Deal drought raises stakes for boutiques

The slowest start to dealmaking in a decade is expected to unleash further consolidation across the investment banking industry as more boutiques and brokers are picked off by bigger players.

Higher interest rates and a transatlantic banking crisis choked off mergers and acquisitions in the first quarter, almost halving the value of transactions, according to data from Refinitiv.

The drop extended a downturn that began last year and is a sharp contrast to 2021, when booming stock markets and pandemic stimulus drove mergers and acquisitions to a record.

Mizuho and Deutsche Bank have taken advantage of the deal drought in recent weeks, purchasing ailing US investment bank boutique Greenhill & Co and struggling UK broker Numis respectively.

While particular factors were at play in each transaction — Numis, for example, has been hit hard this year by the near-vanishing of initial public offerings in London — bankers say that if the wider backdrop remains grim, more takeovers are likely among firms whose lifeblood is advising on deals.

“It’s a much more difficult year so if somebody provides you a good solution with good economics, people might be tempted to sell,” said one financials banker at a boutique firm.

At the same time, bigger banks are sitting on profits fattened over the past 18 months by rising interest rates and have the chance to diversify their revenues through beefing up their investment banking or wealth management businesses.

“There are other integrated banks that I think are looking at the market opportunistically,” said Nick Millar, a managing director for financial institutions at Lazard, referring to big banks with multiple business lines.

Deutsche Bank said that its £410mn purchase of Numis in late April was part of an effort to bolster its investment banking business in anticipation of a rebound in M&A in coming years. Germany’s biggest bank offered a 72 per cent premium to the Numis share price, which slumped last year.

Japan’s Mizuho, meanwhile, is betting that its $550mn acquisition of Greenhill, one of the first M&A boutiques to go public, will help it expand its investment banking operations in the US. One of Japan’s largest banks late last month agreed to pay more than double a share price that had plunged around 80 per cent from a recent 2018 high.

Rival Daiwa Securities said last week that it would consider buying boutique M&A businesses.

“The volumes have been subdued for a while now,” said Matt Moon, a KBW analyst who covers US boutique advisories. “I do think that the smaller private boutiques are certainly in a position where they’d be considering selling themselves.”

Smaller boutiques focused on providing advice in industries such as tech and private equity may prove attractive as buyers anticipate an eventual pick-up in dealmaking, bankers said.

Sales may also appeal to those advisory firms doing better as they seek to accelerate expansion plans. Last month, Italy’s Mediobanca struck a deal for London-based Arma Partners, a firm focused on the tech sector.

“Arma just had three record years and is sitting on a record pipeline. It’s more about building more, more quickly, which we can’t do on our own,” said Arma’s founder and managing partner Paul-Noël Guély, a former senior banker at Goldman Sachs. “In the United States with the help of Mediobanca and the firepower of Mediobanca we plan to open for business.”

Although the tougher conditions suggest more deals are likely, bankers say that more successful firms, including boutiques, will also seek to expand by poaching key staff. 

According to people familiar with the matter, Moelis & Co, the Wall Street firm founded by veteran dealmaker Ken Moelis, has hired about a dozen tech bankers from failed Silicon Valley Bank, reducing its need to make an acquisition.