Boutique Firms Steal M&A Business from Bigger Banks

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Investment banking's smaller fries are grabbing a bigger share of the lucrative mergers and acquisitions advisory business.The Blackstone Group (BX) is going back to its roots. Led by Stephen Schwarzman, the New York based firm was originally founded as a mergers and acquisitions boutique investment bank in 1985. However, over the years, it sought out private equity deals and made itself into one of the largest private equity firms in the world.

Today, however, the Blackstone Group is reclaiming some of its lost luster in the world of mergers and acquisitions. So far this year (through April 10), Blackstone Group's ranking in the worldwide mergers and acquisitions advisory business has moved up to 11th. That's, a big leap up from the 86th position it held at the same time last year, according to deals tracked by Thomson Reuters.

M&A is a business that Blackstone has been growing in recent years. The latest boost in performance is something Blackstone had been working on since late 2006, when the firm hired John Studzinksi away from HSBC (HBC), where he was the co-head of M&A advisory business.

Benefiting from the Demise of Rivals

Clearly, the firm was strongly positioned to benefit from the demise of Lehman Brothers and Bear Stearns during the financial crisis. CEO Schwarzman noted that the firm's "M&A business grew 7% in 2009 despite a 30% decline in industry volumes globally and the back log continues to grow." Blackstone's market share has grown from a mere 0.1% to 9%.

Besides Blackstone, other boutique investment banks that were in a good position are also performing well. Lazard (LAZ), for instance, moved to sixth position so far this year, up from 12th in the same period of last year. Its market share has grown to 17.5% from 8%. And Houlihan Lokey, an investment bank better known for restructuring advise, also moved up in its M&A business to 13th position from 53rd last year.

"We've seen a movement of top people from the better known banks into boutique banks and these shifts in personnel is influencing the deal making that's going on," says Matthew Toole, deals analyst at Thomson Reuters.

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Gains Come at Other Banks' Expense
The gains have come at the expense of larger investment banks. Citi (C) has dropped to seventh position, from third, and Bank of America Merrill Lynch (BAC) dropped to ninth position from sixth.

Last year, fresh off the financial crisis, corporations sought the safety of large, well-known investment banks like Goldman Sachs (GS) and J.P. Morgan (JPM). This year, with a more stable financial system in place, companies are seemingly comfortable with going to boutique investment banks for advice. Goldman and JP Morgan continue to hold the number one and two spots.

However, their market shares have dropped. Goldman's has dropped from 37% to 25%, while JP Morgan's has dropped from 36% to 22%. At the same time, Morgan Stanley (MS), which ranked first at this time last year, is now at fourth place, and its market share dropped to 21% from 48%.

So far this year, there has been a 28% increase in global M&A activity to $639 billion. Blackstone and Lazard were able to pick up the advisory business for the $35 billion purchase of American International Group's (AIG) Asian life insurance unit AIA by British insurance firm Prudential. They also snagged the business for Nestle's $3.7 billion acquisition of Kraft's (KFT) frozen food business, among other mergers so far this year.
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