Corporate Finance - Boom time for corporate finance.
Thanks to merger mania, corporate finance has never had it so good.
Thanks to merger mania, corporate finance has never had it so good.
It’s party time for accountants in corporate finance. The market has never been so buoyant – $2.2 trillion of mergers and acquisitions around the world last year – and there’s more work than they can shake a stick at. Piles of dot.com proposals alone are thudding onto their desks each morning. No wonder the corporate finance chiefs of the Big Five and some group A firms are walking around with grins on their faces as wide as the Grand Canyon. With more mega-mergers, such as that between Vodaphone and Mannesmann, to keep the big investment banks such as Goldman Sachs, Merrill Lynch and Warburg Dillon Read busy, a large lacuna has opened up in the so-called ‘middle market’. Take the not so small matter of Rover. KPMG is at the heart of the controversial sale of the car company by BMW. The firm is advising the venture capital group Alchemy Partners on its purchase. And while it may be a small deal in terms of money – Alchemy will pay a maximum of #50m – it could hardly be more high profile. It’s just the sort of deal the firms think they are well placed to advise on. ‘We don’t think the big investment banks are interested much below a #1bn deal size these days,’ says John Griffith-Jones, head of European corporate finance at KPMG. This has created an unprecedented opportunity for major accountancy practices to grow their corporate finance portfolios. But with corporate finance calling for a new range of skills and, equally important, a different kind of culture, some seem to be adapting to this new opportunity faster than others. A survey of 201 investor relations executives revealed a wider spread of satisfaction when scoring the Big Five as ‘highly-rated advisers for corporate finance assignments’ (see panel). And it’s also clear that each of the Big Five has a somewhat different perception of what the ‘middle market’ means. Estimates of deal sizes in the middle market range from #25m up to #2bn. Meanwhile, group A firms, such as Pannell Kerr Forster and Grant Thornton, are moving into the void which the Big Five are leaving behind as they move upmarket looking for the richer pickings. All this means the competitive landscape in corporate finance is more complex than it used to be. In the upper reaches of the middle market, the Big Five find themselves competing with beasts from the banking jungle such as the Goldman Sachs and Merrill Lynchs. There’s also competition throughout the middle market from medium-ranking investment banks such as Rothschilds and Schroders. At the lower levels, especially with work such as the sale of private companies, medium-sized accountancy practices are competing with each other and the investment house ’boutiques’. The picture is one of everybody trying as hard as possible to stamp on everyone else’s toes. So why should a company want to go to an accountant for corporate finance advice when there are plenty of other specialists around? According to some of the practices already making a success of the market, the key factor is relationships. For many clients looking for corporate finance services, the choice between a larger investment bank and an accountancy firm is rather like choosing between a one-night stand and a live-in lover. There’s a market for both but the investment banks are not strong on long-term fidelity. ‘We believe in long-term relationships with people rather than short-term deals,’ says Nick Pasricha, managing partner of corporate finance at Ernst & Young. ‘The big investment banks are increasingly heading towards one-shot deals. People see the banks as gladiators. They could be fighting for you today but battling against you tomorrow.’ ‘We are prepared to invest time in building relationships,’ says Chris Ward, head of corporate finance advisory at Deloitte & Touche. ‘The larger investment banks are not spending very much time on good old-fashioned relationship banking, particularly in the middle market.’ Ward also points out that a strength of the Big Five is that they can ally relationship building with global reach – something medium-sized investment banks, at least, find difficult to do. But Hugh Brown, global head of corporate finance and investment banking at PriceWaterhouseCoopers thinks there’s more to it than relationships and reach. ‘Clients are looking for people who understand their industry,’ he says. ‘I think they see us as having much more industry focus.’ It is certainly true that much of the pitch of the Big Five is on their ability to provide in-depth services to specific industry segments. Smaller players, too, stress their industry focus. ‘We have a number of industries in which we’re building credibility,’ says David Brooks, head of the corporate finance lead advisory team at Grant Thornton. They include IT and telecoms, food, retail and leisure. Again, sector focus can be seen as playing the relationship card – building in-depth understanding of the issues and problems affecting a particular category of client. Of course, the concept of long-term professional relationships is already deeply ingrained among accountants in a way which is not as marked with investment bankers. After all, accountants build audit and other relationships which span years and even decades. Despite this, most of the main accountancy firms are keen to stress they are building their corporate finance businesses independently – although most acknowledge that a useful proportion of leads come from other parts of the practice. Nick Whitaker, head of corporate finance at Pannell Kerr Forster, estimates about half of corporate finance work originates from existing clients. PwC’s Brown says the proportion varies from country to country but is about half in the UK. Griffith-Jones at KPMG says around 40% by value of deals is for existing audit clients. Ernst & Young’s Pasricha says: ‘Relationships help, but it’s very rare that, just because you happen to have an audit or tax relationship, the work will land in your lap.’ Over at Arthur Andersen, Chris Rowlands, head of corporate finance UK, stresses the firm has gone into the marketplace to build its corporate finance business. ‘We obviously enjoy internal introductions, wherever in the firm they come from, but we wouldn’t have made as much progress as we have if we’d relied on that.’ For all the hype, corporate finance work still contributes only a small proportion of fees for the Big Five – generally, less than 10% and in some cases not much more than 5%. Yet it’s strategically important in three ways. First, it’s growing faster than much of the rest of the business – certainly the old staples like audit or tax advice, where there are few opportunities for fast-track growth. Second, it’s more profitable, largely because corporate finance work severs the professional’s traditional bond between time and cost. Fees are increasingly calculated on the value which the adviser is adding to the deal – and are often contingent upon success. ‘If I had anybody in my office who said he was going to charge on the basis of time, he would have to go,’ says PwC’s Brown. Finally, it puts accountants where they’ve always wanted to be – in the offices of the chairman and the chief executive. ‘It’s the one service where for a limited period in the deal you actually get the chairman’s and the chief executive’s home phone numbers,’ Brown says. The one black cloud – at the moment, no more than the merest speck on the horizon – is what could happen if the global economy turns downwards and the volume of deal making slumps. Then the major investment banks in the so-called ‘bulge bracket’ – which turn their noses up at deals worth less than a #1bn – could start moving downmarket again. Big league investment bankers are the financial world’s toughest street fighters, so even Big Five accountants could find it difficult to defend their growing market share if the competition got heavy. But nobody’s worrying about that at the moment. With cross-border M&A activity in Europe set to grow this year – and no end to the dot.com mania in sight – the good times are set to roll for some time yet. FLOATING FOR FUTURE GROWTH The story of AremisSoft’s flotation on Nasdaq shows how a strong relationship built over several years can make an accountancy firm the natural adviser for a flotation. During the nineties, Pannell Kerr Forster’s M&A team acted as lead adviser and performed due diligence on 11 AremisSoft acquisitions. But the takeover drive left the company with a highly leveraged structure that was shackling its growth. So PKF advisers helped AremisSoft, whose main market is in software for the hospitality industry, develop a new strategy. ‘We felt that a flotation would achieve two things,’ says Nick Whitaker, head of corporate finance at PKF. ‘It would eliminate debt and cost of debt by turning it into equity, and it would increase access to capital to assist with growth.’ But, when PKF advisers sat down with AremisSoft founder and chairman Lycourgos Kyprianou to review options with nine months to go, UK confidence in hi-tech companies was relatively low. ‘We looked at Nasdaq because the US seemed likely to give the company a higher valuation,’ says Whitaker. In New York, the Nasdaq listing and IPO work was led by PKF engagement partner Stan Patey. The listing in April 1999 raised $15.2m at an opening price of $5. Kyprianou’s early worries about the dilution of his shareholding and loss of control have dropped as fast as AremisSoft’s share price has risen. It is now around $34. And Kyprianou believes the listing provides a platform for the company’s strategic development.