Boutique firms see "pure advice" paying off

NEW YORK Fri Mar 25, 2011 4:28am EDT

A labourer arranges bananas at a wholesale fruit market in the eastern Indian city of Siliguri May 27, 2009. REUTERS/Rupak De Chowdhuri

A labourer arranges bananas at a wholesale fruit market in the eastern Indian city of Siliguri May 27, 2009.

Credit: Reuters/Rupak De Chowdhuri

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NEW YORK (Reuters) - A Delaware ruling last month accusing a large investment bank, Barclays Capital, of conflicts of interest is already driving some business to boutique firms.

Just a day after the ruling, a client told Evercore Partners (EVR.N) it wanted the 15-year-old boutique to be the lead adviser on a transaction.

The client wanted a bank that focused on pure M&A advice and wasn't distracted by other businesses.

"The idea of having an adviser who is fully focused on the situation, not the financing, is something that is valued and a lot of CEOs and boards want assurance of that," said Eduardo Mestre, vice chairman of Evercore. He didn't name the client.

The case that led to the change was the buyout of Del Monte Foods by private equity firms led by KKR (KKR.N). Although Barclays was not a defendant, the judge criticized its role in advising Del Monte while also providing funding to the buyers.

Barclays has rejected the criticism.

Boutique investment bank executives see an increasing number of clients wanting their advice, and say cases like Del Monte would only drive more business away from big banks.

In closely watched global adviser rankings, Evercore rose to seventh place in the first quarter, a huge jump from 34th place a year ago, according to Thomson Reuters data.

Other boutiques such as Greenhill & Co (GHL.N), Perella Weinberg Partners and Moelis & Co also crept up league tables that have long been the domain of Wall Street giants like Morgan Stanley (MS.N), JPMorgan Chase (JPM.N) and Bank of America Merrill Lynch (BAC.N).

"I don't think there is any one event like Del Monte that's going to drive all the clients our way," Greenhill Chief Executive Scott Bok told Reuters. "But I do think there has been and will continue to be a steady movement of clients more toward firms like ours for advice."

Greenhill and Evercore benefited from advising AT&T (T.N) in its $39 billion bid for Deutsche Telekom's (DTEGn.DE) T-Mobile USA. Evercore also advised Lubrizol LZ.N in its $9.2 billion sale to Warren Buffett's Berkshire Hathaway (BRKa.N).

Boutique firms are reaping the benefits of aggressive hiring through the financial crisis, when investment bankers could be poached more easily due to problems at big institutions that ranged from plunging stock prices to the bankruptcy of Lehman Brothers.

After settling in their new homes, these bankers are starting to deliver. While the two key telecommunications bankers behind the AT&T deal -- Gil Ha and Lawrence Chu -- joined Greenhill in 2008 from Evercore, scores of bankers from the large Wall Street companies have also made the move to boutiques.

Evercore added 31 investment banking senior managing directors since 2007. Greenhill snapped up enough bankers to more than double the number of advisory managing directors since the start of 2008.

"All aspects of the financial crisis were good for our recruiting," Greenhill's Bok said.

It's not all smooth sailing though. Some clients still want a one-stop-shop bank that can not just provide advice but also help with other things necessary to do a deal, like financing.

Critics have argued that the advice from boutiques is not entirely free of potential conflicts either.

A large deal like T-Mobile USA could bring in somewhere around $60 million in fees for the advisers, which in the case of a boutique can be a substantial portion of annual revenue.

Greenhill's financial advisory fees for all of 2010 totaled just $252 million, while Evercore's investment banking revenue was $302 million.

That means, the argument goes, a boutique firm could have an incentive to urge clients to pull the trigger on large deals because it would have a direct impact on the bottom-line.

Indeed, shares of both Evercore and Greenhill surged after the T-Mobile deal, where both served as advisers -- a reaction almost never seen in the stock of the larger banks with more diverse businesses.

Morgan Stanley, which was the lead adviser to Deutsche Telekom, raked in $1.47 billion in advisory revenue in 2010, making the fees from the deal much smaller portion of total revenue and, thus, less significant.

Greenhill's Bok, however, rejected the argument, pointing out that advisers do not have that much control over which deals get done and bankers could spend years advising clients before any of them decide to actually pull the trigger.

"I don't think anybody is going to be trying to drive the advice to try to create a short-term outcome," Bok said. "It would be completely ineffective to even try to do that. Most people are smart enough to realize that."

(Editing by Steve Orlofsky)

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