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Riches in niches

Boutique investment banks are playing a bigger role as corporate M&A advisers than you might think.

Rarely do boutiques in places like Minneapolis and Milwaukee get much attention when it comes to discussions and rankings of the top mergers and acquisitions advisers. Rather, it's bankers at the big New York firms like Goldman, Sachs & Co. and Morgan Stanley that win raves for negotiating the big deals that transform corporate America and the economy at large. But small firms that don't make the headlines play a far more significant role as M&A advisers than popular perceptions and measures suggest. These shops specialize in smaller deals, often within a few industry sectors or regions, that can be no less important, complex and difficult than the megamergers their bulge-bracket competitors execute. And as major firms grow ever larger and focus on the giant deals that carry the highest fees, boutiques are rushing to serve the thousands of middle-market and small-growth companies the big guys are leaving behind.

"We've seen a number of boutique firms crop up lately to fill that void," says John Clinton, managing partner at Conning Capital Partners, a $500 million-in-assets private equity firm in Hartford, Connecticut, that mostly buys and sells companies that are worth less than $200 million.

Indeed, some surprising names pop up when ranking merger advisers by the number of companies they've sold rather than the dollar volume of those transactions (see table). Houlihan Lokey Howard & Zukin, a Los Angeles firm with 600 employees, rises from 13th to third, ahead of big hitters like Morgan Stanley and Merrill Lynch & Co. Another boutique, Jefferies & Co., jumps from 28th to tenth. Milwaukee's Robert W. Baird & Co., Chicago's William Blair & Co. and Minneapolis's Piper Jaffray & Co. also move up significantly. One exception: Goldman, which leads both rankings.

In the eyes of many clients, boutiques increasingly have a lot going for them compared to their bulge-bracket brethren. Most important are senior bankers with extensive expertise and contacts in their client companies' industries, who devote themselves to smaller deals. Huge firms often send junior bankers to handle this business, if they pay attention to it at all.

"A lot of the large financial institutions are using small- and midcap M&A as a training ground for junior people and bringing low-cost resources to bear," says Robert Kitts, a partner and head of M&A at San Francisco­based Thomas Weisel Partners. "For a client, that's a suboptimal outcome."

The top three advisers by dollar volume -- Goldman, J.P. Morgan and Merrill -- each boast an average deal size of more than $1.5 billion, whereas Houlihan, Jefferies, Baird and Blair are playing mostly in the sub-$150 million space. The fees on these deals are rounding errors for giant financial institutions, but they make for nice profits in boutiqueland.

"Our focus tends to be in the $100 million to $500 million range," adds Kitts, a Morgan Stanley veteran who joined Weisel Partners in 2000. "And we are seeing an increase in deal flow." (Weisel Partners, 35th in the conventional league tables, rises to 21st when measuring number of deals.)

Some middle-market clients also fear that bulge-bracket firms won't fight to wrest the best price and terms from potential buyers, which are likely to be larger companies with which the big firms want to do future business.

Explains Conning Capital's Clinton, "We know we can get the top dogs at these firms to work on a deal for us and it will be an important deal in their eyes.

Mighty mites
Many boutique investment banks don't show up in rankings of top M&A advisers that are based on transaction dollar volume. But small firms are working on a substantial number of transactions, as shown in the ranking below of advisers to U.S. target companies in 2004.

Rank (No. of deals)

Rank ($ volume)


No. of deals 2004*

Average size ($ million)

1 1 Goldman, Sachs & Co. 83 1,622.0 2 10 Citigroup 64 367.9 3 13 Houlihan Lokey Howard & Zukin 59 143.3 4 8 Morgan Stanley 57 559.1 4 2 J.P. Morgan 57 1,579.0 6 5 Credit Suisse First Boston 54 867.8 7 7 Lehman Brothers 41 895.9 8 6 UBS 40 993.1 9 4 Lazard 35 1,983.0 10 28 Jefferies & Co. 34 56.0 11 3 Merrill Lynch & Co. 28 3,005.0 12 9 Deutsche Bank 26 1,044.0 12 19 CIBC World Markets 26 221.4 14 11 Banc of America Securities 24 641.2 15 31 Robert W. Baird & Co. 17 84.4 16 20 Sandler O'Neill & Partners 15 309.4 16 12 Keefe, Bruyette & Woods 15 683.3 16 15 Bear, Stearns & Co. 15 511.2 19 23 Piper Jaffray & Co. 14 245.4 20 39 William Blair & Co. 13 48.0 *Through September 22.

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