I was recently in a meeting with some senior regional coverage bankers and it seems like BB has soften up their IB fees per deal and size. They are looking to tackle the MM area by leveraging its balance sheet.
How big of a threat is that to EB and other MM boutique?
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Depends on the approach and dynamics. GS and others have publicly stated that they are interested in capturing some of the MM share and are aggressively targeting sponsor business.
If a particularly strong BB (e.g. GS, MS, JPM) starts to move downmarket, the brand and M&A strength may allow it to capture some nice $500-$1B transactions. However, often deal teams staffed on smaller deals end up running poor processes and clients seem aware of this (heard this second hand FWIW), so if that doesn't change, PEGs are going to prefer the Jefferies or Blair attention and deeper deal team than a lean BB one that isn't able (or willing) to give it the proper attention.
BofA, WF (not a BB, but up-market from a CB/LevFin standpoint) have tried to serve MM clients for years with poor success. There are C team MDs that have few tombstones and a mediocre track record leading the regional coverage for MM IB opportunities. So, the concept isn't necessarily new and also hasn't borne fruit.
I'm not talking about $500MM - $1Bn I'm talking ~$250MM. There's regional coverage and product teams that's getting staff on these deals. Regional coverage headcount have increased from 8 to 22 in last year as per the meeting.
Just because the numbers change doesn't mean my thoughts do. I'm at a well known MM and we've lost and won pitches against EBs (Evercore, Moelis, etc.). I never understood why those firms were pitching deals in the $250-$400mm range. Rarely do we see BBs.
I will say this, the difference between $1B+ and $250mm deals is actually quite extensive, particularly in terms of buyer universe and process strategy. The BBs will need to use their brand name and possibly corporate relationships to their advantage in order to get deals because they will be at a disadvantage when it comes to MM sponsor relationships and process experience compared to HL/HW/Blair/Baird, etc.
Can you comment on how the regional groups go after deal flow? Again, my prior interactions are that they were generalists and really sucked at industry knowledge and buyers, but perhaps that is changing with that type of staffing?
I think you're right about finding buyer in the ~$250MM range, therefore they are saying that if they see a business that they can easily find buyer then they will do the ~$250MM M&A deal. It will largely depend on the business. Regional coverage team will not be sector specific but rather arrange geographically. As far as my BB is concern, they are trying to leverage the debt platform as an alternative to credit. My take is that the deal team will be staffed with generalist geographic specific coverage banker / product banker / corporate or commercial relationship manager.
That's why I don't think MMs are that concerned. A good MM coverage team > generalist/product (M&A)/corporate banker since MMs do mostly industry M&A.
I'd clarify that last point a bit, MMs tend to to pick their spots with a focus on only a few subsectors within a sector. Its hard to see how geographic generalist coverage can significantly compete in M&A but can definitely see them doing well in lending to small to mid-caps and doing corporate banking, but im sure there are exceptions.
Interesting article in the FT today about this...
https://www.ft.com/content/2a19f680-38b3-11e9-b72b-2c7f526ca5d0
They point to Lazard buying Goldsmith Agios Helms as an example of how a bank with a culture of chasing big deals successfully bought their way into the MM. Its not clear that if GS were to buy Blair or HW as was rumored would have the same result. M&A in the business of M&A is rarely successful. It would be very interesting to learn how LMM has managed to keep performing.
People forget how long it took for Goldsmith to get integrated. There were lots of losses because inevitably, as what happens in many of these types of acquisitions, deal fee expectations increased. Goldsmith bankers that were used to $750K fees could no longer get those mandates approved once fee minimums rose to $1mm and then $1.5mm. Another huge issue is relationships and how those are handled. LMM had some strong MW corporate relationships that LAZ wanted. You can imagine the friction that causes.
GHF saw the same thing when BMO gobbled them up, left with a shell of the former group. If GS were to acquire WB, it would need to make sure that it didn't try and push the bankers up market. Although there is an explicit need to service the MM, Blair needs to be able to do $150mm transactions, not just work on $250mm-$750mm or wherever GS decides it will cut itself off at.
Anyway, those were some rambling thoughts about complex subjects.
Blair as a standalone entity needs to be able to do those $150 mm transaction but does Blair as a potential Goldman subsidiary need to? If you're Goldman management and your goal is to grow your M&A business by increasing your share of MM dollar volume, would you rather pay 100 bankers to maybe generate $750mm in revenue or pay 50 bankers to probably generate $500mm. My point is the marginal increase in market share/revenue matters alot more for Baird as a standalone entity than for Goldman as a parent company. Therefore, they're more likely to set a cut-off and just fire the bankers who can't meet it. Are they getting the most they possible can out of the Blair platform? Probably not, but they're accomplishing the goal of increasing MM market share and that's probably enough....
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