The Merger and Acquisition (M&A) advisory is a big business, which has traditionally been dominated by the global investment banks and large accountancy firms. Of late, a new trend is taking shape where small sized M&A advisory shops, commonly called M&A advisory boutiques, are increasingly capturing big ticket M&A advisory deals from bigger players.
This article focuses on the M&A advisory boutiques, the evolving trends in this new stream of M&A business, potential future opportunities and challenges faced. (Related: Investopedia explains Mergers and Acquisitions)
What are M&A advisory boutiques?
M&A advisory boutiques, also known as independent advisory banks (or M&A microfirms or M&A kiosks), are small sized firms usually owned by one or a few individuals who offer merger and acquisition advisory services. Depending upon the setup size, the services offered may be specific to certain business or industry sectors, or may be generic in nature at the regional or global level. The owners of such boutiques are usually ex-investment bankers with proven experience in advising on large sized global or regional M&A deals. Boutiques are owned by single individuals usually have young but extremely talented staff on payroll, while the ones with multiple owners are run on partnership basis, who may hire staff as needed.
M&A advisory boutiques distinguish themselves in terms of the small sized dedicated firm run by individuals, compared to the large organizational setup of investment bank and accountancy firms.
The evolution of M&A advisory boutiques:
Based on data from Dealogic, Financial Times reports that M&A advisory boutiques commanded a mere 8% market share in 2008. Over the last 5 years it has increased from 8% in the year 2008 to 20% in 2013. The M&A advisory fees captured by these boutiques is reported to be USD 1.5 billion. Report further cites that “seven of the top 20 M&A fee earners are now independent advisers”, which marks a significant shift in the way M&A advisory business has evolved in recent times and the tremendous potential of this new stream of business in coming times.
Why are M&A advisory boutiques becoming popular?
All things being equal, people buy from friends. The nature of any advisory business in any sector depends on personal rapport. Owners additionally have emotional affinity to their businesses, and it is human nature to trust more and work with personally known individual(s), compared to working with a big setup in a large organization. Although dedicated team of individuals is assigned for each deal, attrition at large organizations may also play spoilsport, forcing clients to deal with new individuals frequently, to their dislike. Boutiques, directly run by owners, score well with direct dedicated involvement from an expert strategist.
Large banks are also frequently bound by political and regulatory bindings, which may enforce unwanted constraints on advisory businesses for conflicts of interest. M&A boutiques enjoy great flexibility in this regard. With independence from political and regulatory bindings, M&A advisory boutiques offer a perfect fit for specialist advisory services dedicated to specific sectors.
Large investment banks may also have holdings in client companies, whereby regulations may force them to abstain from getting into any associated M&A transactions and advisory services. Independent boutiques being pure play advisory firms don’t have such constraints.
The M&A advisory boutique business gathered momentum in the backdrop of the financial crisis of 2008. Traditional M&A advisors, investment banks and accountancy firms, were said to have a conflict of interest and based their decisions and advices on financial statements of the parties. The boutiques capitalized on this opportunity, as they claim to remain free from challenges of conflicting interests and are rich in human capital and dedicated services beyond the financial statements and numbers. The industry seemed to have responded well to these claims and justifications, thereby resulting in the increasing market share of M&A boutiques.
How are the M&A advisory boutiques performing:
Being run by individuals or as a group, a lot of success stories are available for transactions conducted by M&A boutiques:
One man show:
- Paul J. Taubman, working as independent financial advisor from 2012 onwards, advised on two largest deals of 2013 - “Verizon’s USD 130 billion takeover of UK’s Vodafone” and “the Comcast/Time Warner Cable merger worth USD 45 billion”. In 2013, he is reported to have handled more than USD 175 billion worth of deals single handedly.
- LionTree owner, Aryeh Bourkoff, advised the two cable companies Virgin Media and LibertyGlobal, on a USD 23 billion mega merger.
- Zaoui & Co.: Run by two brothers, Michael and Yoel Zaoui, ex Goldman Sachs employees, have advised several of the top-notch deals in Europe. Their firm is reported to have “topped the $80 billion mark in deal credit” in 2014.
Small to Mid size setups:
- Riding high on successful business, Moelis & Co. floated their IPO on NYSE, which was initially hammered, but has risen significantly and even paid a dividend in August 2014. It has to its credit significant deals like Nuveen’ USD 6.3 billion acquisition by TIAA-CREF. Global expansion in Europe, Asia and middle-east is already underway, with offices being setup at prominent international locations of strategic importance.
- Greenhill & Co.: Another old timer founded in 1996 with a NYSE listing, this boutique is known for regular dividend payments to its shareholders. This year, it advised Actavis for its USD 25 billion acquisition of Forest Labs. It also advised Actavis earlier for its USD 5 billion purchase of Warner Chilcott.
- Evercore Partners: One of the oldest boutiques founded in 1996, the current involvement of this firm includes deals from varied sectors – Pharma company Shire Plc sold to AbbVie for around USD 55 billion, TW Telecom sale to Level 3 Communications for USD 5.7 billion, and even advising AstraZeneca to keep away Pfizer’s USD 100+ billion bid.
Challenges with M&A advisory boutiques:
Although it has been a smooth ride with a high growth rate, the M&A advisory boutique business has its own share of challenges.
Claimed to be a dedicated or specialist service provider, the M&A advisory boutique business remains completely fragmented. While large investment banks can leverage their large size and global reach across multiple industry sectors, boutiques remain confined to their own specialized streams at local or regional levels. Finding specialized boutiques with expertise in specific industry sectors remains a challenge.
Most of the action is happening in the US and Europe for business boutiques, while investment banks are busy exploring new opportunities in geographies of emerging markets like Asia, Africa and Middle East. M&A boutiques may not have a presence in these locations, but this does provide room for further growth.
Most boutiques remain one-person shops, though a good number have emerged as big businesses with large employee headcounts. Single person dependency remains a risk, which is difficult to mitigate for the clients.
Recent reports from the Financial Times indicate few signs of decline in Europe, based on the data available from Thomson Reuters as of August 2014. “In the past 18 months, the European market share of independent corporate finance houses slipped slightly to reach 30.2 % in the first half of this year,”.
Whether this decline is a temporary trend or whether boutique business will see further signs of fading in coming times remains to be seen.
The Bottom Line
Every business has multiple factions, and the same applies to M&A advisory houses. For the time being, M&A business boutiques are humbly eating into the market share of traditional M&A business of large investment banks and accountancy MNC’s. Running the one person dependency risk with regional concentration in US and Europe, these boutiques do offer significant advantages of dedicated and specialized services without regulatory pressures faced by investment banks. Each business stream will continue to find new opportunities in terms of exploring new locations and innovative ideas to survive in a healthy competitive atmosphere, offering a wide variety of choices to M&A clients today and years to come.
Disclaimer: At the time of writing this article, the author does not hold any of the securities listed.