The Strategist

Boutique Investment Banks Catch Up With Finance Giants

03/30/2015 - 16:58

Want to buy a new asset? Go to Boutique Investment Bank! Experts draw attention to the latest trend in the M & A market: such a big deals like a merger of Kraft Foods and Heinz now are not organized by giant banks but the so-called Boutique Investment Banks.
New Era?

We are used to reading that well-known banks, like, for example, JP Morgan Chase, have become IPO underwriters or advisors in the field of mergers and acquisitions. However, recent trends shows that companies, entering the M & A market, are gradually abandoning the services of market giants and are turning to bank boutiques - investment banks with a limited set of services that specialize in a particular type of transactions. 

The most recent example of banking boutiques’ dominance in the area of ​​M & A is the not yet closed deal of merge Heinz and Kraft Foods being conducted with help of the Brazilian investment company 3G Capital and Warren Buffett’s Berkshire Hathaway. As it became known, the Boutique Investment Banks will earn over $ 100 million on the deal. Centerview Partners LLC was the Kraft Foods’ only advisor within this transaction, and Lazard - the only bank acting on behalf of H.J. Heinz. This year, the union of two food companies may become one of the largest agreements in the market of mergers and acquisitions, and the amount of the transaction is estimated at $ 36.6 billion.

To break the market

In the business environment, there is such a thing as "disruption" – when new players suddenly begin to dictate their own rules in a business field. Usually this is applyed for high-tech start-ups, but the actions of banking boutiques can be added to the same list.

Centerview in the past year has already been an advisor to the largest part of another transaction: when a telecommunications market giant Comcast decided to absorb its competitor ISP Time Warner Cable. The deal has not closed, but Centerview had already earned on it. Since 2008, Boutique Investment Banks doubled its share of revenue in the US M & A market. Last year, it grew from 8% to 16%, and the trend continues. The research firm also reports that Centerview, appeared on the market in 2006, is already ranked on 12th place in the field of M & A in terms of revenue among banks.

At the same time, the debates over the definition of ‘Boutique Investment Bank’ are ongoing. Dealogic does not include in the list such companies as Jefferies LLC and already mentioned above Lazard, although in many ways they belong to precisely this class of players. However, everyone agree that their business model is fundamentally different from the one that we see in Goldman Sachs, Morgan Stanley and JP Morgan.

According to Dealogic’s experts, Qatalyst Partners, Perella Weinberg Partners LP and better known to the market Evercore Partners Inc. are among the most powerful boutiques too.

Where did they come from?

Interestingly, the banking boutiques sometimes "bud" from larger companies, when someone from the top management decides expand the list of its own assets or quarrels with colleagues.

Scandals often become the cause of the weakening of the largest players and play in favor of boutiques. One of the most famous examples is Paul Taubman’s leaving of Morgan Stanley and his resounding success in the independent work. In particular, the banker managed to earn $ 175 million on the transaction, in which Verizon Vodafone bought a share in its Verizon Wireless business for $ 130 billion.

In fact, banking boutiques have appeared in the nineties, when Evercore Partners and Greenhill & Co were established. Virtually all of these firms eventually succeeded in their fields, regardless of the crisis. Later, the recession of 2008 gave a new impetus to Boutique Investment Banks development and reduced costs on quick and efficient carrying out the necessary transactions.

Favorable background

Favorable background in the field of M & A also contributes in the Boutique Investment Banks evolving. In principle, almost all the big banks still have clients, and not all traditional players lose profits. Goldman Sachs reported that profits from its investment arm is close to $ 6.5 billion, which is the best result since 2008. The main giants’ advantage is the possibility of the organization of complex international transactions. Regarding this, boutiques are yet in the background, but it will be interesting to see whether the situation will change in the future.

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