An Investment Banker’s Worst Nightmare
More companies are deciding to do without bankers when they make acquisitions
One day late last month, two big companies announced takeovers that had something in common: Neither Comcast Corp. nor AbbVie Inc. used a banker.
Comcast and AbbVie, both giants in corporate America, aren’t alone. More companies are deciding to do without bankers when they make acquisitions.
In 2015, the buyers in public-company deals valued at more than $1 billion didn’t use financial advisers in 70 instances, or 26% of the time, according to Dealogic. That is the second-highest total on record and far surpasses the 25 cases, or 13% share, in 2014.
In 2016, there have already been 23 examples, or 27% of deals in question. While merger volume has been surging, the rise in deals without a bank since 2014 is more pronounced.
That is bad news for Wall Street firms, which bring in enormous fees—sometimes measuring in the tens or even hundreds of millions of dollars—from takeover advice. The timing could hardly be worse for big banks as they lose market share to smaller upstarts known as boutiques and grapple with new regulations and low interest rates.
Boutique firms such as Moelis & Co. and Perella Weinberg Partners LP have steadily gained ground on their larger rivals in recent years, with the group’s market share based on fees recently at nearly 18% so far in 2016, more than double where it stood in 2008, according to Dealogic.
Corporate executives attribute the rise to a desire to keep transactions confidential, move quickly when needed and, of course, save money. There is also a view by some that all bankers don’t always have their best interests at heart.
In his 2014 letter to shareholders of Berkshire Hathaway Inc., Warren Buffett captured that view. He derided investment bankers, who, “being paid as they are for action, constantly urge acquirers to pay 20% to 50% premiums over market price for publicly-held businesses.” He went on: “A few years later, bankers—bearing straight faces—again appear and just as earnestly urge spinning off the earlier acquisition in order to ‘unlock shareholder value.’”
What has changed inside companies?
Some of them now have large internal teams capable of developing deal strategy, building out financial models and executing transactions without bankers’ help.
The trend has accelerated as companies again embrace M&A after years of sluggish activity. Meanwhile, restrictions on compensation and other regulations at big banks have created a steady supply of seasoned advisers willing to go in-house—even if the pay is lower.
Making such a move generally involves taking a pay cut. Senior internal deal makers at big companies often rake in more than $1 million a year, and such roles can be stepping stones to bigger jobs like finance chief. But in a good year, a senior M&A banker can make several million dollars.
In one previously unreported recent move, Goldman Sachs Group Inc. media banker Guy Nachtomi left to join Activision Blizzard Inc. as chief strategy officer, people familiar with the matter said.
Banks haven’t disappeared completely, of course.
Big Wall Street firms have armies of advisers with wide-ranging expertise and access to valuable information. Having bankers can also inoculate deals against legal challenges if they are botched or the price is questioned. And companies often need to borrow for takeovers, which frequently goes hand in hand with advice.
It is especially difficult for a company on the sell side of a transaction to go it alone, deal makers say. Coordinating a multilayered auction without a banker, for example, would be challenging and expose the company to legal risk.
None of that deterred Comcast or AbbVie, both of which recently hired ex-bankers.
Comcast brought on Bob Eatroff from Morgan Stanley as executive vice president of global corporate development and strategy.
When Comcast agreed to buy DreamWorks Animation SKG for $3.8 billion last month, the cable company handled the negotiations itself in part because it needed to move quickly, said people familiar with the matter. Over the course of two weeks, Comcast’s deal team and executives including Chief Financial Officer Mike Cavanagh—a former banker—hammered out an agreement with the film studio, the people said.
Toward the end of the talks, Comcast’s board had a few phone calls with Paul Taubman of boutique PJT Partners Inc. to get an outside opinion, some of the people said.
PJT will likely get less than the typical outside-adviser fee on such a deal of as much as $20 million, one of the people said.
AbbVie also eschewed an investment bank when it agreed that April day to buy cancer-drug developer Stemcentrx for $5.8 billion.
The drug company in December hired J.P. Morgan Chase & Co.’s Henry Gosebruch to be chief strategy officer.
Within Mr. Gosebruch’s first two weeks on the job, AbbVie set up a meeting with Stemcentrx’s chief executive and indicated interest in buying the company, said a person familiar with the matter. By the time an auction for Stemcentrx later began, AbbVie had already done a substantial amount of work and didn’t see the need to bring in a bank, the person said.
As AbbVie finalized the purchase, it tapped Bank of America Corp. —for a fairness opinion, which typically costs much less.
Neither PJT nor Bank of America was credited for advising in press releases announcing the two deals.