Innovative Solutions: How Bankers are Persevering in the M&A Fee Drought – The Lex Newsletter

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Dear reader,

In 2023, big mergers and acquisitions have become scarce. However, this hasn’t deterred ambitious investment bankers from seeking any fees they can get to secure their jobs.

When the market is thriving, there’s no better business in banking than providing transaction advice. With just a few spreadsheet experts and a rainmaker, a bank can easily earn success fees ranging from $10mn to $30mn without a significant capital investment. The compensation for junior staff is mostly a fixed cost.

The challenge, however, is that the deal market is unpredictable and highly competitive. Numerous companies, big and small, are offering essentially the same product. There are limited ways to structure a buyout or merger, which makes it difficult for bankers to stand out in the industry. Most CEOs and CFOs would say that New York bankers all start to look the same after a while.

Enter the concept of “[official-sounding finance term] advisory service”. Recently, I received an email from Houlihan Lokey, a prominent firm known for fairness opinions and corporate valuations. They have introduced a “sustainability advisory services” practice aimed at providing clients with expert insights and decision support related to valuation, due diligence, transaction structuring, and monitoring across the global ESG spectrum.

This is a far cry from fierce competition.

Instead of forming activist investor defense groups to counter figures like Elliott and Carl Icahn, investment banks have transitioned to offering “shareholder advisory” services. These services help companies engage with major index fund managers like BlackRock. Additionally, geopolitical experts are increasingly in demand in Wall Street firms.

However, the true “masters of the universe” don’t particularly desire more people involved, as it dilutes their bonus pools. These emerging “product” groups provide advice that often goes beyond buy-and-sale transactions. Their relatively modest earnings, such as a six-figure retainer for a year, reflect this reality.

Nevertheless, the aim is to keep banks relevant to executives and board members and keep them well-informed about global developments. The hope is that when a company is ready for a significant deal involving actual money, the bank will be the first choice for a substantial payoff.

The fight for fee credits among bankers is nothing new. It’s comparable to journalists competing for the top spot in the byline of an article. However, the current landscape is more intricate due to the abundance of hungry competitors. The level of proximity and influence determines the returns a bank can generate.

Interestingly, one banker from an advisory boutique shared with me a promising new area that capitalizes on structural changes in corporate lending markets. Private credit firms like Ares Management and HPS Investment Partners are increasingly funding buyouts and refinancings, replacing the traditional syndicated loans offered by balance sheet banks such as JPMorgan Chase.

Independent banks earn fees by arranging private loans. The compensation for assisting with a few hundred million dollars’ worth of debt deals can rival that of an M&A transaction of the same magnitude.

Running a company as a chief or director may be more complex than ever in 2023. The good news is that there is no shortage of bankers, lawyers, consultants, or PR professionals willing to provide specialized counsel. Of course, this assistance comes at a cost.

Elsewhere on Wall Street

I delved into this year’s major bank M&A rescues, including UBS’s rescue of Credit Suisse, in an article for the FT’s Alphaville blog.

Thanks for reading,

Sujeet Indap
Wall Street editor

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