Boutique Banks to Cash In


With the collapse or conversion of big banks, smaller competitors stand to scoop up talent and M&A business. Some of their stocks are up sharply

The credit crunch has leveled Wall Street as we know it, but small investment banks hope that leaves more space for them to seize market share from the former titans. Investors are betting it will. The stocks of Lazard (LAZ), Evercore Partners (EVR), and Greenhill & Co. (GHL) have soared. Greenhill is trading for more than 25 times expected profits for 2008, while Lazard's shares are trading at roughly 23 times projected profits. The boutique banks jostle with the likes of Morgan Stanley (MS) and Goldman Sachs (GS) to provide mergers-and-acquisitions advice to corporate clients.

Toxic mortgages that felled the larger banks simply weren't a problem for these smaller players, who didn't take risky debt onto their balance sheets. They operate primarily like traditional investment banks, focusing on personalized transaction advice without the outsize trading operations of the large securities firms. That leaves them poised to snatch up (BusinessWeek.com, 08/10/08) talent fleeing from rivals, and a larger piece of the advisory business, as buyers seek counsel on mergers and restructuring.

"These firms stayed out of the mess and now they have a historic opportunity to expand," says Roger Ehrenberg, managing partner at IA Capital Partners.

The boutique firms have trust on their side. Their reputations haven't been sullied by massive writedowns or troubled debt lurking deep on their balance sheets. Even though the advisory arms of banks like Morgan Stanley and Goldman Sachs weren't directly impacted by the subprime crisis, the dust has certainly clouded their reputation.

Purely Independent Advisers

By sidestepping the mess, the smaller advisory firms have earned investors' confidence, say analysts. When corporate clients need advice on how to best structure a merger—or in this flailing economy, a bankruptcy—they will turn to these other banks, perceived to be above the fray. Lehman Brothers has tapped Lazard to provide guidance on its bankruptcy filing, and the firm ranks No. 10 in the industry for mergers-and-acquisitions activity, according to Dealogic.

"There has been a real loss of confidence," says Lauren Smith, an analyst at Bruyette & Wood. "Strategic buyers will want a pure, independent advisory." And that's exactly what these banks can focus on without the organizational distractions plaguing the bigger players.

Before the credit crunch, it was difficult to woo bankers away from the bulge-bracket firms. But already the boutique banks have snagged key players seeking refuge from the security-firm wreckage. Former industry heavyweights are at the helm of the smaller banks. Roger Altman left Lehman to head Evercore, and Robert Greenhill was a former chairman at Smith Barney before he left to start the smaller bank.

The bulge-bracket firms won't cede market share easily. But, if boutique firms capitalize on trust and the infusion of talent, they can take on a much larger role in the new financial landscape.

Silver-Greenberg is a reporter for BusinessWeek.com.

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