IDD had a nice piece on the difficulty of acquiring niche investment banks. They focused on the acquisition of Harris Williams by PNC and of Houlihan Lokey by Onix (a Japanese bank).
See the article pasted below.
Bought! Will the acquisition tale end differently for
Houlihan Lokey and
Harris Williams?
Christopher O'Leary.
The Investment Dealers' Digest : IDD. New York:
Feb 27, 2006. pg. 1
Full Text (2304 words)
Copyright Thomson Media Feb 27, 2006
It's a story as old as Wall Street: A boutique firm finds a niche and prospers until it becomes lucrative enough to be acquired by a larger bank. After the acquisition comes the honeymoon, during which everyone-especially the boutique founders who get massive paydays- wears smiles. Then, when the noncompetes run out, the acquiring bank gets anxious and begins making suggestions that devolve into demands. Finally, sick of the red tape and politics, founding executives of the boutique fly the coop. All that's left of the boutique is a name on a subsidiary's letterhead.
However, officials at two former boutiques that tied the knot last year with larger acquirers are adamant that this time, their unions will thwart history. True, the ink has barely dried on the acquisition documents for
Houlihan Lokey Howard & Zukin, of which Japan's Orix Group now owns 70%, and
Harris Williams & Co., which was purchased by PNC Financial Services last October. But these former boutiques are convinced they will be equal partners under their new owners, and that their new bosses will stay out of their hair.
On paper, both pairings make good sense. The former independent boutiques now have access to vast reserves of capital that can only help them land deals. They also have multinational presences they couldn't have dreamt of in their prior incarnations, and they are now able to expand into new products, such as distressed debt or advisory. At the same time, both
Houlihan and
Harris Williams say they will not change their business models, nor, they say, are they required to land financing business for their new owners as a primary goal, despite market skepticism that the latter was a key reason for their purchase.
"PNC has left us alone entirely in terms of what we do on a day- to-day basis, so in terms of how we go about our business, it was the same story the day after closing [the acquisition] as it was two years before closing," says Ned Valentine, managing director at
Harris Williams.
But the dynamic of the boutique acquisition is deeply entrenched on Wall Street, and it will take some overcoming. Other deals of that ilk over the past 10 years have started out equally sunny, but descended into gloom fairly rapidly. Thus Street veterans who witnessed or lived them-especially the acquisitions of the fabled Four Horsemen boutiques in the late 1990s-are skeptical that
Houlihan or
Harris Williams will be able to buck history.
"The image of these firms-their ability to capture business-will be hurt," says Ben Howe, head of Boston-based boutique America's Growth Capital. "That's because they are no longer as agile or as strong an entrepreneurial enterprise."
The pressures of conforming to a larger financial acquirer's culture are just too strong for most boutiques to survive, according to Howe. "The boutique culture in most cases was destroyed," he says. "You become a meaningless piece of the puzzle, after having been at the core of your business." He adds that acquired boutiques tend, after a while, not to attract the top talent they were able to hire in the past due to a perception that key decisions are not being made in-house.
So how to avoid such a fate? All parties involved in the
Houlihan and
Harris Williams acquisitions have said they want to avoid the specter of boutique mergers in the late 1990s, such as NationsBank's ill-fated purchase of Robertson Stephens or
Credit Suisse First Boston's takeover of Donaldson Lufkin Jenrette. While some mergers wound up aiding their acquirer's market presence in key areas (CSFB in high yield, for instance), in most cases-with Robbie Stephens as the prime example-little remains of the original boutique's spirit, let alone its founders.
The two latest deals differ in some significant ways. Whereas the PNC/
Harris Williams deal is more a standard boutique acquisition, and thus has its share of skeptics, the Orix/
Houlihan deal, in part due to the 70/30 partnership (with an Orix subsidiary the majority shareholder and the remainder owned by
Houlihan shareholders), has the potential to go a different route, analysts and rival bankers say, in particular because Orix's current US presence is so minimal.
But some bankers note that if the middle market stalls in the next few years, and
Harris Williams, for example, no longer generates solid M&A fee revenue, the leniency of its new bosses might get strained. "More of these companies are selling out because the business is no longer an attractive one to be in," says Richard Bove, an analyst at
Punk, Ziegel & Co.Further, since getting a major payout was one of the key incentives for the boutique owners to sell, their drive to retain autonomy will likely ebb over the next few years. "The main driver of these deals is the partners cashing out-it always is," Howe says.
Houlihan: Some Independence
For
Houlihan, the decision to end its life as an independent-a life that had been quite remunerative since the firm's inception in 1970-took a good deal of soul-searching, a process complicated by the identity of its new majority owner, a little-known Japanese financial services company. Also, the track record of Japanese firms on Wall Street had not been stellar, with
Nomura Securities' ill- fated commercial mortgage business coming most readily to mind.
What sealed the deal,
Houlihan pros say, was a series of face-to- face meetings between the US contingent,
Orix USA CEO James Thompson, and, more importantly, Orix's Japanese executives, who wowed the
Houlihan pros. During the negotiations,
Houlihan tried to impress upon Orix that although the Japanese firm would be majority shareholder of the new enterprise (having shelled out an estimated $500 million), day-to-day decisions involving M&A stateside, for example, would be better served by remaining in
Houlihan's hands.
After all, Orix only has about 75 US-based officials, while
Houlihan has more than 700. "We're by far the larger player in terms of employees, so they had to get comfortable with that, and we had to get comfortable with them," says Jeffrey Werbalowsky,
Houlihan's co-CEO. "We come from an advisory culture, and they come from a money-investing culture."
"The first thing we decided upon," he says, "was a sort of Hippocratic oath: First, do no harm.' We're going to run the businesses separately and then intelligently seek synergies."
For his part,
Orix USA chief Thompson is adamant that his company is not looking to impose any changes on its new acquisition. "
Houlihan has a great corporate culture, and frankly I'd like to bring some of that into our own culture," he says.
Werbalowsky emphasizes that his new partners are not interested (or so they say) in using the boutique mainly to land new lending business. "Orix is not the best financing solution to the majority of the very large transactions we look at. They have a sweet spot in certain areas, such as lower middle-market story deals' and venture secured lending, for example, and we're becoming much more sensitive to those opportunities for our clients," Werbalowsky says. "But we will continue to deal with a whole host of financiers, and even in our most successful synergistic operations in the future I bet we will never have the Orix side doing anywhere close to even a plurality of our clients' financings."
Market observers say that tough talk of independence aside,
Houlihan is not going to overplay the role of recalcitrant. It freely admits it needs Orix both to capitalize on the firm's established presence in Asia, a market
Houlihan is itching to get into, as well as Orix's estimated $15 billion market capitalization.
Houlihan says that prior to the acquisition, it was beginning to lose out on larger deals because it lacked a large lending capacity.
Some rival bankers say that the ability to get into Asia really sealed the deal. "There's not a lot of Asian M&A going on," says one banker at a major firm. "
Houlihan has a great name, a strong presence-it didn't need Orix." And in truth,
Houlihan had already come a long way on its own-it has finished in either first or second place in the $50-500 million M&A niche for middle-market specialists over the past two years, and in 2005 was the top-ranked adviser among middle-market specialists in deals of $750 million or less.
Houlihan had been looking for a larger, deep-pocketed firm for about a decade before finding Orix. "We had come to the point in our growth where successful, privately held companies have issues," Werbalowsky says.
A question on rivals' minds is whether
Houlihan's staff, which includes some of the best-regarded middle-market bankers in the sector, will enjoy being part of a Japanese finance empire. Werbalowsky says that rather than try to lock down top earners with noncompete contracts,
Houlihan and Orix are instead working on improving compensation. "We're trying to increase the opportunities for people to make money on both the advisory side and the capital provisioning side for both
Houlihan and Orix professionals," he says
Some employees have told Werbalowsky that they regret not latching on to
Houlihan stock years before, to which he replies that the firm still has much room to grow in terms of shareholder value. "They say, I wish I could've gotten in on the ground floor,'" he explains. "Well, the ground floor is here. We have a huge rollout to do in Europe and Asia. The best times are in front of us-that's our aspiration anyway."
HW: Moving On Up
In terms of selling out, Richmond, Va.-based
Harris Williams went the distance. Unlike
Houlihan, which still has some ownership of its operations,
Harris Williams is now entirely the property of PNC Financial. By most accounts, the move has been a happy one, as bankers at the boutique were said to be giving each other high- fives when news of the deal hit in June.
But
Harris Williams officials are talking a similar game of retaining their independent streak, saying that because PNC has told them it does not intend to become a full-service, middle-market banking presence, the former boutique should be able to continue to operate as before, except that now it will serve as PNC's public face in middle-market M&A.
What is likely to change, however, is the very narrow focus that has defined
Harris Williams, which primarily offers M&A advisory frequently to private equity clients. It has been a successful business (with some reports of a very high 90% closing rate for deals) and a growing one, with about $3.2 billion in M&A volume last year, about half coming from repeat clients.
But a boutique cannot live on advisory fees alone if it wants to keep growing its business-unless, of course, it is
Lazard or
Greenhill & Co., both of which boast blue-chip client rosters. Some Street sources see
Harris Williams as an ambitious experimental stage for a major entry into middle-market banking by its parent company. "With PNC, we have the resources to consider things that could be complementary to our business," Valentine says, including restructuring and distressed M&A.
"Usually the capital required to run a boutique is provided by one or two of the founders, but because of the nature of investment banking, where you have choppiness in fee revenue, it can be a challenge to fund the business as it gets bigger and you have a bigger payroll," says Rick Chance at
Trenwith Group, which was acquired by BDO Seidman in 2001. "What these firms have been trying to do now is diversify income streams from being derived only from success fees, which are very unpredictable, to more reoccurring revenues, through valuation services, fairness opinions-those type of services."
But for all those grand visions, some rivals see
Harris Williams, now known primarily as an M&A boutique, ultimately being converted into a funnel for middle-market lending opportunities for its new parent. "I think that before long,
Harris Williams will looking for PNC deals and just PNC deals," says a banker at a former boutique.
Valentine says that simply isn't true. "We will look for opportunities where PNC can participate competitively, but our sole objective is to maximize the outcome for the client-that may or may not mean PNC is a participant in a debt package, for example," he says. "We're not going out there and just offering PNC as a staple finance package on all transactions that we work on." He adds that his firm will continue to use rival lenders in some cases.
Market analysts believe that, given the track record of past boutique acquisitions, the culture of an acquired boutique such as
Harris Williams could be altered beyond recognition. "The acquirer is going to look at salespeople as distribution points-while a small number of products used to flow through them, now a large number of products is going to," says Bove. "[Boutique] salespeople are going to be selling business loans, auto liens and so on."
Where does PNC stand? James Graham, head of PNC's treasury management, says that first and foremost, PNC wants to retain
Harris Williams' top management and top earners. "The key people in
Harris Williams are the key value in the brand. It's important to keep it intact," he says. PNC viewed itself as a strong middle-market bank with a regional perspective, while
Harris Williams "had a national focus," he adds.
Valentine says he can't guarantee Williams' staff will stay put, but he notes that many of them have already undergone several changes in ownership since the firm's inception in 1991, as
Harris Williams was purchased first by Sirrom Capital Corp. and then acquired by
Finova Group when
Finova bought Sirrom in 1999. Subsequently,
Finova sold
Harris Williams back to its founders in 2000. "During that period, we had zero turnover and we quadrupled in size," he says.
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