Greenhill’s Deal Savvy Makes Adviser a Target: Real M&ABrooke Sutherland
Greenhill & Co., the merger adviser GrainCorp Ltd. hired to consider Archer-Daniels-Midland Co.’s bid, is itself a potential target for firms looking to add banking expertise on optimism deal-making will resurge.
Greenhill’s banking savvy, honed on deals such as Aetna Inc.’s $5.6 billion purchase of Coventry Health Care Inc., may appeal to financial firms betting on a revival after this year’s high-profile takeovers such as Dell Inc., Holland & Co. said. Worldwide mergers and acquisitions totaled $2.2 trillion in 2012 and are running at about the same pace in 2013, roughly half the record set in 2007, according to data compiled by Bloomberg.
The New York-based company, founded by Robert Greenhill after he led Morgan Stanley into the M&A advisory business, would fill a hole for Wells Fargo & Co., said Mark T. Williams, a former Federal Reserve bank examiner. Raymond James Financial Inc. and Leucadia National Corp., which purchased Jefferies Group Inc. this year, also make sense as buyers of the $1.3 billion company, Morningstar Inc. said. Another possibility is a merger with Rothschild, said Standard & Poor’s.
“Greenhill is desirable bait for big fish,” Williams, now a lecturer at Boston University’s School of Management and the author of “Uncontrolled Risk,” a book about Lehman Brothers Holdings Inc., wrote in an e-mail. “As the global economy moves towards a full recovery, more M&A activity will expand,” he said. “This is Greenhill’s bread and butter.”
In 2012, Greenhill was hired to advise on 45 deals valued at a total of $65 billion, giving the company 2.9 percent of the global market and ranking it No. 19 among M&A advisory firms, according to data compiled by Bloomberg. That was an improvement from 2011, when its 0.9 percent market share put it in 42nd place, the data show.
Among U.S. deals, Greenhill was in 13th place last year with a 5.2 percent market share, data compiled by Bloomberg show. In 2011, it ranked 36th with a 0.7 percent share.
“We have built a valuable global investment banking brand that would be very difficult to replicate and which has much more room to grow,” Scott Bok, chief executive officer of Greenhill, said in an e-mailed statement yesterday. “But, I am confident that none of our 70 partners, each of whom joined Greenhill to be part of a firm that provides unconflicted, independent advice, would have any interest in any kind of business combination.”
“I know our clients would strongly prefer that we retain the independence that has been the hallmark of our firm since its founding in 1996,” he added.
Robert Greenhill, the 76-year-old founder and chairman, led Morgan Stanley’s M&A department in the 1970s and became director of the firm’s investment-banking division in 1980, according to a biography on Greenhill & Co.’s website. He was chairman and CEO of Smith Barney Inc. -- where he was replaced by Jamie Dimon, who now runs JPMorgan Chase & Co. -- before leaving in 1996 to start his own firm.
Even as Greenhill’s market share grew last year, global deal volume fell about $200 billion from 2011 and trailed the record $4.06 trillion set in 2007, before the worst financial crisis since the Great Depression, according to data compiled by Bloomberg. Announced deals have totaled about $680 billion in 2013, in line with the same period in 2012, even following blockbuster deals such as the bids for Dell and H.J. Heinz Co., the data show. The data exclude terminated transactions.
Greenhill has missed analysts’ earnings estimates for each of the past four quarters, data compiled by Bloomberg show.
“All of the fundamentals are there for a strong M&A environment and yet we haven’t seen it in revenue,” Alison Williams, a Bloomberg Industries banking analyst in Skillman, New Jersey, said in a phone interview. “Because Greenhill is totally focused on this area, obviously it makes it a tough market for them,” she said. Among companies of its size, Greenhill is the only one “with a pure focus on the M&A business.”
Michael Holland, chairman of New York-based Holland & Co., said he expects M&A activity to accelerate, particularly with the S&P 500 Index at a record high. For financial institutions that feel the same way, there may be no better time to consider a takeover of Greenhill, he said.
“With the stock market at new highs, it probably augurs well for the possibility of a pick-up in the M&A business,” Holland, who oversees more than $4 billion, said in a phone interview. For interested buyers, “it’s probably a decent time to go fishing.”
Greenhill’s most valuable asset is its employees and their expertise, which would offer an instant foothold to banks looking to bolster their investment advisory operations, according to Holland.
“They’ve got top quality professionals there,” he said. “This would be an obvious place to look” for firms aiming to bulk up in investment banking.
Financial institutions also would find Greenhill’s high margins and returns attractive, said David Trone, a New York-based analyst at JMP Group Inc.
Greenhill’s operating margin in the past 12 months of 24 percent surpassed 92 percent of U.S. institutional brokerage firms, while the M&A adviser’s return on equity beat 95 percent of peers including JPMorgan and Goldman Sachs Group Inc., according to data compiled by Bloomberg.
“There would be plenty of interested buyers, no doubt,” Trone said in a phone interview.
Today, shares of Greenhill fell 1 percent to $46.82. The stock is down 9.9 percent this year.
Among large banks, San Francisco-based Wells Fargo could benefit from buying Greenhill, said Williams, the former Federal Reserve bank examiner.
Wells Fargo is “not strong in investment banking,” he said. “Acquiring Greenhill could fill” that hole.
While other large financial institutions such as Goldman Sachs likely wouldn’t be interested in Greenhill, Raymond James and Leucadia could be logical suitors, according to Michael Wong, an analyst at Morningstar.
“The managing directors that Greenhill has will probably be complementary to the investment bankers that they already have, versus having a large amount of overlap, like with a bulge bracket investment bank,” Chicago-based Wong said in a phone interview. Raymond James or Leucadia “would be big enough to put together a deal if they really wanted it.”
Raymond James has a market capitalization of $6 billion, while Leucadia is valued at $11.7 billion.
Ancel Martinez, a spokesman for Wells Fargo, declined to comment. Steve Hollister, a spokesman for St. Petersburg, Florida-based Raymond James, said the firm doesn’t comment on speculation. Richard Khaleel, a spokesman for New York-based Leucadia’s Jefferies division, didn’t respond to requests seeking comment.
Another possibility is a merger with Rothschild, which has expertise in global investment advisory, while Greenhill is more U.S.-focused, said Ken Leon, an equity analyst at S&P.
Greenhill competitor Lazard Ltd. “has global coverage,” he said in a phone interview. “If Greenhill is trying to move to the next level or notch like Lazard, a company that would be a mid-sized firm outside the U.S. would be pretty interesting maybe as a merger of equals,” he said. A union with Rothschild “could make sense.”
Mark Semer, a spokesman for Rothschild, which is owned by Paris-based Paris Orleans, declined to comment on whether the firm would be interested in merging with Greenhill.
Greenhill also could fit well inside of a private-equity firm, Holland said. Blackstone Group LP has been a “role model” for the benefits of coupling an M&A advisory business with traditional private-equity investment operations, and other firms could seek to mimic that, he said. Holland was once a general partner at Blackstone and the CEO of Blackstone Alternative Asset Management, according to his website.
Still, any deal for Greenhill would likely need to be friendly and a buyer would need to ensure retention of its managing directors, who may balk at the idea of losing the firm’s independence, said Leon of S&P.
The pushback will be “we’re not sure being part of a bigger organization makes sense,” he said. Greenhill has been “gaining market share from the larger investment banks because they’re singularly focused on client services as an adviser.”
Given Greenhill’s core competency in deal negotiations, its managers will be savvy enough to avoid selling during the current lull in industry M&A, which would prevent them from getting the highest price, Trone of JMP said.
“It would be the worst time to sell,” he said. “It wouldn’t happen in a year like this. They’re smart guys. They would sell at the peak, not at the trough.”
If a buyer offers a high enough price, Greenhill may be forced to consider a deal because it’s a publicly traded company, said Williams, the Boston University lecturer.
“Executives can complain and say this isn’t a good deal, but if an offer is above market, then I think they have less control over it than a privately held company,” he said. “Larger financial institutions are taking notice of Greenhill’s success.”