Greenhill & Co., the financial advisory firm started by Robert F. Greenhill, has lost 41 percent of its stock value this year as rising compensation costs consume revenue, even amid a global rebound in takeovers.
Greenhill’s personnel expenses surged to 75 percent of revenue in this year’s first three months, contributing to the first quarterly loss in 2 1/2 years, after the firm boosted the number of managing directors 63 percent since 2007. Greenhill ranks 17th among advisers on deals announced this year, sliding from 13th in 2007, according to data compiled by Bloomberg. The stock closed at $49.23 yesterday, its lowest since July 2008.
“They have yet to see the full payoff from those people,” said Howard Chen, a New York-based analyst at Credit Suisse Group AG. “They’re just not hitting many of the deals that are there.”
Chief Executive Officer Scott Bok, 52, added bankers during the global economic slump to win advisory mandates when corporate takeovers rebound. With deals accelerating this year - - the total value is up 22 percent so far -- the company aims to reduce the share of revenue spent on employees, Bok said in an interview last week. The stock has previously overcome short-term setbacks, he added. It has almost tripled since the company went public in 2004.
“It’s been a difficult three years in the M&A business,” Bok said in the interview at Greenhill’s New York headquarters. “There’s no question the market is turning around, and we feel quite good about the business.”
Bok is scheduled to speak to investors tomorrow at a conference in New York hosted by Sandler O’Neill & Partners LP, where he will discuss the M&A environment and the firm’s performance.
Greenhill shares fell $1.43, or 2.9 percent, to $47.80 at 4:15 p.m. in New York Stock Exchange composite trading. The firm is the worst performer in the 14-company Standard & Poor’s Supercomposite Investment Banking & Brokerages Index Sub-Industry Index this year.
Greenhill’s slide in trading this year compares with an 8.8 percent decline at Lazard Ltd., the largest independent advisory firm, and a 0.8 percent gain at Evercore Partners Inc. Both of those competitors have other businesses including money management.
The value of global deals announced so far this year is $1.04 trillion, compared with $850 billion in the same period a year earlier.
“M&A activity is likely to continue to rebound in the way that all past cycles have,” Bok said. “Greenhill is progressing upward appropriately as part of that.”
Roger Altman, the former U.S. deputy Treasury secretary and founder and chairman of New York-based Evercore, said last month that dealmaking is at the beginning of a recovery whose peak will exceed the record $4 trillion of takeovers at the height of the merger boom in 2007. Companies are pursuing deals “in the midst of a classic, cyclical upswing,” Altman, 64, said in an interview at Bloomberg’s headquarters in New York.
Greenhill’s $1.58 million first-quarter loss was the firm’s first since the third quarter of 2008. Full-year net income in 2010 was $34.5 million, the lowest since it went public.
Greenhill’s stock declines may be exacerbated by the firm’s lack of a full-time chief financial officer or investor relations contact, said Richard Bove, an analyst with Rochdale Securities LLC in Lutz, Florida. CFO Richard Lieb is also a managing director focusing on the real-estate industry and financial restructurings. The company doesn’t hold conference calls after announcing quarterly results.
‘Out With Clients’
“When they report a disappointing number, the impact on the stock is far greater than if they were doing a conference call answering investors’ questions,” Bove said. “What they’re doing magnifies the negative impact when bad things happen.”
Greenhill doesn’t hold conference calls because the press releases containing results have all the relevant information, Bok said.
“I’m not convinced our shareholders want to talk to an investor-relations person,” Bok said. “I think they like talking to the CFO or myself because we’re in the business. We’re actually out with clients all the time.”
Robert Greenhill, 74, founded the firm in 1996 after a Wall Street career spanning more than three decades. He joined Morgan Stanley in 1962 and rose to become its president. In 1993, he left to be CEO at Smith Barney Inc.
Bok, who had been a managing director at New York-based Morgan Stanley, joined Greenhill’s firm in 1997. Prior to that, he was an M&A and securities lawyer for Wachtell, Lipton, Rosen & Katz. He was co-CEO of Greenhill from October 2007 to April 2010, when he became the sole chief.
No Cash Bonuses
Greenhill’s compensation expenses remained steady from 2007 to 2009 at a yearly rate of 46 percent of revenue, and increased to 57 percent in 2010. Because of the jump, Bok and senior managers didn’t take cash bonuses for the year, the company said in January. His 2010 compensation totaled $8.27 million, which included a $600,000 salary and $7.32 million in stock awards, according to a regulatory filing.
Greenhill’s Park Avenue offices occupy five floors. The firm has 70 managing directors stationed around the globe. Locations include London, Sydney, Tokyo and Frankfurt, according to its website.
Talent was “very expensive” in 2006 and 2007 before the credit crisis, Bok said at an investor conference in February. Greenhill’s hiring surged in 2008 through 2010 as talent on Wall Street became cheaper and people were more willing to switch firms, he said.
“They’re positioned right to benefit from what’s going on in the industry because they’ve hired a lot of attractive people from the bigger firms,” Bove said.
‘Handful’ of Departures
In 2008, Greenhill hired Gil Ha as a managing director focusing on telecommunications companies. He was previously at Evercore, Rohatyn Associates and Deutsche Bank AG, where he co-headed the German firm’s telecommunications investment-banking group for the Americas. He had advised on AT&T Inc.’s 2007 merger with BellSouth Corp. This year, he was part of the Greenhill team that advised AT&T on a proposed $39 billion takeover of Deutsche Telekom AG’s T-Mobile USA Inc., this year’s biggest deal.
Greenhill hired Robert K. Collins from Morgan Stanley in 2009 to focus on infrastructure companies. Collins, who is based in Chicago, was head of Morgan Stanley’s infrastructure investment-banking business in the Americas.
Only a “handful” of managing directors have left in the past few years, Jeffrey Taufield, a spokesman for Greenhill, said in an e-mail. The firm has had an average of less than one departure per year since its founding, he said.
Last week, Zurich-based Credit Suisse, the world’s third-biggest merger adviser, hired Greenhill’s Alejandro Przygoda as global co-head of financial institutions investment banking. He had joined Greenhill in 2009.
“We’re back in a more difficult environment for recruiting now,” Bok said at the investor conference in February. “We can digest all the people we brought in and focus on our cost and profitability for a bit.”
Greenhill has advised on nine announced deals so far this year with a total value of $41.6 billion, Bloomberg data show. The AT&T deal accounts for 94 percent of that volume.
Lazard, which ranks ninth this year, and Evercore, which ranks 12th, have advised on 68 and 21 deals, respectively, during the same period, with a combined volume of $185 billion.
Evercore has more than doubled its total headcount since 2007 to 610 employees at the end of 2010, according to a regulatory filing. The number of managing directors in Evercore’s investment-banking unit, which includes equities and private funds business along with financial advisory, increased 68 percent during that time, to 47.
Revenue Outpacing Rivals
Lazard’s headcount decreased 5.1 percent to 2,332 in 2010 from 2007, according to a filing. The number of financial advisory managing directors declined 6.5 percent to 129 in that span.
Greenhill’s advisory-fee revenue has increased faster than its peers since last year, Bok said. The firm’s first-quarter financial advisory revenue was $48.5 million, a 33 percent increase from the year-earlier period. Lazard, based in Hamilton, Bermuda, had a 15 percent decrease in advisory fee revenue in the same period.
Greenhill’s revenue probably will rise to $76.3 million in the second quarter, according to estimates from five analysts surveyed by Bloomberg. Total revenue will be an estimated $319 million for 2011, and $401 million next year, which would beat Greenhill’s 2007 results, according to six analysts.
Greenhill’s hiring eventually will pay off, Bok said.
“We don’t know at what rate, but if history repeats itself, M&A activity is going to turn back up,” Bok said. “We expect to benefit from that along with everyone else.”