M&A: Bypassing the Street

More companies are avoiding investment bankers' fees by doing M&A work in-house

When Viacom (VIA ) Inc. said on Apr. 22 that it would plunk down $1.2 billion in cash to buy AOL Time Warner (AOL )'s 50% stake in their Comedy Central cable station joint venture, there wasn't a Wall Street investment banker in sight. It was by no means the media giant's first unaided deal: Last year, it paid $650 million for KCAL-TV in Los Angeles as soon as it heard the station was for sale. In fact, Viacom hasn't used an outside banker to buy a company for at least two years. "We are not as reliant on investment bankers as other companies may be," says Chief Financial Officer Richard J. Bressler.

Watch out, Wall Street. More and more companies are starting to get the same idea. They're moving their investment banking in-house -- hiring bankers who cut their teeth at the top Wall Street firms, identifying potential targets on their own, and often doing their own due diligence. Blue chips such as General Electric (GE ), PepsiCo (PEP ) and Johnson & Johnson (JNJ ) have long handled many deals themselves. But, now, even midsize companies such as funeral-services chain Hillenbrand Industries (HB ) Inc. and diet empire Weight Watchers International (WTW ) Inc. are getting in on the act. "Corporate America is saying adiós to Wall Street's high fees," according to Richard J. Peterson, a market strategist at Thomson Financial.

The savings can be hefty. Wall Street generally charges 0.5% of a deal's value, or about $2.5 million for a $500 million transaction. That's a lot, considering that companies can hire one of the thousands of laid-off bankers for as little as $187,500 a year, according to recruiters. "A lot of bankers are trying to get into companies' strategic groups," says Maurice B. Toueg, a recruiter at headhunter Foster McKay Group.

The recent spike in do-it-yourself deals is startling. Mergers and acquisitions handled without an outside banker helping either the buyer or the seller accounted for 83% of U.S. deals announced this year through May 21, up from 73% over the same period a year ago -- and the highest level since 1991. By value, in-house deals swelled to 24%, up from 14% a year ago. One of the largest: Berkshire Hathaway (BRK ) Inc.'s $1.7 billion bid on Apr. 1 for homebuilder Clayton Homes. Berkshire Chairman Warren E. Buffett doesn't often hire investment banks to do deals.

Neither do other investment whizzes. Financiers such as Carl C. Icahn, Philip Anschutz (through his Regal Entertainment Group (RGC )), and Samuel Zell, chairman of the real estate investment trust Manufactured Home Communities, snapped up many of the companies bought without Wall Street's aid this year. "Investors expect that we will pursue properties on our own, as opposed to retaining investment banking help," says David Steinwedell, chief investment officer of Wells Real Estate Funds Inc., which expects to buy $2.5 billion in commercial-and-industrial real estate properties this year, up from $1.4 billion in 2002.

The trend has taken on added momentum because so many companies are sticking to their knitting. They're avoiding the complex megadeals of the '90s that Wall Street bankers specialize in, focusing instead on bite-size purchases, so they have less need for outside M&A counsel. Acquisitions announced this year have averaged only $125 million. Some CEOs, such as Gary L. Bloom of Veritas Software (VRTS ) Corp., feel they don't require outside help if the deal is less than $500 million. "For a lot of our smaller deals, we have the deal -- and legal -- skills we need," he says. After all, since most companies want to expand only within their industry, they often know more than the bankers about both what's worth buying and how much to pay.

As a result, companies can dispense with the two main services bankers offer: identifying targets and financing the deals. "I'd like to think there is no opportunity that we haven't thought of first," says Thomas J. Derosa, who left Deutsche Bank (DB ) in September to join real estate operator Rouse (RSE ) He helped put together a $320 million deal announced on Mar. 6 for Rouse to buy Christiana Mall in Newark, Del., and he is now carving out a SWAT team of in-house dealmakers from the firm's finance department. "We should know what's right for our business better than anybody else."

Look for these banking departments to grow as industries continue to consolidate. General Electric Co. pinched senior banker Robert A. Jeffe from Credit Suisse First Boston (CSR ) in December, 2001, and has been bolstering its in-house M&A operation ever since. "None of us here were actively looking to leave investment banking," says Jeffe -- until the chance to work for GE was dangled in front of them. Novartis, which acquired a new drug from Pfizer Inc. for $225 million on May 9, already employs about 50 people to scout out deals. "Why didn't we use a banker? Because we didn't need one," says Victor Hartmann, head of business development. "The transaction was not complicated."

Of course, not every company is rushing out to hire a bevy of rainmakers. After all, the value of transactions is still down 60% from two years ago, and most companies aren't buying or selling anything.

Even so, there's always some work that will go to an investment bank -- especially when it comes to selling. Conglomerates such as the ailing Vivendi Universal (V ), which is shedding a dizzying array of properties from Hollywood studios to textbook publishing, often need all the help they can get from Wall Street to get the best price for their assets. And when McDonald's (MCD ) Corp.'s new CEO, James R. Cantalupo, decided it was best to get back to burgers and fries, he hired Morgan Stanley (MWD ) to find buyers for properties such as Boston Market and Chipotle. When the chains were bought, however, McDonald's had used in-house bankers.

Plus, boards of directors and shareholders often insist on getting an outside opinion when a deal reaches a certain size. That assures them that they're getting a good price and helps protect the board against lawsuits. "The board has no recourse without an outside opinion. That's the risk," says Jay W. Lorsch, a professor at Harvard Business School who specializes in corporate governance. "Any board that's thinking clearly ought to be very cautious about signing off on a deal unless they have some independent opinion or if they have some reason to believe, through their own investigation, that management is correct."

Still, it's hard for outside bankers to compete with the likes of Viacom's bosses, Sumner M. Redstone and Mel Karmazin, when it comes to knowing what's on offer in the media business. And so far, Viacom hasn't been talked into any bad deals by pushy Wall Streeters. That happened to so many execs now saddled with failed mergers from the go-go '90s that bankers face a high hurdle in regaining their trust. And until they do, companies will steer clear of their pricey advice whenever they can.

By Emily Thornton, with Diane Brady, in New York, and Peter Burrows in San Mateo, Calif., and bureau reports

— With assistance by Diane Brady, and Peter Burrows

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