A personal touch back to Wall Street
With the industry in disarray, banking and dealmaking are heading back to the old ways.
NEW YORK (Fortune) -- Many theories are floating around about what can be done to fix Wall Street: more transparency, greater oversight, even lower pay. But what's really needed, according to one solution, is the return of a personal touch.
Francois Maisonrouge and Bernard Poussot go way back. Beginning in the early 90s, Poussot was climbing the corporate ladder at U.S. drug-giant Wyeth, and Maisonrouge was one of Wyeth's advisors at Credit Suisse in New York. Introduced by a mutual business acquaintance in the early '90s, they had kept in close touch over the years, sharing insights about each other's industries and developing a trust.
Eventually, the nearly two-decade long relationship struck gold: Maisonrouge had left Credit Suisse in 2007 to work at a much smaller New York shop focused on merger advisory, Evercore Partners, but Poussot, who eventually became CEO of Wyeth (WYE, Fortune 500), turned to him and the founder of his new shop, Roger Altman, to advise on the company's $68 billion mega-merger with Pfizer (PFE, Fortune 500), announced in late January.
"For the past nine months, I have been in a corridor of Collegeville, Pennsylvania, where Wyeth's pharma business is, to the headquarters in Madison, New Jersey, to my office, and to Wyeth's lawyers at Simpson Thacher," Maisonrouge explains in a phone call from London where he'd finally been able to get to on business for the first time in months. "That's the kind of attention you get in a relationship like ours."
Their relationship is an example of how Wall Street is going back to the old ways. As the global financial supermarkets that have dominated investment banking over the past few years go through wrenching changes, the Street is harkening back to one of its favorite old saws: The "relationship banker" is the best kind of banker.
The relationship banker is a more patrician and less pushy version of the league table-obsessed, cheap money-pushing fee-factory sort who ascended in the early 2000s. But it's not a total throwback either.
"Relationship banking isn't about going to the country club and having a three-martini lunch," says Maisonrouge. "The relationship banker is the person who is going to fulfill his or her professional mission by putting himself or herself at the disposal of a decision maker. You're not building your career on their back, they're building their industrial purpose on your back."
The nature of the last boom gave bankers incentives to ditch the old ways. In a debt-heavy take-private transaction, the buyers, sellers, and bankers care less about the advisory side than the financing side. Whoever was offering the big money, usually those bulge-bracket megabanks, called the shots on who got the advisor title and who didn't.
Relationship bankers say today's environment, with more "strategic deals" where one company is typically buying another to grow its business, as opposed to a private-equity firm buying it to re-sell it, favors their way of doing things. Such bankers care less about closing the deal than the long-term quality of the advice they give, because they want relationships to last for years. They have little stake in the lending or financing aspects of a deal, and their compensation isn't tied to volume.
"Let's bring back a model of life relationships," says Ken Moelis, a former superstar at UBS's U.S. investment bank who split off in 2007 to open Moelis & Co., "rather than one built around a banker's bonus cycle."
The importance of financing isn't going away, especially on the buyer's side of things. And the bulge-bracket banks, no matter what regulatory strait jackets they may be forced into, will still have thousands of smart bankers working hard to generate deal flow.
But without the lure of huge bonuses to keep them where they are, or mega-financing to offer their clients, many life-long bankers are moving to firms that prize the steady advising business over the more profitable (but much riskier) business of financing and lending.
"When financing was easy, business at the larger banks became less about developing deals than deal processing," says Maisonrouge. "As financing terms and credit conditions have become more difficult, clients are now realizing that big banks are constrained and have interests that aren't completely aligned with their own."
Smaller banks have been hiring at a break-neck pace. Greenhill, an advisory firm on the $43 billion Roche-Genentech deal last July, launched a Chicago office with three former Lehman bankers and a San Francisco office with an ex-Morgan Stanley hire. Last Monday, Evercore announced it hired the former vice chairman of UBS, and Italy-based Mediobanca said it had hired 20 former Lehman, J.P. Morgan, and Merrill Lynch bankers in its London office.
Recent signs show that smaller banks are gaining ground. Independent banks and advisors advised 20% of the dollar-volume of deals from 2000 to 2007. The number doubled to 40% in 2008, according to Devin Ryan, an analyst at New York independent bank Sandler O'Neill + Parners.
More of the deals getting done these days are in the middle-market range, of which smaller players have typically had a greater share. But most of the recent mega-deals have had independents attached.
InBev's $61 billion deal for Anheuser Busch included Moelis & Co. Centerview Partners, which was started by former UBS and Morgan Stanley bankers, advised Altria's (MO, Fortune 500) $113 billion spinoff of Philip Morris International (PM) last June. Evercore kept up its hot start in 2009 by being the sole advisor on Warren Buffet's purchase last week of 3% of Swiss Re.
It isn't a great business for anyone to be in right now. Overall dealmaking dropped to $1.4 trillion last year from $2 trillion in 2007, according to independent tracker Dealogic, and most say it'll keep falling in 2009. But when the deals come back, relationship bankers and boutique firms might have a bigger role than before.
"Everyone is starving now," says David Trone, an analyst at Fox-Pitt Kelton, a finance-focused firm that advised Bank of America on the Merrill Lynch deal. "But the good news is, if the independents can get across the desert, there's a once-in-a-lifetime opportunity for them on the other side."