Different Banks’ Business Models?
Understand the difference between boutiques and bulge brackets to an extent, with the latter having the additional benefit of a balance sheet and ability to provide financing. But I do have a few Qs overall:
1. Why are balance sheet banks not always preferred for this advantage? Is the advice provided by boutiques really that much better?
2. Is the only distinguishing factor for MMs just the size of the deals they work on? Is the only reason bigger banks don’t leverage their brand and enter that market the opportunity cost of missing out on bigger deals?
3. How do hybrid banks (e.g. Jefferies, banks of the past such as Lehman etc), position themselves within the bulge-boutique spectrum? What niches do such banks fill?
4. For example, what firms are perfect competitors vs having a more nuanced relationship where they might compete for some deals but not for others?
Why are balance sheet banks not always preferred despite their financing advantage?
Based on the most helpful WSO content, balance sheet banks (bulge brackets) can provide financing, which is a significant advantage in certain transactions. However, this comes with potential conflicts of interest. For example, bulge brackets may prioritize deals that align with their lending or underwriting interests, which can compromise the perception of unbiased advice. Boutiques, on the other hand, are often seen as providing more independent and specialized advisory services, particularly in areas like restructuring (RX) or M&A, where conflicts of interest are a concern. This independence can make boutiques more attractive for clients seeking purely advisory expertise.
Are middle-market (MM) banks only distinguished by deal size?
While deal size is a primary differentiator, it's not the only factor. Middle-market banks often focus on specific industries or regions, providing tailored expertise that larger banks might not prioritize. Bigger banks, like bulge brackets, may avoid this market due to opportunity costs—focusing on larger, more lucrative deals aligns better with their resources and brand. Additionally, MM banks may offer a more personalized client experience, which can be appealing to smaller companies.
How do hybrid banks position themselves?
Hybrid banks like Jefferies or historical examples like Lehman Brothers occupy a middle ground between bulge brackets and boutiques. They often combine the advisory focus of boutiques with some balance sheet capabilities, allowing them to compete across a broader spectrum of deals. These banks typically target niches where they can leverage their flexibility, such as mid-sized deals, specific industries, or geographies. For instance, Jefferies is known for its strong presence in middle-market M&A and capital markets, bridging the gap between the two extremes.
Competitors vs. nuanced relationships in the banking spectrum?
Perfect competitors are firms that directly overlap in services, deal sizes, and client bases. For example, bulge brackets like Goldman Sachs and Morgan Stanley often compete head-to-head for large-cap M&A or IPO mandates. However, nuanced relationships exist when firms compete in some areas but not others. For instance, a boutique like Moelis might compete with a bulge bracket for high-profile M&A deals but not for financing-heavy transactions. Similarly, middle-market banks might compete with boutiques for smaller deals but rarely with bulge brackets due to scale differences.
Sources: Boutique vs. Bulge Bracket in a Recession, David and Goliath: The Boutique and The Bulge Bracket, Boutique vs. Bulge Bracket in a Recession, Evaluating Commercial Banks (part 1 of ??)
Don't have experience in a MM or BB, so I'll leave #2 and #3 for others to answer, but I can address #1 and #4.
There are a couple reasons why clients choose a boutique like my firm over BB/MM or even a larger EB (e.g., Evercore, PWP, etc.)
First, larger top banks (e.g., GS or Qatalyst in TMT) aren't really incentivized to focus much time and attention on a public company client with $1 billion market cap that may or may not do a deal in the near future. They have bigger fish to fry. If they send a team at all, they likely aren't sending the A-team. That's where we can fill a niche. Our client sweet spot is generally in the $1 - $20 billion market cap range.
Second, rather than having all of our revenue come from deal fees that are predicated on deal completion, we are often hired on retainer. That means we help out on a wide range of problems, including M&A but also including investor relations (quarterly earnings prep), activism defense, random Board decks on strategy, etc. We spend most of our time on a handful of retainer clients who each pay us ~$1 - $2 million a year. The time investment is really not worth it for a large bank, but for our 15-person boutique? Hell yeah it's worth. We have minimal overhead after all.
Third, because we're on retainer, we're seen as a more unbiased opinion on deals. To your last question, we frequently co-exist (aka co-advise) alongside larger banks on deals. While we do get incremental fees from deal completion also, it's not worth it for us to risk a key relationship with a large client by pushing a bad deal. On the other hand, the large bank likely only gets rewarded in a deal, so they are more incentivized to push. You may not believe me, but that's what our clients generally believe. We often advise on the buyside, and we often advise against deals. I've been on probably 15-20 live deals at this point, but only a handful went through to completion. That's a dynamic our business model allows.
Fourth, being on retainer, we often already know the client far better than a new large bank coming up to speed. Our fee is nothing in the grand scheme of things for clients in our size range, so they'll often prefer to retain both us and the new large bank on deals, so we can help the bigger bank on things like how the client prefers presentations to be done, ideas they've considered before, determining comps/precedents, etc. We also sanity check their analyses, valuation, and advice.
Lastly, the client executives (CEO, CFO, etc.) may not always be in full agreement with the Board. Some directors may also disagree with other directors. We therefore sometimes end up in arrangements where we are advising the CEO, CFO, or a special committee specifically, whereas the larger bank advises the Board.
Copy pasting my response from an almost identical post from months ago:
“I think you’re like, using buzzy words that overcomplicates why M&A is more about selling an experience than a “product” per se.”
1. Why would a balance sheet bank win a M&A deal just because they have a balance sheet? M&A is cookie cutter the same no matter where you go so why does this matter?
- Imagine you are the way home. Your wife calls you and tells you to pick up the following things from the store before you get back. Some meat for dinner and hairspray because she ran out. Are you going to stop at Trader Joe’s for the meat and then drive 10 minutes to CVS for the hairspray or are you going to just stop at Walmart because you can get all that you need in one stop. Yeah sure, maybe each individual product is a little worse, but hey what you value is the convenience of getting everything in one place for a bit cheaper fee.
However, there will then be premium snobs like me who thinks getting food from Walmart is deplorable, and would happily spend a little bit more for quality meat at Trader Joe’s, even with the extra gas money premium on top.
Different people (companies) have different priorities and flavor of M&A they want to run. They may prefer banks that have everything in one place and others want to maintain a variety of relationships across M&A & capital providers directly.
1. What does better service even mean? I mean there’s no one irrefutable definition of “great M&A service” because each process is infinitely customizable. Some companies want the bank with the best relationships with the type of acquirer they want (I.e. want to sell to a strategic company vs. a PE fund). Some people want the bank who can move the fastest process (regardless of who buys it). Some want the bank who get them the best price / consideration terms - great M&A providers usually excel in one particular flavor of M&A.
You may not be mature enough in your career to fully understand my metaphors above, but my honest advice is to just think simply about what a bank sells, who their customers are etc. to better understand why some dynamics are the way they are. If you understand why some would go to a Chanel vs. an Old Navy store - you should understand what could potentially differentiate M&A between different segments”
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