Boutiques provide a glimpse of a new-look Wall Street
By William Cohan
Published in FT: September 28 2008 20:04 | Last updated: September 28 2008 20:04
Afew short weeks ago, way back on September 4, the unthinkable happened: a Wall Street investment bank – Lazard – sold $265m worth of its own stock to the public in an underwritten offering. What is more, this was a secondary offering of shares, meaning that the proceeds flowed into the pockets of the selling shareholders – in this case a long list of the bank’s most senior executives – and none of the proceeds went into the company, which has been around since 1848 and has never needed much more than a drop of capital to operate profitably anyway. The offering flew out the door. Huh?
That this offering occurred at the precise moment when the pluralistic investment banking system that has thrived for so long now seems to be coming apart at the seams makes the Lazard offering all the more remarkable. But it also provides a glimpse into what the post credit-crisis Wall Street will look like. In addition to the gargantuan and historic re-combinations of commercial and investment banks – Bank of America/Merrill, JPMorgan Chase/Bear Stearns, Barclays/Lehman, Citibank/Salomon Brothers and the equally earth-shattering transformation of Goldman Sachs and Morgan Stanley into bank holding companies – the landscape will also include a plethora of smaller, thriving, more focused firms, such as Lazard – which provides only M&A advice and asset management – that require very little capital to operate and shun all the high-risk capital-intensive activities such as underwriting structured products and proprietary trading.
While the shocking collapse of the lions of Wall Street has garnered headlines, the market has quietly been acknowledging the role that firms such as Lazard are likely to play once the dust settles. During the credit bubble a number of these M&A boutiques exploited the euphoria and transformed themselves from private partnerships into publicly traded corporations. Greenhill , started by former Morgan Stanley banker Robert Greenhill in 1996, went public in 2004. Lazard followed in 2005; then came Evercore, started by former Lehman banker Roger Altman, and Keefe Bruyette & Woods, founded in 1962.
These firms are hardly immune to the effects of the credit crisis. The fact that the global volume of M&A deals so far this year is down 27 per cent will cut their revenues and profitability. Those with private-equity and asset-management businesses will also suffer. But it is equally true that the number of corporate-driven M&A deals – the bread-and-butter of these boutiques – has risen as a percentage of overall M&A as private-equity firms, which drove M&A activity during the boom sit on their capital and the sidelines. (M&A volume for private equity firms is down 63 per cent this year.)
The market has noticed. Since Lazard priced its secondary offering, the shares of Lehman, Merrill, Morgan Stanley and even the mighty Goldman Sachs have crumbled. But shares of smaller, public firms have stayed basically flat or moved up smartly: Greenhill has increased a stunning 37 per cent since September 9; Keefe Bruyette was up 33 per cent on September 18 alone; and, Lazard’s stock has moved up 18 per cent since September 4.
Before our eyes a new post-crisis financial architecture is being designed. There will be the highly regulated, capital intensive global behemoths providing capital wherever it is needed around the world to allow companies to innovate, grow and create new jobs. The days of massively leveraged balance sheets are over. But while all that is getting sorted out, the Wall Street boutiques – some public, some private – will provide a growing list of clients with the intellectual capital needed to navigate through some rough waters. The boutiques will benefit for the simple reason that corporations will want – and pay for – the advice of those bankers who managed to get through the crisis unscathed.
Wall Street is undergoing its most radical transformation since the passage of the Glass-Steagal Act in 1933 forced banks to choose between investment and commercial banking. The once-unimaginable changes of the past six months have been gut-wrenching and far-reaching. They are not over yet. In the midst of the turmoil, the market is reminding us that once there was a simpler, less risky way of doing business. It may be worth taking another look at it today.
The writer is author of The Last Tycoons: the Secret History of Lazard Frères, and is at work on House of Cards, a book about the collapse of Bear Stearns
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