M&A Matchmakers Pairing Up Themselves
Submitted by Yizhu Wang from Mergermarket, an Acuris company, a partner of M&A Leadership Council
with analytics by Kylie Kirschner
Investment banks have essentially evolved into technology engines, making trading decisions and routing orders in milliseconds. However, one old-school and people-dependent specialty within investment banking remains robust, highly profitable and resistant to market swings - M&A advisory.
Pressured by rising compliance and technology costs and falling margins across many business lines, investment banks are acquiring M&A advisory businesses to achieve more resilient revenue streams, industry executives tell Mergermarket.
Piper Jaffray’s $485 million acquisition of Sandler O’Neill, announced in July, was the second largest investment banking deal since 2016, following Permira Advisers’ $1.75 billion acquisition of Duff & Phelps in 2017.
Overall, deal flow is climbing in the sector. Year-to-date there have been 20 acquisitions of M&A advisory firms, compared to a total of 17 in all of 2018, 16 in 2017 and 14 in 2016, Mergermarket data show.
Investment banking is still a very fragmented industry, says Scott Adelson, Co-President of Houlihan Lokey. The cost of regulatory compliance is expected to continue climbing, and investing in technology is necessary for banks to remain “best-in class.” But doing so is difficult when a firm does not have scale, Adelson says.
Unlike sales, trading and research, M&A advisory is one of the few remaining profitable business lines for investment banks, says Emmett Daly, principal of investment banking at Sandler O’Neill.
“Personal relationships and sound advice have not been commoditized by technology. Clients will always pay for judgement and trust,” Daly says.
Firms, especially those with trading businesses, are facing structural changes that are narrowing margins and making some business lines uneconomical, Daly notes. These challenges are prompting them to join forces with peers.
Equities businesses have been under pressure for the past decade, with many institutional investors moving from active to passive portfolio management. Revenue from underwriting equities is also subject to greater swings, while M&A advisory work has higher margins and has consistently generated fees over a long period of time, says Jim Bunn, president of global equities and investment banking at Raymond James.
Stricter capital markets rules, such as MiFID II, are another pressure point for investment banks, Bunn adds. The European legislative framework, most recently updated in January 2018, requires fund managers to unbundle their budgets for research and trading services, which previously tended to be provided by the same broker-dealer. This move has resulted in fund managers shifting the business to multiple broker-dealers.
Serial acquirers
Capital markets-oriented investment banks, whose revenue is predominately generated from equities, have been among the active acquirers of M&A advisory firms, Raymond James’ Bunn says.
Alongside St. Petersburg, Florida-based Raymond James, Providence, Rhode Island-based Citizens Financial Group, Tokyo-based Daiwa Securities Group, Los Angeles-based Houlihan Lokey, Philadelphia-based Janney Montgomery Scott, Bermuda-incorporated Lazard, and St. Louis-based Stifel have all been repeat bidders for M&A advisory businesses since 2016, according to Mergermarket data.
In its most recent acquisition, Raymond James bought New York-based Silver Lane Advisors, an M&A advisory firm specializing in asset management deals, in January.
The deal followed a stellar performance from Raymond James’ M&A advisory business in 2018, which accounted for the highest year-on-year revenue growth among its operating business lines, according to its 10-K. Overall, M&A advisory fees saw 30% YoY growth in 2018, following 54% growth in 2017. Conversely, Raymond James’ revenue from securities commissions declined for two consecutive years.
For Silver Lane, joining Raymond James offered it more resources to get deals done more quickly in an increasingly competitive environment, says Peter Nesvold, former Silver Lane COO and now a managing director and COO of financial services investment banking at Raymond James. The deal also gave Silver Lane access to broader equity and debt capital markets teams, private placement capabilities, IPO advisory services and a dedicated financial sponsors group to service private equity-owned companies and potential IPO candidates, he adds.
Commercial banks with big lending books have also been acquiring investment banks to add the services to their commercial banking relationships, Dunn says. Deals following this pattern include Cleveland-based Keybanc’s acquisitions of Portland, Oregon-based Pacific Crest Securities and New York-based Cain Brothers.
Yizhu Wang covers fintech for Mergermarket and Dealreporter based in New York.
