Is the Mergers and Acquisitions (M&A) Advisory Industry losing its shine?
Aroop Gupta, 11/8/2016
Mergers and Acquisitions (M&A) have long been a lever for companies to boost growth or improve current performance. Investment Bankers play an important role in the entire process by identifying, advising and helping companies (financially and as consultants) navigate through the M&A process. All this requires access to industry information and special skills, which justifies the premium that the industry commands. Historically clients have been heavily dependent on investment bankers as their trusted aid to help them identify and acquire companies. In short Investment Bankers have been the one stop shop for all acquisition needs of companies.Figure 1 - While Global M&A activity is at the same level as CY2007 the global M&A advisory fee is down 35%
However the statistics above may possibly be early indicators of some form of disruption in the making. What got us thinking was, while the dollar value of M&A deals is almost at the same level as the year 2007, there is almost a 35% drop in the advisory fees for M&A transactions. Looking at the patterns above we could think of possibly two scenarios which are affecting the industry.
- New Players driving price competition – The investment banking space is increasingly getting populated with a large number of new entrants. The new entrants have a different business models as compared to the incumbents and are able to offer comparable services at cheaper price. Their target customer base is the least demanding customer base. This in turn points towards a Low End Disruption and thereby does justify the drop in the advisory fee.
- Investment Banking Industry facing modularity – There is a change in what clients value in the services of an investment banker. Hence they are not willing to pay a premium for original value proposition. This points towards modularization of the industry and thereby could also be a reason for the drop in the investment banking fee.
To introduce the two potential competitors, on the one hand we have the boutique investment banks that have grown in number over the last five years and are collectively taking away marketshare from some big names in the industry. On the other hand, we have Corporate Development Teams that are increasingly going into deals without the involvement of bankers.
A Boutique Investment Bank as defined by Wikipedia is “a non-full service investment bank that specializes in at least one aspect of investment banking”. These usually are run by experienced senior bankers who were part of the large investment banks. These banks usually work on deals that are smaller in size (less than a billion dollars) and are focused on a specific industry or a specific function of an investment bank. The competition from these banks have increasingly grown over the years. According to a report from Thompson Reuters, all boutique banks put together constituted almost 30% of the overall advisory fees as of end of 2015. This has been a consistently increasing trend since 2007.
Also as reported by the Wall Street Journal few months back, many corporate teams today are going into deals without the involvement of an investment banker. As of end of 2015, one in every four deals were happening without a buy side banker. While these are numbers for deals that are 1 billion and above, this is not a new trend. This was already happening for deals that were less than 100 million and like in any case of disruption, has become significant now to gain attention of the incumbents. In 2014 The New York Times reported and I quote “Deals with unadvised buyers are increasing rapidly. The acquiring company did not use an investment bank in 69 percent of American technology acquisitions worth more than $100 million this year, according to Dealogic. That number was 27 percent 10 years ago.”
Whatever the reason may be, it seems that large investment banks are gradually losing marketshare to competing entities. The two potential competitors in this space are the corporate development teams and boutique investment banks. With this we take a pause and as part of the next post we would try to dig into the causal reasons as to why this is happening and what the applicable theories of disruption would tell us. Irrespective of what theories of disruption may be at play, in the end disruption drives change. If this data points towards potential disruption then we may see some change in industry and how M&A deals have been happening up to now.
 2015 Becomes the Biggest M&A Year Ever – Wall Street Journal (http://www.wsj.com/articles/2015-becomes-the-biggest-m-a-year-ever-1449187101)
 Global M&A Advisory Report – Thompson Reuters
 ‘What’s driving Deal Making’ – Thompson Reuters, April 2016
 An Investment Banker’s Worst Nightmare - (http://www.wsj.com/articles/an-investment-bankers-worst-nightmare-1462895679)
 In Silicon Valley, Mergers Must Meet the Toothbrush Test - (http://dealbook.nytimes.com/2014/08/17/in-silicon-valley-mergers-must-meet-the-toothbrush-test/?_r=0)