October 2, 2012 4:29 pm

Boutiques take growing slice of M&A work

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The largest-ever defence deal – EADS’s proposed €38bn takeover of BAE Systems – is an example of the prominent role that small investment banks are playing on the big deals.

EADS, the European aerospace group, is being advised by Evercore Partners, Perella Weinberg Partners and Lazard, with French bank BNP Paribas also receiving advisory credit. On the other side, Gleacher Shacklock, another boutique, along with Goldman Sachs and Morgan Stanley, is advising BAE.

To be sure, other big banks have a role on the EADS side.

The presence of boutique banks on the list of advisers in this deal is a vivid illustration of a force that is reshaping Wall Street’s lucrative mergers and acquisitions practices: clients are increasingly turning to boutique investment banks to handle some of their most sensitive, and largest, deals.

Such banks continue to take a growing slice of M&A advisory work. So far this year, they have advised on a record 18 per cent of global deals by revenues, up from 15 per cent in 2009, according to Dealogic.

“The wind is at the back of the independents,” says Ken Moelis, founder of Moelis & Co and a former senior banker at UBS and Credit Suisse First Boston.

There are several factors helping boutiques gain prominence following the financial crisis. Clients, judges and regulators are focused on conflicts of interest at big banks after a series of high-profile deals where these lenders were working both sides. Boutiques say that because they do not provide debt for deals, they are immune to such conflicts.

“There’s clearly been a trend of companies being concerned about a conflict of interest and not wanting to use the big banks,” says Scott Bok, chief executive of Greenhill, the publicly traded boutique. “We don’t have any of the baggage that goes with being in the trading or principal investing business.”

Yet critics of boutiques say their advice is not entirely objective either. Most independent advisory groups are paid only if the deal gets finished rewarding completion more than advice.

Another force working in favour of boutiques is the exodus of talented bankers from the big banks. As bonuses plummet and deal flow withers, some bankers are leaving for boutiques – or even founding their own companies – in search of wealth and influence.

Yet boutiques face an uphill climb as they try to break into the ranks of the top nine investment banks – Goldman Sachs, JPMorgan, Morgan Stanley, Barclays, Bank of America, Credit Suisse, Citi, UBS and Deutsche Bank – that dominate M&A advisory work.

Because those banks also provide financing, credit and capital markets services, they tend to establish comprehensive relationships with companies. Indeed, those nine banks have this year reported a 50.5 per cent share, the highest in recent memory according to Barclays analysts.

So while the independents may in fact be gaining share, it seems to be coming at the expense of second-tier banks, not the leading lenders.

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