When PPR SA, 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 Charles de Fleurieu, 39, a former France Telecom SA M&A executive. “When we can, we do it on our own,” said group managing director Jean-Francois Palus, 51.
Banks have had a tough past few years. Financial companies including Goldman Sachs Group Inc. (GS:US) and Deutsche Bank AG (DBK) have cut about 88,000 jobs in 2012 alone and global deal volume has plunged 53 percent from 2007, a victim of the recession and European debt crisis, Bloomberg Businessweek reports in its Nov. 26 issue. Now, with the average size of deals shrinking, more European companies such as BP Plc and Siemens AG (SIE) are eschewing bulge-bracket banks for M&A advice in favor of using their own employees for smaller deals, further hurting bank revenue.
“More than ever, companies are sophisticated about M&A and want objectivity and an independent perspective around transactions, which they feel more confident they can get themselves,” said Richard Jackson, 43, head of the Europe, Middle East and Africa M&A practice for consulting firm Bain & Co.
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, 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 may be a factor as companies grow increasingly skeptical about banks, said 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 financial institutions.
“Financial institutions need to rebuild trust and repair damaged relationships with businesses,” Longworth said, citing the London interbank offered rate scandal as one such black mark.
While advisory work accounts for just 4.7 percent of overall revenue for banks, it’s crucial for firms’ reputations and earnings. It underscores their proximity to corporate clients and often leads to other, more profitable business from those customers, such as providing financing for the deal and handling future debt and equity sales.
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 euros ($218 million).
Banks might have earned almost 3 million euros in fees to advise Siemens on the deal, estimates Freeman based on transactions 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 said.
London-based BP still turns to banks for large deals, as when it hired Morgan Stanley (MS:US), UBS AG (UBSN), 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,” said 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 Inc. and Perella Weinberg Partners LP. 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, said Joseph Boutross, director of investor relations at LKQ Corp. (LKQ:US), 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 in October 2011 when it bought U.K. distributor Euro Car Parts for at least 225 million pounds ($362 million).
“We try to leverage our in-house resources,” said Boutross, “because they have the knowledge.”
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