We all know that M&A deals have virtually abandoned the high rent district and moved into lower cost neighborhoods. This year's biggest deal - Bayer AG's bid for Monsanto Co. (MON) , at $66 billion - would have ranked seventh on last year's big deals roster. The second largest deal wouldn't have made the list. Mega cap deals, it seems, have gone the way of the Iberian wild goat.
So what's the humble investment banker, who dined out in the historic years of 2014 and 2015 to do under the circumstances?
The impulse, of course, would be to do what they suggest in thrillers: follow the money. Which would mean moving down the proverbial food chain to pursue advisory engagements in the middle market. Sure, it's not an $88 billion transaction. And the cuffs of that bespoke suit might get a little grimier. But there's deal flow in the middle market. And advising on a $22 billion deal isn't going to hurt.
Except that the notion of bankers moving into the middle market hasn't happened. And, by all indications, isn't going to happen.
"I don't see the bulge bracket firms stretching down into the middle market today," Peter Davis, managing director and head of financial technology banking at Macquarie Capital, said in a recent interview.
The reality is that bulge bracket banks don't evaluate the attractiveness of the advisory engagement based on the dollar value of the deal. "It's more about the size of the fee," David Maughan, managing director for investment banking at Navigant Capital Advisers LLC, the investment banking subsidiary of Navigant Consulting Inc. (NCI) . Maughan's firm advises on lower middle market deals, and he reported that "I haven't seen people showing up in smaller places than you'd expect them to be."
See, banks have high embedded costs. Not to mention a lot of overhead. Working on deals with fee structures that are measured at six figures behind the dollar sign, rather than the seven figures they saw in their salad days, don't pay to turn on the lights, let alone start the corporate jet.
And - think about it - a bulge bracket firm starts offering what are essentially discounts to their conventional fee structure now. What are they going to do when the M&A market is restored to its rightful primacy? Ask Uber how that surge pricing thing works?
In addition, bulge bracket firms that think they're going to launch a beachhead in the middle market can expect to be surprised there will be resistance. "Over the last five to seven years, specialist banks have surfaced in the middle market," said Thomas Bonney, founder and CEO of , a Philadelphia-based advisory firm for private equity and middle-market companies. "By now, they're embedded in the eco-system."
Think of Houlihan Lokey Inc. (HL) , Robert W. Baird & Co., William Blair & Co. LLC and Lazard Ltd. (LAZ) . Some of them are already in The Deal's top 10 of investment advisers in the third quarter league tables. And then ask if they're willingly going to cede turf. Bulge bracket firms may think they're going to treat middle market competitors the way Godzilla treated balsa-wood replicas of Tokyo. But maybe not.
As one banker noted, "It's not just that (bulge bracket firms) will be competing with the same four or five banks that they see alight on every advisory opportunity." Now there's four or five more competitors, sniping at them from every angle.
JPMorgan Chase & Co. (JPM) took an ingenious approach. Beginning in 2012, the bank undertook an initiative in which its investment banking operations focused on the bank's existing commercial banking clients. Not all of whom are located within a town car ride from Midtown.
As a result, the bank developed a regional investment banking business that "has something of a midcap feel to it," James Roddy, regional investment banking head at JPMorgan Chase, said in an interview. "We've got the global banking platform that is JPMorgan Chase, but we've also got someone local, present."
Some constituencies of the broader M&A community have responded to the change in the merger environment by more successfully moving down into the middle market.
"Conditions are more fluid than they've ever been, because of the competition in the market," said Howard Spilko, partner and co-chair of the corporate department at Kramer Levin Naftalis & Frankel LLP. He said he's seen lawyers for white shoe firms who previously worked exclusively on mega-cap transactions - and was able to name a specific firm - soliciting for business in the middle market. "I get the sense that firms are willing to come downstream, in instances which we might not have seen before," Spilko said.
Of course, the lawyers, accountants and consultants are presumably billing out by the hour. Accounting firms, for instance, may be more accommodating about moving down the proverbial food chain, CMF's Bonney agreed. On the other hand, bankers are negotiating fees, so their compensation structures are distinctly different. And, not to mention, higher.
All this isn't to say there's not available, legitimate opportunities for bulge bracket bankers in this middle market dominated environment. (For one thing, they could individually go get jobs at the boutique firms farming that middle market.) As Davis at Macquarie - which ranked in the top 25 of investment advisers in the third quarter - said, "We are seeing larger companies buying midsized companies." Of course, Davis already has something of first mover status in the fintech sector, where deal flow remains robust. "The market for fintech assets can garner attractive multiples and it continues to be extremely strong," he said.
Bulge bracket bankers could have existing clients among the Fortune 1000 companies looking to expand through acquisitions of middle market enterprises. The challenge is going to be having the boots on the ground among those middle market companies to be able to identify appropriate takeover candidates.
Which is why Navigant's Maughan insisted the surest path to success is to not lead with the fee.
"Lead with the idea," he suggested.
EDITOR'S NOTE: This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.