Future of IB- race to the middle market?
Was speaking to a senior MD at a BB (friend's dad) and he gave me a pretty interesting opinion that he basically thinks the IB industry is going to shift a lot from what it is currently. His point was essentially that the current 'best deals' are the multi-billion dollar mergers, and now that space is so crowded with BBs, EBs, and boutiques that everyone is going to start targeting other things. His opinion is that, 5 years from today, there's going to be a lot more ECM/DCM activity and a lot of MM M&A (in the sub $2B range), but the mega mergers of today might be a thing of the past.
What do people think about that theory? Obviously there will always be mega mergers, but there are currently so many banks pursuing those mandates that the space is just incredibly crowded. Also, a lot of the mega deal activity is coming from PE firms basically just flipping businesses around, and a lot of people believe the laws/taxes around PE might not last forever and the PE space might slow down, which would obviously be a huge hit to IB as well.
Here's an article explaining Goldman's move into the space. There were also rumors a few years back about Goldman trying to buy Harris Williams- are BBs just going to try to scoop up MM firms to try to build out their platforms? https://www.spglobal.com/marketintelligence/en/ne…
Are BBs going to be forced to move 'downstream' into the MM to stay afloat in the future? Is M&A going to lose its allure if the mandates get smaller? Are different banks going to be seen as the 'best' in the future because of this?
I'm a confused intern trying to figure out my career and thinking about what the future of IB might look like...
In your shoes as well so here's my two cents. I think your reasoning is on the right tracks but that you may have put the cart before the horse with this one. Banks just follow the activity, so they are going to compete for any potential deal that throws fees their way. I think what you're trying to ask is if large companies will still see the benefit in pursuing mergers with companies that are somewhat similar in size. As a lot of these deals have been value destructive or perceived to be value destructive in the past (think Oxy/Anadarko, failed PMI/Altria deal), so big companies are starting to shift away from these deals in an attempt to save themselves money down the line while smaller companies in the MM space will continue to pursue M&A up until they reach their desired size, so the MM space will be much more (and already is much more) active than the megadeals which we've been used to seeing. Banks are recognizing this and now attempting to go for quantity instead of size because at the moment that's whats active. It's kind of like fishing; if they aren't biting you better move to a new spot.
Exactly- my thoughts are that it seems to be a lot easier to do five $1b deals vs one $5b deal just because the $1b deals seem to come more often, be a lot easier to follow through on and execute, and fall through less. So many banks spend years pursuing the Ubers of the world trying to get a piece of their action in the eventual hope they will go public, when in reality they could just spend that time churning out smaller deals and make just as much in fees (without the risk of getting 0 in fees if you lose the deal). Just seems like an easier place for banks to go for fees. I'm curious how the industry will react from a prestige perspective because GS, which is generally considered the most prestigious bank, is going to be going after MM deals (which are generally seen as less prestigious).
For the record, deal size =/= prestige.
i thibk it somewhatvdoes
The bulge bracket have been trying to tap into the middle market for many years unsuccessfully. Winning a mandate in the middle market isn’t as simple as showing up to a board meeting and throwing your deck at the CFO as you ramble on about the cheap financing that “you can jam through credit committee” at the end of the month.
For the most part, many of the middle market transactions are cultivated over many years of relationship and success within the industry and broader middle market space, especially as it relates to PE-backed deals. Also, the bulge bracket model isn’t meant to scale downward over the long-run, as these platforms have way too much overhead to cover in a given year.
BofA is also expanding into MM. Their Chicago office does a pair amount of it.
go to a bad bb like DB or UBS and you will do MM deals anyways.
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