Wall Street’s big banks take on small deals

A Wall Street sign is displayed in front of the New York Stock Exchange in New York on March 13. Mark Kauzlarich/Bloomberg

Wall Street’s biggest banks traditionally shied away from getting their hands dirty advising on small mergers and acquisitions. Too much work for the modest fees, so they focused on the blockbuster deals.

But with the pandemic-induced slowdown in dealmaking this year, bankers who have been talking about embracing smaller clients for ages are finally doing it. They’re swooping in on smaller transactions — those of $500 million or less — winning assignments to an extent not seen in five years. And in so doing, they are elbowing out some lesser rivals that typically make their bread and butter advising smaller clients.

“When the larger deals are slow, people pick up the smaller deals,” said David Friedland, global head of mergers and acquisitions in the cross-markets team at Goldman Sachs.

In the first nine months of the year, Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley advised on about $61 billion of announced transactions in the global small and midsize segment, according to data compiled by Bloomberg. That gave them 9.2% of that market, their largest slice since 2015, and enough for the banks to dominate the advisory rankings.

It’s a big change from last year when megamergers ruled and big banks’ share of the small end of the market fell to just 7%. The top two spots on the 2019 league rankings were won by PricewaterhouseCoopers LLP and Rothschild & Co. Lucrative deals such as United Technologies Corp.’s $90 billion merger with Raytheon Co. kept the big banks busy.

Now, while dealmaking has fallen almost 25% through Sept. 30, the volume of transactions valued at up to $500 million has seen a less severe drop, down by only 14%.

A small M&A deal typically generates roughly the same fee margins compared with bigger, more complex purchases, but the segment can hardly make up for the decline in bigger transactions. In 2019, for instance, there were four deals that individually were bigger than the entire $61 billion volume of this year’s deals of $500 million or less.

For Goldman Sachs, its emergence as the top adviser on smaller deals this year is also a sign that an effort to build teams dedicated to winning smaller corporate clients is paying off. Goldman Sachs bankers began fanning out across the U.S. two years ago to pitch companies once deemed too small to warrant regular attention. Its cross-markets group, which also stretches across Europe, the Middle East and Africa, was launched to help the bank win more midsized advisory mandates.

Friedland said that initially some smaller clients were skeptical. They’d ask “How committed are you to the middle market? We have seen this before,” Friedland recalled.

“And that’s true, we first started talking about this effort more than 15 years ago,” he said. “But now we have 190 people dedicated to this part of the market and they’re not getting pulled out to do $10 billion deals when they come along, they are full-time on the $300 million deals.”

Eamon Brabazon, co-head of M&A in Europe, the Middle East and Africa at Bank of America, said there had been a flurry of smaller deals in the first wave of the M&A comeback. “The rationale for this is clear. Smaller deals are inherently less risky and hence it’s not surprising that we saw a disproportionate amount of smaller deals immediately post-lockdown,” he said.

A particular bright spot has been the health-care sector, where smaller deal volumes are up 38% this year. Companies’ renewed desire to access lucrative therapies for cancer and other rare diseases through acquisitions is driving the broader trend.

Smaller companies in the U.S. are also keen to do deals ahead of next month’s presidential election, according to Rodney Miller, vice chairman of investment banking at JPMorgan, which has 2,000 bankers globally working with small and midsize companies. Any overhaul of policy on capital gains tax under a Joe Biden administration could result in undesirable consequences for those looking to sell businesses, investment bank Houlihan Lokey Inc. wrote in a report in July.

“For the last four or five months, clients have been coming to us saying, ‘Can you get my company sold before there’s a potential tax regime change?’” Miller said.

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