M&A Indies should enjoy their moment in the sun

October 4, 2010

Independent merger advisers should relish their moment in the sun. The busiest among them have grabbed a record share of the U.S. market this year. Bulge-bracket banks suffered distractions and defections as mid-size deals, and less conflicted advice, have become all the rage. That has helped the crop of firms, including startup boutiques, who are small enough to fail. But the phenomenon may be short-lived.

The shift has been explosive of late. A decade ago, the 16 non-supermarket-type institutions in the top 25 rankings of M&A advisers had about 6 percent of the so-called deal wallet, according to Thomson Reuters data. By 2008, their share had crept up to 10 percent. This year, the group, which includes established advisers like Greenhill and newbies such as Moelis, is at 20 percent.

Smaller firms say it’s all about independence: clients want assistance from banks untainted by credit write-downs and government interference. Nine of the top 10 deals involving an American target have included at least one of these focused advisory firms. Some, like CenturyTel’s acquisition of rival telecom operator Qwest, generated fees for no fewer than three independents.

The crisis has helped boutiques and their ilk in other ways too. One-stop shops have been restrained from opening their balance sheets, which used to be a competitive advantage. Big fee-generating buyouts dried up. Deal sizes shrank, providing more opportunities for smaller firms to compete for business. And a flood of senior bankers have either hung out their own shingles or landed at boutiques, bringing customers with them.

These trends won’t last, though. There will continue to be room for differentiated and specialized advice, such as the kind dispensed in Silicon Valley by Frank Quattrone or by Byron Trott, the former Goldman banker focused on family companies, who struck out on his own and advised Alberto Culver on its sale to Unilever this week.

But when the economy picks up again, deals will grow in size and big banks will again use their checkbooks to win deals. LBOs will return and many bankers at small firms will find their relationships with CEOs had as much, or more, to do with their former deep-pocketed employer as it did with their charm. Independent advisors should gorge while they can, because soon the servings will be decidedly more modest.

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