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Tickers in this Article: GHL, UBS, GS, MS
With the exception of the automobile and airline industries, can you think of a business that is more dysfunctional than investment banking? Who would want to work for a company whose finance chief nonchalantly suggests hiring and firing is the norm in investment banking? Not me, that's for sure.

UBS (NYSE:UBS) and others like them must pay their human resource staff an immense amount of money with all the paperwork they do. Even industry darling Goldman Sachs (NYSE:GS) is cutting jobs in 2008. There is an expected cut of 10% from the division which handles mergers and acquisitions and corporate fundraising. How much profit do you have to make before people's livelihoods are off-limits? Not wanting to paint all investment banks with the same brush, I'll look inside Greenhill & Co. (NYSE:GHL) to assess its contribution to the world. (If you would like to learn all about the industry read The Rise Of The Modern Investment Bank.)

An Independent Global Player
Greenhill is an independent global investment banker participating in mergers & acquisition, financial restructuring and merchant banking. The company is unique in that it's not part of some larger banking conglomerate. It opened its first office in New York in 1996 and went public in 2004. Its stock price since the IPO has more than doubled the S&P 500. Robert Greenhill, founding partner and chairman spent over 30 years at Morgan Stanley (NYSE:MS) establishing its M&A group. He was CEO of Smith Barney until 1996 when he established Greenhill & Co. Today, Robert Greenhill owns 18.4% of the stock with the other senior managers and directors an additional 16.9%. Management's goals are firmly in-line with those of the shareholders.

2008 Has Not Been Kind
Up until the second quarter of 2008, Greenhill was bombing along. In 2007, total revenue was $400.4 million, up from $290.6 million in 2006 and earnings per share (EPS) were $4.01, up 57% from $2.55 in 2006. Its after-tax return on average equity was 77% this past year. Despite these numbers, its stock price dropped 15% in 2007. On the plus side, over the last 52-weeks it's actually up over 20%. It's all in how you look at things I guess.

Second quarter numbers were mixed. While it was the third best quarter for revenue in company history, Greenhill was still off 23% to $108.7 million from $140.6 million in the second quarter last year. EPS went down 29% to $1.47. Most of the decrease was due to fewer deals done, and those that were completed were smaller in nature. Accomplishments include starting a new business advisory that raises capital for smaller private equity funds, repurchasing 162,250 shares, its special purpose acquisition company (SPAC) it took public in February continued to search for an initial acquisition, and its merchant banking revenue was actually higher than its advisory fees, representing 54% of revenue.

Riders in the Storm
Global M&A activity dropped off dramatically in the second half of 2007 as financing tightened. There hasn't been a leveraged buyout of $10 billion or more in the U.S. since July 2007. Private equity buyout volume is down 74% year to date. As mentioned earlier, investment banks are cutting jobs and jettisoning excess baggage. Times are tough for the much-maligned industry. One bright light; U.S. deal volume in July was its highest in the last 12-months.

Cue the comeback. I can't say for sure when this turnaround will happen, but when it does; Greenhill is ideally positioned to work its magic. With two businesses: 1) a financial advisory for M&A and restructurings and 2) a merchant banking operation, it has seven revenue streams to pad the numbers. The newest is GHL Acquisition Corp. (SPAC), established in February 2008 via IPO. The offering raised $400 million and it must make a qualifying acquisition of $320 million or more. That shouldn't be a problem. By not overdoing hiring, it's been able to produce pre-tax margins of 40%, 13% higher than Morgan Stanley, the next highest in its peer group and by hiring better talent, its revenue per employee is $1.9 million, again the highest of its competitors. If anyone can recover, it's Greenhill.

Bottom Line
Robert Greenhill has built a truly independent company. In 2007, the independent portion of global M&A business was 38%, up from 19% in 2000. Greenhill feels its independence will help it in this market. I couldn't agree more.

For more on this area check out M&A Competition Is Cutthroat For Acquirers.

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