Investment banks are a good way to play the new M&A cycle.
The papers have been abuzz with merger and acquisition news. There's been the drama of the financial exchanges, with NYSE Euronext
The string of high-profile acquisitions and headlines provides evidence that we've entered into a new M&A cycle. Commonly touted interrelated factors conducive to overall M&A activity that appear to be present are rising share prices, senior management confidence, a positive trajectory to the economy, and access to financing. Certain company- or industry-specific factors such as high cash balances, low organic growth prospects, and shifting industry dynamics are also present.
If you want to place your bets on M&A, there are at least two ways you can do it. One, you could speculate on the highest-potential acquisitors and acquisition targets. Or you could invest in the pick-and-shovel investment banks that are providing and booking revenue for M&A financial advisory services.
Below is a table of some of the boutique financial advisory and larger investment banks that we cover along with their proportion of revenue related to financial advisory:
As can be seen from the table, the financial advisory boutiques Evercore Partners
Moaty Lazard Has Downside Revenue Protection and Upside Potential
Of the three boutique-ish investment banks, we are partial to Lazard for three reasons. First is that Lazard has the largest geographic footprint of the three: Evercore has offices in three countries with strategic alliances in three more, Greenhill has offices in six countries, and Lazard has offices in 26 countries. A global geographic footprint and local expertise are a competitive advantage in a world with increasing amounts of cross-border M&A. A larger geographic footprint could also fortify revenue if economic recoveries across various countries are uneven.
Second, Lazard has the greatest downside protection in any possible double-dip recession scenario. All three firms have countercyclical restructuring advisory services to complement their M&A services that should do well in a double-dip. That said, Lazard is considered one of the preeminent names in the restructuring field. The difference in ability to weather a double-dip is evident from the cyclical 2007 advisory revenue peak to the 2008 trough for Evercore or 2009 trough for Greenhill and Lazard. Evercore and Greenhill's advisory revenue fell 39% and 41% respectively, while Lazard's investment banking and other advisory revenue only decreased 20%.