Definition of M&A Boutiques
For the purposes of this article, it may be helpful to first define what is meant by M&A boutiques, as opposed to the larger, middle and “bulge bracket” banks. To define the genre by size, M&A boutiques are classified as earning more than 85% of their revenues from M&A and equity capital markets activity – where M&A accounts for at least 70% (Wiki). They are also defined as, a “small company that offers highly specialised services or products.” (Websters dictionary). The dominant, identifying criterion however, lies in the deliberately narrow focus and high levels of expertise to be found in boutiques, meaning they are able to offer exceptional advice to their clients.
Pre-financial crisis, the big banks were riding the crest of the wave, bankers were enjoying unfettered access to enormous bonuses and generally enjoying great job satisfaction with relatively little accountability. In post crisis 2008, the picture was far less rosy for the big banks and their employees, with stringent new regulations and restrictions being imposed, reducing access to sky high bonuses, forcing them to focus on longer term wealth management rather than short term trading and investing. As Information Arbitrage predicted at the time, agile, focused, high value-add boutiques would enjoy a resurgence.
Influences of Post Financial Crisis Banking Regulations
As the new regulations and controls began to bite, so senior bankers who had lost their large pay checks, uninhibited autonomy and job satisfaction began to desert their big banking roots and set up boutique advisory firms to utilise their experience and capitalise on their earnings potential. Somewhat inevitably, these bankers also began poaching top deal makers they knew from their amongst their banking colleagues - hiring numerous top bankers to further their growth.
M&A Boutiques Making their Presence Felt
Fast forward 8 years to 2016 and we see an increasing proliferation of M&A boutiques, populated by former investment bankers as capped bonuses and other fiscal regulations continue to bite. As bankers become increasingly disenchanted with the bureaucracy and cumbersome operating regulations of the big investment banks so, increasing numbers continue to establish their own boutiques, utilising their years of knowledge and expertise to win some significant deals. And, whilst the large banks, such as JP Morgan, Goldman Sachs and Morgan Stanley (all in the top 5) hype their ability to finance deals in conjunction with their expertise in hedging currencies, they remain hampered by red tape and are unable to act with the same agility and and don't enjoy the same freedoms as their boutique competitors.
Big Banks Clinging to Diminishing Market Share
This isn’t to diminish the fact that the large banks still capture the ‘lion’s share’ of the available M&A pot, however, in the 2nd quarter of 2016, advisory fees for the likes of European banks, Credit Suisse, Deutsche Bank and UBS fell 21%, compared against the same quarter for 2015 - and none of them are in the top 10 for fees earned on completed deals this year. According to data produced by Thomson Reuters (to August 10th), the converse is true of “the challengers”, the advisory boutiques, which have captured 44% ($1.7 Billion) of total M&A fees in Europe, compared with 42.8% for the whole of 2015. Of these fees, Europe based boutiques won 24.9% ($964 million) with boutiques located elsewhere winning 19% ($728 million).
The movement away from the big banks dominating the M&A stakes in Europe is mirrored in the US, where the big 5 banks have also seen a decline in advisory revenues. Australia is seeing similar reduction in activity. This reduced demand is coupled with an increase in business owners proactively seeking out and engaging with independent M&A advisors, whose sector expertise they value. Boutique M&A firms have been quick to capitalise on this trend, providing the niche expertise and experience that the bigger institutions cannot match. Whilst the big institutions will endeavour to profit by cross-selling a range of services, business owners are attracted to the single, expert focus of the boutique M&A consultancies, whose niche knowledge can net them a far better return on their investment at exit.
European Boutiques Currently Enjoying Greatest Success
Data from Reuters shows that European boutiques are having greater success (Capturing 27.5% of the market – or $2Billion) than their US counterparts at winning M&A business from the investment banks, so it is small wonder that we are now witnessing the increasing phenomenon of US bankers are traversing the Pond in order to exploit the trend and establish their own boutique M&A consultancies. Such boutiques say that their aim is not to sell multiple products like the banks but to offer instead, high value advisory services. Peopled by industry veterans, they have much value to add in terms of their specialist knowledge and experience as well as being able to offer their clients completely independent and unbiased advice.
From 2003-2012, boutiques enjoyed a consistently increasing market share, but, in 2013, the rise was a dramatic 30% with boutiques, jointly earning $5.73 billion - More in M&A fees than the top 4 banks (Goldman Sachs, JPMorgan, Morgan Stanley and Bank of America Merrill Lynch) combined. New York Times - "Banner Year for Boutique Investment Banks" It is interesting to note that overall M&A revenues were down 12% in 2013 – so boutiques were also netting a larger share of smaller available revenue.
As boutique consultancy firms continue their upward trajectory, it is also noteworthy that they are increasingly called upon to advise across the full spectrum of M&A transactions, from small to major transactions. In most major deals of 2013, Boutique firms were influential - from Guggenheim Securities and Paul J. Taubman, the former Morgan Stanley banker, who advised on the Verizon Communications $130 billion buyout from Verizon Wireless, to Lazard’s advisory role during the $23 billion acquisition of HJ Heinz by 3G Capital and Berkshire Hathaway.
M&A Boutiques advise on major global deals
M&A boutiques are increasingly called upon to advise on some of the biggest deals. In 2015, Gordon Dyal, formerly of Goldman Sachs investment bank, established his own boutique, Dyal Co, which then advised Swiss firm, Syngenta throughout its sale to ChemChina. Greenhill advised AT&T on the sale of its wireline operations to Frontier Communications. In addition, Robey Warshaw, which worked on both the Shell merger with BG Group and the proposed merger of the LSE with Deutsche Borse, has earned $42 million in fees on completed deals, year to date, ranking 15th on the league tables, above HSBC, Societe Generale and MedioBanca.
The logic behind this global trend to engage with the boutique advisors is clear. Firstly, they are the experts with exceptional experience and a laser-like focus on their chosen niche. Additionally, by their very nature, boutiques are small in size, offering reassurance that the highest levels of discretion will be observed, with business critical information only shared amongst a small number of trusted senior advisors, rather than vast tranches of staff at the investment banks.
The Future Looks Bright for Trusted M&A Boutiques
In deals both great and small, it is evident that M&A boutiques are reaping the benefits of their independent status. There is a bourgeoning perception that they are the ‘go to’ trusted – and “squeaky clean” - expert advisor, when compared against the somewhat besmirched reputations of the big banks. Having gained traction since the financial crisis and currently developing advisory partnerships with the big banks on major deals, the foothold for M&A boutique firms is now well and truly established and shows no signs of being weakened. On the contrary, it seems apparent that, building on earlier successes and an unblemished reputation, boutique M&A advisors seem set for ubiquity across the global, corporate landscape.
by Isabel Ross-Edwards
