. The partners plan to divide their efforts between the advisory and private equity businesses, and are in the process of raising a $300 million fund. But with the firm only just approaching its first anniversary, few potential acquirers are going to see Evercore as a ready-made entrée into the advisory world.

Those that can wait should note that Evercore has had a promising start. Co-founders Altman, Beutner, David Offensend and Walter Dec have been joined by five professional staff and a four-man advisory board comprising Edwin Artzt, former chief executive of Procter & Gamble; Michael Jordan, CEO of Westinghouse Electric; Gerald Greenwald, CEO of United Airlines; and Robert M Bass, the Texan investor who heads Keystone. Those relationships have already paid dividends. The firm had barely opened its doors when Altman’s friendship with Jordan, dating back to the Westinghouse head’s days at PepsiCo, had landed the firm advisory roles in Jordan’s $5.4 billion media gamble, the acquisition of CBS; and Westinghouse’s $3.6 billion divestiture of its defence electronics group to Northrop Grumman.

The firm currently has four clients paying a retainer, but will only confirm Westinghouse as one. Two of the other three, according to Offensend, were referrals, with which none of the Evercore partners had a prior relationship. “We thought there was a real niche opportunity there but I don’t think we thought we would have four Fortune 50 clients within six to nine months,” he says. Is the firm listening to potential suitors? “We’re strictly focused on building our franchise and have no thoughts about selling it. That’s so far off into the future,” says Offensend, interrupting his vacation in the San Juan islands to talk to Euromoney. Altman himself was out of contact, on a western-style horse trek in Wyoming.

WASSERSTEIN PERELLA

Would Wasserstein work for you?

By far the biggest name to remain independent is Bruce Wasserstein, chairman of super-boutique Wasserstein Perella, the firm he and fellow First Boston managing director Joe Perella set up in February 1988.

The boutique’s founders distinguished themselves as two of the few dealmakers to advise on larger and more visible transactions in a boutique setting than they did as part of a large investment banking firm. The young Wasserstein Perella & Co collected fees for advising Kohlberg Kravis Roberts on its $29 billion takeover of RJR Nabisco; Beecham Group in its $17 billion merger with SmithKline Beckman; Philip Morris on its $13 billion purchase of Kraft; and on the $16 billion Time-Warner merger. As the epitome of 1980s’ dealmakers, the duo were lionized by the press until some of the less well known deals the firm advised on failed, at which point press coverage turned sour. Says one of the managing directors of the firm: “We either sought, encouraged or welcomed a relatively high profile early on. That’s a dangerous line to walk. The value of that when you start up is that you get immediate attention; people tend to focus on you. The disadvantage is when you stumble, it is exaggerated.”

The firm’s fortunes sank to their nadir in the summer of 1993 when Perella left to join Morgan Stanley. But according to senior M&A lawyer Marty Lipton, partner at Wachtell Lipton Rosen and Katz, the impact on the firm’s reputation of various high-level departures has been overstated: “There’s no question that the firm went through wrenching changes in the 1990s. But if you look at the M&A departments of all of the investment banks, except for Lazard, they all went through the same changes.” Wasserstein, described variously as “brilliant”, “a genius” and “radioactive”, is philosophical about the period: “In this business, one season M&A is in, the next it is out. People throw pies when it’s out and flowers when it’s in.”

In the past 12 months they have begun throwing flowers again. The firm has begun to reappear on deal lists, representing Softbank Corporation in its $2.1 billion acquisition of Ziff-Davis publishing; Maybelline, which was owned by an investment fund controlled by Wasserstein Perella, in its $611 sale to L’Oréal; and Kirk Kerkorian in his dealings with Chrysler subsequent to his misjudged hostile takeover attempt. While the mega deals are not yet back, banks thinking of acquiring large-scale instant credibility in mergers and acquisitions might prefer to strike before large influxes of fee income have pushed up the firm’s valuation.

The firm’s 90 corporate finance professionals, out of a total of 180 professionals and 190 support staff, would create a plug-and-play department for an acquirer. Wasserstein himself counts 14 suitors in need of investment banking skills. Have any of them approached him? “As a smart observer, you’ve got to assume that we’d be pretty high on people’s interest list,” he says. “That doesn’t make them necessarily high on ours.” Is he seeking a buyer? “We really haven’t thought about [selling the firm]. We’ve thought from time to time about specific alliances for specific things, like high yield. What is the advantage for us? We’re fortunate enough that economics aren’t the driving force. Unless you wanted to retire, there’s no compelling reason.”

BLACKSTONE GROUP

Sweetest pill hardest to swallow

When bankers assess the boutiques still available in the wake of the Gleacher and Wolfensohn sales, the name most often mentioned is the Blackstone Group, the firm founded by Steve Schwarzman and Pete Peterson in October 1985. “We’ve seen what’s happened in each of those situations,” notes Schwarzman, adding: “We would be quite desirable to some of these outside people, because of our scale and the fact that there’s a scarcity value to these boutiques.”

The reputation of the two founders is such that even if the 70 or so professionals at Blackstone were not enough to fill an acquirer’s corporate finance department, additions could be readily hired. The difficulty which has potential buyers calling their lawyers is that roughly half of Blackstone’s business is private equity investing.

The current fund has $1.3 billion to invest. Schwarzman claims that the presence of the fund does not preclude an outside acquirer purchasing the firm. However, current regulations, which date from the Glass-Steagall Act, prevent banks from holding more than 5% of the voting stock or 25% of the equity of a company. Even investments up to those limits must be passive. Controlling a boutique which operated and advised an investment fund could therefore breach securities legislation.

Observers note that Gleacher & Co had to dissolve its merchant banking fund before winning approval from the Federal Reserve Board for its deal with NatWest Markets North America. According to Frank Puleo, partner in the banking and institutional investments group at law firm Milbank Tweed Hadley & McCloy: “If the boutique and or its principals own a substantial interest in the fund, life becomes considerably more complicated on the bank regulatory side. It’s not impossible, but a good deal of structuring has to be done.”

There is a good deal of speculation that regulatory concerns prevented Chase Manhattan Bank from buying Blackstone. Group head of global investment banking at Chase, Jimmy Lee, and vice-chairman Bill Harrison spoke to both Gleacher and Schwarzman before embarking on a team-building exercise for the M&A department, beginning with the hiring of Mark Davis from Salomon Brothers. There were also question marks about where senior figures such as Peterson would fit into the senior management structure at Chase, already overcrowded in the wake of the merger with Chemical Bank.

For those with friends at the Fed though, Blackstone is still for hire.