If the Deal Line Goes Dead: Michael P. Reganby
The rationale that led to boutique investment bank PJT Partners Inc. becoming a public company is pretty clear. The rationale for buying the stock? Well, that’s not as obvious.
First, the thinking that led Blackstone to combine its advisory unit with Paul Taubman’s business and spin it off: Having a merger advisory business inside of Blackstone isn’t a perfect fit, considering conflicts that arise when one part of a firm is buying companies and another part wants to advise companies, including Blackstone competitors, on what to buy and sell. So spinning it off makes sense.
Merging the Blackstone advisory unit with Paul Taubman’s business as part of the deal also makes sense because, well, these are merger bankers after all so what else would you expect? And by all accounts the 54-year-old is one of Wall Street’s greatest dealmakers, who had some time available after finishing a three-decade career at Morgan Stanley.
Another part of the pitch is that firms like PJT Partners tend to have higher valuations than asset managers. Fair enough: Lazard traded at 11 times forward earnings as of Wednesday’s close, 20 percent higher than Blackstone, while multiples for Evercore Partners, Moelis & Co. and Greenhill & Co. were more than 50 percent higher. Price-to-tangible-book values are also higher, but let’s be honest: the "book" that matters most to these companies is the little black books that rainmakers like Taubman keep in the hand not holding the old Samsung flip phone.
As for PJT, consolidated financial statements show the firm would have had revenue of $401 million in 2014 and posted net losses in four of the past five years. So investors may have to settle for a "N/A" in some earnings-based valuations for awhile. That’s fine for a startup with prospects for a lot of growth, right?
Hmm. It’s tough to make the argument there’s an appetite for richly valued stocks in cyclical industries at the moment. And mergers are very much a slave to the economic cycle.
PJT has its fingers crossed for a prolonged boom in M&A, which is on pace for a record year in 2015. It believes the frenzy will continue because of "an improving global macroeconomic environment, strong corporate balance sheets, attractive financing markets," etc.
That’s some glass-half-full thinking right there. And you have to admire it. But the macro view isn’t shared by all. Christine Lagarde at the International Monetary Fund, for one, just said global growth appears "disappointing and uneven" and "the risk of low growth for a long time looms closer.” Well fine, you may think, that’s the French for you: the inventors of -- and only ones who know how to pronounce -- "ennui." But here’s the consensus outlook from all economists, both French and otherwise:
Shares of boutique investment banks have taken a beating this year, which makes you wonder if shareholders think the M&A boom is in danger as volatility picks up. Even PJT’s own stock, which started trading officially on Thursday, is already in a bear market if you start with when-issued prices last week.
PJT also has a restructuring business, so it’s somewhat hedged against a cyclical slowdown in mergers. But the main selling point is M&A -- and Taubman’s reputation as a home-run hitter.
As the firm and Bloomberg Intelligence point out, boutique banks are carving out decent market share among the Morgan Stanleys and Goldmans of the world. Yet all of these boats rely on a rising tide, whether they are the size of a cruise ship or a dinghy.