Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Shares of financial companies have been on a tear since Donald Trump's presidential victory, leaving many stocks trading above their 12-month price targets. One of them, Evercore Partners Inc., may be better able to defend its valuation thanks to its 2014 purchase of equities research and trading firm International Strategy & Investment Group LLC.

Evercore bought ISI, which was founded by Ed Hyman, in a bet that by expanding the firm's offerings beyond its core M&A advisory work, it could win more corporate clients and increase market share. And while that notion encountered some skepticism early on, it's proven to be rather deft: Evercore's fees are now growing at a rate well above that of its peers. After analyzing the transaction, Gadfly gives it a polite clap -- with room for an upgrade to slam dunk in the future, depending on how the business holds up in a prolonged downturn.   

Hail to the Chief
Since its acquisition of ISI, Evercore was trading roughly in line with the benchmark index, but has rallied since Donald Trump became the President-elect
Source: Bloomberg

Early reactions to the all-stock deal -- which coincided with Evercore buying the remaining 40 percent of its own institutional equities business -- were adverse: Investors sent the stock plunging more than 8 percent. For one, the firm's decision to issue its own shares and thereby dilute existing investors in order to bulk up in an area with declining commissions and slim margins puzzled many. Investors also feared the firm's earnings could suffer if it became a "full-service" investment bank, which was never the goal.

Evercore president and CEO Ralph Schlosstein did his best to appease investors, explaining in an interview with Bloomberg that the deal made the firm better able to counsel companies not only about their strategic direction (which more often than not involves M&A transactions) but also their stock performance. Evercore itself has ramped up buybacks, designed to offset the dilution from the ISI acquisition. And the company's decision to tie a large portion of the deal's consideration to specific earnings and margin targets is proving savvy: For context, Evercore cut its acquisition expenses by $28.3 million in the quarter ended Sept. 30 because the maximum performance thresholds weren't achieved. 

Still, some two years later, the wager is paying off. Evercore, which has shed its "boutique" moniker as it has grown, is set to report a record fee haul for 2016 on estimated revenue of $1.4 billion, a figure 52 percent higher than 2014. That compares with projected growth of less than 20 percent during the same period for all its closest rivals: Greenhill & Co., Moelis & Co., Houlihan Lokey Inc., Lazard Ltd. and PJT Partners Inc. With some 75 percent of its revenues derived from U.S.-based clients, Evercore also is better placed than many of its peers to weather any disruption to inbound M&A that may occur if protectionist policies are put in place by the Trump administration. Likewise, the firm should receive a similarly outsize benefit from any U.S. corporate tax reform.

ISI Scorecard
Evercore's decision to broaden its equities research and trading capabilities is paying off
Source: Bloomberg
^As of Dec. 31, 2014 (deal closed on Nov. 3) *Based on projections for the year ended Dec. 31, 2016. Evercore reports in February.

Adding ISI's research to its mix has also helped Evercore boost its profile and increase its coverage fourfold to 12 industries. In October, Evercore ISI ranked third in Institutional Investors' All-America Equity Research survey, which collects opinions from close to 1,100 buy-side institutions. That's two spots higher than its 2014 finish and the best place secured by a non-bulge-bracket firm since 1995 when Donaldson, Lufkin & Jenrette Securities Corp. placed second. Its presence in equity capital markets (which includes initial public offerings and follow-on issuance) has broadened also, with the bank landing bookrunner roles in 69 percent of its transactions in the year ended Sept. 30, nearly double its 36 percent total a year earlier (or 26 percent at the end of 2014). 

Creeping Higher
Evercore's advisory market share has climbed to an all-time high both compared to bulge-bracket peers and indepdent rivals.
Source: Company presentation

As part of the transcation's rationale, Schlosstein predicted the ISI deal would enhance Evercore's ability to recruit top bankers and that may indeed be true. In November, the firm named John S. Weinberg, a former high-ranking executive at Goldman Sachs Group Inc. with long-time corporate relationships, as its chairman. That followed a series of senior hires in 2015 and 2016 including that of Goldman's top shareholder activist defense banker Bill Anderson, one of Bank of America Corp.'s top power and utility bankers Laurie Coben and one of Lazard's top restructuring bankers, Daniel Aronson. Just last week, Evercore said it hired Rothschild & Co.'s Ira Wolfson to advise clients on industrial deals.

This trend could well continue -- in a recent note, Nomura analyst Steven Chubak told clients that Evercore's research arm serves as a "critical tool" for the firm's recruitment of "top tier" senior managing directors, a cohort of bankers that are responsible for driving millions in fees towards the firm. 

Good Books
A randomly selected cross-section of Evercore ISI's research recommendations shows its analysts are generally positive about the companies they cover
Source: Bloomberg
*Analysts chosen cover financials, retail, media, telecommunications, specialty pharmaceutical and energy stocks

Currently, none of Evercore's direct rivals are a force in equities, and they may not have any regrets about that because in a downturn, such revenue can take a beating. But observing the impact the business has had on their New York counterpart -- at least to date -- may lead at least some to seek out an ISI of their own.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Deals are ranked according to five grades (listed here from positive to negative): Slam Dunk, Polite Clap, Meh, Troubled and Cringeworthy. In assessing the performance of the ISI deal, we took into account the earnings accretion following the deal's close; the company's share-price performance; and the additional revenue (and profits) obtained as a result of the transaction. 

  2. Lazard and Greenhill, for example, have a greater exposure to non-U.S. clients, as do global bulge-bracket investment banks.

  3. Evercore acknowledges that research budgets are shrinking but that its position within the industry should enable it to snare more market share from lesser-recognized peers.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net