Revenge of the Boutique Banks

Small firms are doing a robust business

Robert F. Greenhill is a rare breed on Wall Street. The chairman and founder of the six-year-old investment banking boutique Greenhill & Co. is hiring. Most of his big rivals are firing--chopping more than 11,000 jobs so far this year. Recently, Greenhill added 20 more bankers to his roster, bringing his total payroll to 110. What's more, he expects the firm to end 2002 with record revenues. "Business is terrific this year," he says.

Sweet revenge. The independent small fry who earn money exclusively from their advice and gold-plated connections once thrived in the lucrative merger business. Wasserstein Perella was a power broker in the late 1980s, while Lazard Frères and Rothschild had been global dealmakers since the 19th century. But by 2000, they looked in danger of being reduced to relics of the financial services industry, as juggernauts like J.P. Morgan Chase & Co. (JPM ) and Citigroup (C ) aggressively packaged loans and other banking services to win deals.

Now, small firms are in vogue again. They have advised on 30% of the mergers announced so far this year, nearly double their 15.9% share in 2000. And it's not just because the average merger has shrunk to $68 million--below the radar for big banks. Large companies often team boutiques with big banks, even hiring them as sole adviser. Lazard, for example, was one of two firms that advised Pfizer Inc. (PFE ) on its $61 billion purchase of Pharmacia Corp. (PHA )--the biggest merger announced this year. "The death knell in 1999 and 2000 for independent advisory firms was wrong then, and it's even more wrong now," says Gerald Rosenfeld, CEO of Rothschild North America Inc., the U.S. arm of the Anglo-French Rothschild Group.

The resurgence of the small fry is easy to explain. For starters, they haven't been tainted by conflict of interest and scandal. Because they didn't extend loans or underwrite scads of corporate bonds as their big rivals did, they also don't find themselves on both sides of the fence in restructuring negotiations--acting both as creditors and advisers to debtors. And, unlike Merrill Lynch & Co. (MER ) and Salomon Smith Barney (C ), for example, the boutiques didn't issue rosy research to win investment banking business.

Concerns over conflicts are part of what drove Lands' End Inc. (LE ), the mail-order clothing retailer, to choose New York-based Peter J. Solomon Co. to handle its sale to Sears, Roebuck & Co. (S ) for $1.9 billion last May. "[Big banks] had done good work for us," says Gary Comer, then chairman of Lands' End. "But you do have the Chinese Wall that looks like Swiss cheese now."

Companies also use boutiques as independent watchdogs to evaluate top investment banks' proposals and give broader advice to executives and the board. For example, Dynegy Inc. (DYN ), the natural gas and power company, confirmed it recently asked Greenhill for advice on its financial situation though it wouldn't go into details.

Restructuring--managing creditors, raising money, and reorganizing the capital structure--is one of the biggest sources of overall M&A these days. So the independence of the smaller fry gives them a valuable edge as many of the deals the big banks orchestrated in the 1990s--and also invested in--turn sour. "It doesn't make a lot of sense to be advised by the same people you are negotiating against," says Kenneth Jacobs, deputy chairman of Lazard. "You pretty quickly realize that if you do what the banks ask you to do, the only people who will get anything out of it are the banks."

The boutiques have another advantage when it comes to restructuring: They did a lot of such work for small companies in the early '90s, when big banks deserted them. Suddenly, even marquee corporations are wrestling with the same problems that afflict small private companies, such as having trouble refinancing. "We've been dealing with this for years," says Paul C. Hammer, a senior vice-president at Houlihan Lokey Howard & Zukin, which hired 54 bankers this year, bringing its total number to 303. "We understand dramatic drops in value and complex deals." Houlihan Lokey was one of two advisers to Trendwest Resorts Inc. of Redmond, Wa., which Cendant Corp. agreed to buy for $1 billion in April.

Of course, the boutiques' resurgence could prove to be a flash in the pan. Some bankers argue that because there are so few deals, boutiques' recent wins look more significant than they really are. The acid test is how they perform when the economy rebounds, distressed companies become a smaller part of the merger deal flow, and concerns about conflicts of interest abate.

Still, the niche firms have no qualms about the future. "What you're seeing is the collapse of the Wall Street merger machine and the continuation of ours," says Peter J. Solomon, chairman of Solomon. So far, he seems to be right.

By Emily Thornton in New York

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