When it comes to the M&A playground, the game is supposed to be well-defined.
While “bulge brackets and top-tier boutiques work on the multi-billion dollar deals with the highest fees; mid-market specialists and the big four accountancy firms focus on the smaller end of the market,” Financial News reports.
But the beginning of 2011 has seen a departure from the norm in this area.
While the high-yield market is booming and as a consequence, bringing BBs to look at smaller deals they might usually bypass, there could be something else at play internally.
Financial News reports,
There is evidence that the large global investment banks have been lowering their sights and targeting transactions they previously would have turned their noses up at. Driven by a need to keep busy while dealflow remains patchy, and attracted by a thriving high-yield market, several bulge-bracket firms have picked up considerable market share in the sub-$500m deal arena.
BBs like JP Morgan say they’re just providing services requested by their clients, and it’s not a deliberate strategy to dominate the mid-market space. Rather, it’s a result of unstable market conditions pushing their clients — who might usually seek out huge merger targets — to look for “bolt-on acquisitions and divestments” instead.
However, the stats suggests there could have been a conscious decision made by at least some of the big banks to get in on the mid-market action.
Example: Bank of America, which just finished 1st in mid-market M&A in Q1. This time last year they ranked 25th, and finished 15th in 2010.
Deutsche, JP Morgan and Goldman have also jumped into the top 5 in mid-market league tables. Those firms finished in 7th spot and below last year.
Of course, to make space for the big guys, the mainstays have seen their market share dwindle. If we look at the league tables (by number of deals) in the mid-market arena, some dislodgement is definitely apparent:
- KPMG — In 2010: 1st. After Q1: 2nd.
- PWC — In 2010: 2nd. After Q1: 7th.
- Deloitte — In 2010: 3rd. After Q1: 9th.
Of course, it’s only April — those rankings will undoubtedly change over the next 7 months. And KPMG’s activity still looks decent to us!
Why It’s Normal: One Deutsche Banker, who now works for a mid-market specialist, pointed out that it’s normal at this point in the year for the BBs to be intimidating, because “at this point in the cycle, when plus-$1bn deals are few and far between… M&A teams need to bring in some revenues.”
And if it’s not just a symptom of this point in the cycle, accountancy giants have little to fear — this strategy is apparently unsustainable long-term for the BBs.
Why It Will Stop: “It takes the same number of bankers to work on a $500m deal as it does a $5bn deal but the rewards are much less,” one M&A banker told Financial News. Basically, the expenses of banks like Goldman and JP Morgan means they have no choice but to return to the massive M&A work when the deal machine starts humming again.