Why Some M&A Deals Are Best Done In-House
When PPR, the French owner of Gucci, sold a stake in its African distributor CFAO in August, it didn’t use an investment bank to handle the transaction. Instead, the company turned to an in-house mergers-and-acquisitions team led by a former France Telecom M&A executive. “When we can, we do it on our own,” says group managing director Jean-François Palus.
Worldwide deal volume has plunged 53 percent since 2007, a victim of the weak global recovery and the European debt crisis. With the average size of deals shrinking 25 percent in that time—to $149 million, according to data compiled by Bloomberg—European companies such as BP and Siemens are relying on their own staffers for smaller transactions. Almost a third of completed European and U.S. M&A transactions this year were done in-house, according to data provided by Freeman Consulting Services, a New York-based research firm. For the U.S., that represents the largest adviser-free proportion of deals since 2003; for Europe, it’s the most since 2004.
Big global investment banks have seen their revenue from advisory work fall 48 percent, to $6.48 billion, in the first nine months of 2012, compared with the same period in 2007, according to data compiled by Bloomberg. Distrust in banks is a factor, says John Longworth, director general of the British Chambers of Commerce, which in an October report found that half of U.K. companies are leery of doing business with big finance. “Financial institutions need to rebuild trust and repair damaged relationships with businesses,” Longworth says, citing the London interbank offered rate scandal as one such black mark.
Siemens, Germany’s most acquisitive company during the past decade, used its own M&A staff for an agreement in July 2011 to acquire NEM and Nem Energy Services, Dutch makers of gas and steam power-plant parts, for €170 million ($218 million). Banks might have earned about $1.7 million in fees to advise Siemens on the deal, Freeman estimates based on deals roughly that size. They may have missed out on as much as $55.5 million when BP, Europe’s second-largest oil company, used its 30-member in-house advisory team to sell Gulf of Mexico oil and gas properties to Plains Exploration & Production for $5.55 billion, announced in September. “On acquisitions, we still prefer to do it without banks,” BP spokesman Robert Wine says.
London-based BP still turns to banks for large deals; it hired Morgan Stanley, UBS, Goldman Sachs, and three other firms for advice in the pending $26.8 billion sale of its TNK-BP stake in Russia. BP also seeks outside advice on deals in unfamiliar markets or involving a capital market transaction, Wine says. And banks can help companies mitigate the risk of litigation from shareholders if a deal turns sour by providing a so-called fairness opinion. “It’s important to have a second opinion,” says Jan Hagen, a faculty member at the European School of Management and Technology in Berlin. Large investment banks have also seen their market share nibbled by boutique firms such as Rothschild, Evercore Partners, and Perella Weinberg Partners. The niche firms’ share of M&A fees in Europe, the Middle East, and Africa rose to 8.5 percent this year from 6.9 percent in 2007, the Freeman data show.
Still, a company’s best option is to use familiar advisers, says Joseph Boutross, director of investor relations at LKQ, a Chicago-based provider of recycled and refurbished motor vehicle parts with a market value of about $6.3 billion. LKQ has done more than 140 M&A transactions since its founding in 1998 and used an internal team of about 19 for its deal, in October 2011, when it bought U.K. distributor Euro Car Parts for at least £225 million ($362 million). “We try to leverage our in-house resources,” says Boutross, “because they have the knowledge.”