With two months until year end, M&A bankers are steeling themselves for their annual compensation discussion with their bosses. Global M&A volumes are down 9% this year, and 26% in Europe, giving bosses the whip hand when it comes to revealing ‘the number’ or bonus that they will earn. But a new study that has passed largely unnoticed shows that it is the individual banker not the firm that creates value on M&A deals
The study in Journal of Financial and Quantitative Analysis, analysed 1,293 M&A deals completed by 709 investment bankers since 1990 and found that individual investment bankers with greater deal experience are associated with higher acquisition returns and post-acquisition operating performance, Based on data from Mergermarket’s individual banker league tables, the study also found that more experienced investment banking teams fetch higher fees for the investment banks that they work for and that when they switch to a new bank, clients are more likely to move with them.
This sheds some fresh light on the age-old question of whether companies hire the individual or the firm? Of course, banks are people business and the best banks attract the brightest talent, so it’s hard to make a distinction on why clients hire a particular firm. Goldman Sachs is consistently top of the global M&A rankings, and the brand gives CEOs confidence, but its people are responsible for successful deal origination and execution.
Likewise, JP Morgan is the ultimate ‘franchise’ player – bankers there are fond of relating the (possibly apocryphal) story of being told at interview with the U.S. bank that while they are worth $1, the seat they are sitting in is worth $2, such is the strength of the bank’s balance sheet, brand and the relationships it holds with corporate America.
It’s hard to argue against this when JP Morgan regularly tops the overall investment banking fee league tables and it has won considerable market share in the last decade. But M&A is the ultimate people business – and despite the best efforts of banks to ‘institutionalise’ relationships when big-name bankers leave, business follows them out of the door.
Citi seems aware of the impact of individual bankers – the firm’s co-head of banking and capital markets Manolo Falco said this month that the bank needs to hire superstars in its quest to become Europe’s top M&A adviser. Meanwhile the rise of boutique banking model over the last decade is due specifically to the power and relationships of a given individual – firms like Robey Warshaw have punched above their weight because of the contacts and reputation of their eponymous founders Simon Robey and Simon Warshaw.
On this basis, big banks should be concerned about the exodus of talent to the independent sector and look to retain their best performers. As senior bankers have left, there has been a ‘juniorisation’ at some firms as banks have looked to bring on the next generation of talent and cut costs. This might work in some product or regional management roles, but when it comes to M&A, there is no substitute for experience and in this particular area of banking, the cult of the individual is alive and well.
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