Why BBs don't create separate unit to get more deals in small and mid-market M&A?

torres657's picture
Rank: Monkey | 51

I know that BBs are usually focused on larger deals because of larger fees with single deals. But why not creating separate unit/brand to tap also small/mid-market M&A where there is also a lot of activity and leverage its network/capacity and get additional source of revenue?

Comments (17)

Aug 28, 2017

A lot of banks are doing this already.

Aug 29, 2017

I am talking about likes of GS, MS, JPM. I am not aware that any of those banks implement this? Do you have info on those kind of banks?

Best Response
Aug 29, 2017

JPM has Corporate Client Banking and Middle Market Banking "coverage groups" these teams cover clients in various industries that are too "small" for the regular CIB teams to really pay attention too. Most of the transaction work is debt and equity offerings but there are M&A deals for these clients every now and again where the capacity of these coverage teams will be utilized.

BofA also has been doing exactly what you are talking about...

http://www.reuters.com/article/us-bank-of-america-...

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Sep 2, 2017

I second what Draper said. JPM has "Regional Investment Banking" which handles all the middle market deals. They worked on the Skip Hop / Carter's deal along with the C&R coverage team (which covers Carter's). So many times regional IB will team up with the larger coverage teams depending on the deal.

Not a BB but Lazard also has a middle market practice.

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Aug 28, 2017

Limited resources, same work, less fees, competition that focuses in these areas vs has a group they does it, ancillary banking services more suited for those companies, different market dynamics, etc.

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Aug 29, 2017

Because a lot of that work is sellside M&A, which generates little/nothing in the way of follow-on deal activity. (Once a business is sold, it doesn't generate any add'l fees). Mid market sellside M&A can be a good business, but it is a hamster wheel, and there's really no great reason to get into it if you can do big cap deals / work with companies that generate a steady stream of fees.

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Aug 29, 2017

I think that's also a prestige thing.
Do you really think GS would be as prestigious if they did a ton of small cap deals as well?

Sep 2, 2017

I just want to chip in there and point prestigious shops in Europe and especially Rothschild have great synergies with their PWM/UHNW arms and bring incredible fees and dealflow in the small and midcap sector just because of their reputation in the region. For short, money don't care about the size of deals.

Sep 9, 2017

Goldman created a team within M&A to do sponsor sellside M&A several years ago

Aug 29, 2017

Short answer: The resources that a BB would need to dedicate to provide investment banking products/services to mid-market companies often outweighs the potential benefit.

Long answer: For bank-owned dealers such as most Bulge Bracket banks, they offer a wide range of financial products to corporate clients that often extend beyond M&A and capital raising. For them to service mid-market companies, they would need to provide ancillary services such as research coverage, correspondent clearing, etc as they do with large-cap companies. Given the size of mid-market companies, the fee received from providing investment banking products just doesn't wet their beak enough to justify the effort.

The typical amount of time it takes for a company to go public/complete an acquisition is the same if not significantly longer when comparing mid-market to large-cap companies. Mid-market(especially LMM) is much more difficult to navigate compared to large-cap, where every transaction is pretty much a home run(from a bank's perspective). All things held constant, the mid-market company will likely require more "cleaning up" before it is ready to be marketed for an acquisition or to go public. From an M&A perspective, the universe of potential acquirers/sellers is way more broad in the mid-market space, whereas you won't have to go searching for a needle in the haystack within the large-cap space. All of the above combined with lower fees per transaction definitely detracts BBs from competing in the space.

However, if the market starts shrinking, you can definitely expect BBs to start searching downstream. In Canada, the Big 5 banks here all have mid-market practices as far as I'm aware of, mainly because the number of mid-market companies here far outweigh the number of large caps. At the end of the day, it all comes down to cost/benefit. If BBs can maintain their pipeline full with mega-deals, there is no incentive for them to look at the MM. If anything changes, you can bet they'd be the first to make a move(if they haven't already).

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Sep 9, 2017

I've actually found it to be the opposite - big banks form groups specializing on middle market when times are good, because the rest of the firm is too busy to focus on them. These are generally the first guys to get blown out when things slow.

Aug 30, 2017

We do it for the higher end of MM spectrum - but financially hard to make sense / compete. Heard Harris Williams type place would do sell sides for $1mm or something. BBs don't touch stuff easily below $3-4mm for M&A. And most times, as someone said earlier, BBs prefer continuous fee stream (e.g. more buyside, follow ons, bonds) vs. a one time $1mm pay day.

Also doing a high quality CIP or preparing financials from the home-brew stuff you get is a lot of work for a $1mm fee. We can literally do a follow on with 6-8 hours of analyst work and couple of diligence / committee calls and make $4-5mm.

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Sep 9, 2017

Goldman does the most sellside M&A, year in and year out. Sellside M&A gets you the best relationships with the company, makes you highly relevant with buyers, and is much higher probability than buyside M&A work. It's very important to remember that M&A revenue is - by far - the highest margin product at any investment bank.

The follow on work described above is clearly at a "market participant" firm.. not leading the deal so not really interacting with management, firm probably has research coverage and supports in secondary market. It's very easy fees when the market is active, but not sticky business or Accretive to a banker's franchise if done in isolation. If it's not supported with lead left cap markets deals and/or M&A, that senior banker will soon get too expensive as clear the firm would still get the role if another person were in the seat.

Sep 10, 2017

My comment was toward middle market (with $1mm-$2mm fee) sell sides - not the big ones GS or any other BBs generally run after. Agreed the bigger M&A is still lot more profitable and long term play. Follow on left or right - still minimal work. You also don't learn anything at junior level

Sep 1, 2017

They are better off chasing and exhausting their resources in chasing a billion dollar deal than working on mid market mandates.

Sep 1, 2017

Not a BB but Lazard has Lazard MM

Sep 2, 2017
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