It’s far from all over for the bulge bracket banks

David Hellier
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ONE of the many surprises of the Walgreens pharmacy chain bid for 45 per cent of Boots was the choice of advisers.

For sure, Walgreens had bulge bracket firm Goldman Sachs on the case but it also took advice from the independent firm Lazard. And on the other side of the deal, Alliance Boots and its 71 year-old chairman Stefano Pessina was advised by the boutique bank, Centreview.

Centreview’s involvement was in no small amount due to the relationship Richard Girling had with Alliance Boots running all the way back to his days at Bank of America Merrill Lynch.

The sight of independent banks on both sides of the transaction illustrate a point that many have recently been making; that the independent banks are increasing their share of the market in advisory work at the expense of the larger, often conflicted banks.

Indeed when the activist corporate raider Nelson Peltz recently raised his shareholding in Lazard he took the opportunity to press home this point in much of his 38-page presentation.

In it, Peltz’s firm Trian argues that boards are increasingly turning to independent advisory firms for conflict free advice; the trend of pairing an independent adviser alongside a bulge bracket firm (a la Goldman and Lazard for Walgreens) is gaining traction; increased regulations and challenges in other business units are impacting advisory; independent advisory firms are increasingly able to attract talent away from the bulge brackets; and lastly, that with approximately 25 per cent market share of advisory fees, boutiques have significant growth potential.

A recent presentation made by Greenhill at a Morgan Stanley financials conference shows the market share of the independent firms increasing in the past couple of years.

Generally speaking the time is propitious for the independent firms and Peltz may indeed be right in his view that Lazard’s shares will have doubled within two years. However, this increase in valuation is just as likely to come through an increase in activity and a containment of costs than it is through a further increase in market share. At the moment things are pretty tough for all.

For it would be wrong to write off the integrated investment banks. They offer capital markets breadth and distribution as well as advisory services and although they may find themselves having to share more advisory work with their independent rivals, they are unlikely to be edged out of the market altogether. Says Hernan Cristerna of JP Morgan: “Boutique firms can and do have a place in advisory situations and what they offer can complement the advice provided by investment banks. But banks will always have a seat at the table because, to be able to fully advise clients on M&A significant transactions, you need to have a finger on the pulse of the capital markets and boutique firms don’t tend to offer this.”

And another thing? When Trian raised $920m in 2008 who did it go to to raise the money? You guessed it. Two of the bulge bracket firms, Deutsche and Merrill Lynch.