2012: The Year of the Boutique Bank

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Published on Thursday, 21 June 2012 08:00

Written by Ryan Cole, Editor, Small Cap Insider

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Last week I looked at how small regional banks are eating the big banks' lunch when it comes to traditional banking services.

Whether talking about mortgages -- up $100 billion at small banks, down $15 billion at large ones -- or loans -- up 5% at small banks, only 1% at large -- or even taking in depositors, large banks are bleeding market share to their smaller, more nimble competition.

However, those aren't the only places big banks are losing to their competition. A number of advisory activities -- long thought the exclusive domain of large investment banks -- now are going to smaller boutiques instead.

The most lucrative type of advisory fees -- those involved in mergers and acquisitions -- are fleeing big banks like they're sinking ships.

Goldman Sachs has gone from owning 14% of the business in 2003 to only 8.6% today. Bank of America/Merrill Lynch has dropped from 9.8% in 2007 to 4.7% now. And even UBS has dropped from a 5.8% share in 2007 to just 2.3%.

At the same time a number of boutique M&A firms have doubled or, in some cases, tripled their market share. The biggest boutiques are actually doing more M&A work than almost all big banks. Lazard, for instance, today owns 3.9% of all M&A activity.

What Are M&A Advisories?

Just to be clear, this isn't merely a sidelight business. M&A is highly lucrative, and highly profitable. And merger, acquisition or restructuring requires a lot of work -- very well-paid work.

Due diligence needs to be done on both the purchasing business and the firm to be purchased. True values have to be assigned, problem areas spotted, concerns addressed. Think of it like the mortgage broker assessing your income -- and the home inspector appraising your prospective house. It's similar work -- only on a much grander scale.

Once the true value and health of companies has been successfully assessed, the value of the new, merged company has to be figured out. What jobs will be cut, saving how much money? What new revenue will be brought in? Will the value of the combined firm go up more than the purchase price of the business for sale? How long will it take?

After it's been determined that the purchase is a good deal, then the nitty-gritty has to happen. Does it make more sense to pay for the merger or restructuring from the cash coffers, or from borrowing (or, usually, a mix of both)? What legal concerns might there be? How likely is government intervention?

As you can see, advising on an M&A deal is complex, in-depth work. You need banking experts to properly assess the businesses, and you need legal experts to successfully get the actual deal done.

Because of that expertise, it's a high-margin business. In fact, last year JPMorgan got $1.8 billion in revenue from M&A -- one of its fastest-growing units -- despite the bank's loss of market share.

Those sorts of numbers get lost in the shuffle in the too-big-to-fail world, but in the boutique banking world -- where entire market caps are often under $1 billion -- they make a big difference.

Now Is the Time to Act

And, especially important right now, M&A activity is picking up in 2012. One in six CEOs say his or her company is planning on making a major purchase this year. And $1.74 trillion sits waiting in corporate balance sheets -- money that's doing nothing right now.

And, thanks to the choppiness of the markets to start the year, M&A activity actually hit a seven-year low in the first quarter. Activity has picked up in the second, but the fact of the matter is, we're sitting on a historic number of transactions waiting to take place... and the demand has just been building the first half of the year.

The second half, you want to own these small boutique banks. When it comes to surfing financial tidal waves, there's no better spot in the markets today.

In my upcoming Small Cap Insider issue, I highlight my favorite boutique M&A firm. It's the best "can't miss" in the bunch.

However, there are a number of others that should do well too. If you aren't a subscriber to Small Cap, I highly recommend you do your due diligence, and find yourself a boutique bank or two to add to your portfolio. By the time 2013 rolls around, you'll be glad you did.

From the Inside,

Ryan