M&A Boutiques Benefit From Big Bank Woes

NEW YORK ( TheStreet) -- Goldman Sachs ( GS) has three rather surprising competitors whose shares have outperformed it over the past two years: Greenhill & Co. ( GHL), Evercore Partners ( EVR) and Lazard ( LAZ).

These three companies are the best publicly listed examples of what are generally known as M&A boutiques, although they take issue with this designation, and they have a point. All three have offices all around the world and Lazard has more than 2,000 employees, hardly indicative of a "boutique."

What's more, these firms stress that providing restructuring and other types of "strategic" advice to companies is a big part of their business, particularly as M&A activity has dropped sharply since the financial crisis kicked in this time last year.

Whatever you call them, these smaller firms seem to be gaining ground against many bigger competitors, including Goldman (see chart below). The publicly listed boutiques and some of their privately held peers like Centerview Partners, Moelis & Co., Perella Weinberg Partners and Rothschild have come out of the financial crisis with some distinct advantages over giant banks like Citigroup ( C) , Bank of America ( BAC) and JPMorgan Chase ( JPM), whose troubled balance sheets, dependence upon government bailouts and multifarious business interests have become more of a headache than a help to veteran advisers who have already made a name for themselves.
Smaller Firms Grab Bigger Bite of M&A Fees
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"Large firms are not such a fun place to work anymore, and top M&A rainmakers/bankers would rather work at a boutique where they can practice their 'craft' in a pureplay sort of way, and not have to cross-sell a bunch of other banking products like the big firms do," wrote Michael Hecht, analyst at JMP Securities, in an e-mail to TheStreet.com.

Indicative of their growth, the boutiques have been hiring at an impressive rate. Greenhill, for example, has added 26 managing directors in its advisory unit in the last 18 months, a 93% jump in head count. Its revenue per employee has fallen to around $900,000 from a high of $1.93 million in 2007, but it still remains higher than all its rivals except for Goldman.

Another trend favoring the boutiques is that they all have expertise in restructuring, a trade very much in demand at the moment and one that is difficult for larger banks to ply because, as lenders to struggling companies, they are often conflicted.

The emphasis on improved corporate governance has also favored the boutiques, according to JMP's Hecht.

"Boards of directors want a truly independent point of view when considering an acquisition and not just some large bank trying to earn a fee on the deal financing," he wrote.

The boutiques also like to stress that they have a lot of senior dealmakers who bring gravitas to a boardroom, such as Evercore founder and Chairman Roger Altman, a former Deputy Treasury Secretary in the Clinton Administration. They portray the large banks as being filled with cocky youngsters more eager to sell products than to listen to what their clients want.

"You're the same age as the board members, you're not someone who's just going through puberty," says John Studzinski, head of the advisory business of The Blackstone Group ( BX), a giant private equity firm with certain boutique-like characteristics.

This sales pitch is probably helped by the fact that the reputations of big banks have taken a beating. Even banks perceived as successful, like Goldman, have been widely criticized and seen defections among top dealmakers. Byron Trott, best known as the favorite investment banker of Berkshire Hathaway ( BRK-A) Chairman Warren Buffett, left Goldman to strike out on his own in March, and Lazard hired Tom Tuft, a top equity capital markets adviser at Goldman, in August.

The boutiques largely deserve the PR victory they're scored, says William Cohan, a former investment banker who has written books about Lazard and Bear Stearns and is at work on a book about Goldman.

"If more firms were run like Lazard, we might have saved ourselves $12.2 trillion dollars here," he says.

Cohan says the Lazard philosophy, best embodied by former Chairman Michel David-Weil but largely carried on by current boss Bruce Wasserstein, means avoiding dangerous financial fads like mortgage-backed securities, bridge loans, internet IPOs, emerging telecom debt and the like.

"They treat the firm as if their shareholders' and creditors' capital was their own," Cohan says.

That relative lack of risk taking kept the boutiques' shares from getting pummeled as severely as the stocks of the big banks late last year and early in 2009. Though they did sell off, they have rebounded sharply since March, along with the broad rally in the U.S. equities market.

"Part of the reason you'll see all of these stocks doing better recently is people are starting to see what they think is the beginning of an upturn in M&A," says Scott Bok, Co-CEO of Greenhill.

If that upturn does not materialize, the boutiques are vulnerable to a pullback. Greenhill trades at 35.5 times JMP's estimate of what it will earn over the next 12 months, Evercore at 27.7 times and Lazard at 20.8 times. These multiples are significantly higher than their historical averages, Hecht notes. Though he believes all three are strong companies, he favors Lazard because of its relatively lower multiple.

Rochdale Securities analyst Richard Bove recently initiated coverage on Lazard with a "Buy" rating. Bove writes that both restructuring and M&A "require that funds flow freely in the capital markets and that confidence is high in the economy. This has not been the case for the past 12 months but it may be the case in the next 12 months."

The most serious problem I could imagine for boutiques would be if boardrooms woke up to the fact, persuasively argued by David Weidner of The Wall Street Journal, that making acquisitions is usually a bad idea.

But seriously -- boardrooms waking up? Hard to see that happening any time soon.

-- Written by Dan Freed in New York.

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