Investment Banks: No Deal Too Small
It was the kind of deal that Wall Street bankers might have snubbed a year ago. Private equity firm Questor Management Co. wanted to sell bankrupt bicycle maker Schwinn/GT Corp. Not one, not two, but five marquee investMent banks, including Lehman Brothers (LEH ) Credit Suisse First Boston, lined up to compete for the deal. CSFB won and sold the company to Pacific Cycle LLC and Direct Focus Inc. for $151 million in late September. "The good thing about the current merger-and-acquisition environment is that smaller transactions receive the attention of top-tier advisers," says Garrett P. Kanehann, a vice-president at Questor.
The fight for the Schwinn deal is yet another sign of hard times on Wall Street. Bankers who once boasted of handling $60 billion megadeals are being forced to lower their sights to M&A transactions worth $500 million or less as business dries up. This year, only 13 deals have been worth more than $10 billion, down from 43 in 2000. Megadeals still being done, such as Hewlett-Packard Co.'s (HWP ) troubled $23.5 billion purchase of Compaq Computer Corp. (CPQ ), are tough to pull off. Or they're time-consuming, unsolicited bids, such as Echostar Communications Corp.'s (DISH ) $31.5 billion bid for Hughes Electronics Corp. (GMH ). Hostile takeovers now make up 11% of the total, up nearly four times from 3% in 2000, according to Goldman Sachs & Co. estimates.
MIGRATING. Overstaffed Wall Street houses are clutching at smaller deals as a way of staying busy. "In times like this, everybody trades down to keep their people employed," says John Herrmann, a managing director of M&A at J.P. Morgan Chase & Co. True, the value of announced U.S. deals worth less than $500 million is down 45%, to $100 billion this year. But the middle market has held up much better than deals over $1 billion, whose value has plunged 58%, to $503 billion, says Thomson Financial Securities Data Corp. "Finding an investment banker to represent us was not difficult," says Bill Naumann, president and CEO of Hatteras Yachts Inc., which Bear Stearns (BSC ) is selling to Brunswick Corp. for $100 million. "The middle market is where deals are getting done, and investment bankers are migrating to where the action is."
It's where the rewards are, too. The solid fees earned by midsize deals are holding up well, adding to their appeal. "Although there has been considerable downward pressure on fees in large transactions, fees on smaller deals have continued to hold steady or rise," says J.P. Morgan Chase's Herrmann. Indeed, while the average fee for a deal over $1 billion is now 0.48%, down from 0.56% in 2000, fees for deals under $500 million have actually risen to 2.31% from 1.62% in 2000, according to Thomson Financial. And bankers are managing to keep their minimum fees in the $1.5 million to $2 million range, no matter how small the transaction.
At the peak of the bull market, overstretched larger firms left most of the smaller assignments to a patchwork of investment banking boutiques and the corporate finance arms of consulting and accounting firms. Now, the smaller firms are fighting back by picking up laid-off bankers from big firms or entering partnerships. Already, a subsidiary of Silicon Valley Bancshares (SIVB ) has bought investment banking boutique Alliant Partners for $100 million, and Japanese securities firm Nomura Holdings Inc. picked up a 3.75% stake in San Francisco-based investment bank Thomas Weisel Partners LLC for $75 million on Oct. 31. "(A strategic alliance) is something we're always open to," says Jack W. Hyland Jr., a partner at McFarland Dewey & Co., a firm that handles deals valued between $30 million and $300 million.
SMALLER BETS. Boutiques and investment banks expect to enjoy brisk business in middle-size deals for at least the next 12 months, thanks to the legions of cash-strapped corporations, private equity groups, and entrepreneurs. Banks are more willing to make smaller loans for middle-size transactions than provide big money for megadeals. CEOs are also loath to take on too much risk. "The deals are smaller because chief executives are willing to take smaller bets rather than bigger bets right now," says Sean McDevitt, managing director at investment banking boutique Alterity Partners LLC.
Smaller companies also are no longer holding off in the hope of seeing a stock market rebound any time soon. Indeed, many are struggling as institutional investors such as pension funds shift away from taking positions in smaller companies; the funds only want to hold stakes they can sell quickly if the need arises. Some small fry are also being pushed into a growing throng of so-called orphans, companies for which investment banks no longer issue analysts' research although they took them public. "Sellers have gotten more realistic," says Don Meltzer, global head of M&A at CSFB, whose team specializing in midsized deals advised 135 transactions under $1 billion this year. "They're not saying it will get better in six months. If they wait for an increase in value, they realize they may have to wait six years."
That's not to say that small and midsize companies are easy to sell. These days it's tough to find buyers with enough cash even for smaller deals. Many are forced to use I.O.U.s because they can't raise all of the money they need. "We're finding a lot of frustration on the part of our clients who want to buy, but can't," says Dennis Soter, head of the corporate finance department of consulting firm Stern Stewart & Co.
Buyers are also wary of cheap merchandise. Most have had enough of trying to rescue companies with busted business models. "Many of the companies that want to sell right now are doing so out of need rather than desire because of the downturn in the economy," says Evan W. Siddall, an M&A managing director at Goldman Sachs who specializes in selling smaller companies.
Still, advising smaller companies is better than having no work at all. For now, Wall Street's heavy hitters are committed to help these clients strike the best price for strategic sales and acquisitions. How long they'll stay around when the stock market recovers and megadeals are back in style is another question.
By Emily Thornton in New York