Saturday, September 17, 2005

The dynamics of advice.

Wisdom and youth rarely coexist.


Wall Street Veterans Find New Gig as Counselors --- As Investment Banks Become Acquirers, Companies Look Elsewhere for Merger Advice

By Jed Horowitz Dow Jones Newswires
775 words
16 September 2005
The Wall Street Journal
(Copyright (c) 2005, Dow Jones & Company, Inc.)

ROBERT GREENHILL was settling in for the Fourth of July weekend at his Nantucket, Mass., retreat when he got a call from Jeff Fettig, chairman and chief executive of Whirlpool Corp.

Mr. Fettig needed to quickly cobble together a bid for rival Maytag Corp. but couldn't use his usual adviser, Goldman Sachs Group Inc., because it was part of an investor group also pursuing Maytag.

Whirlpool eventually prevailed over two other suitors, Wall Street veteran Mr. Greenhill added another notch to his advisory belt -- and any one paying attention saw a prime example of the rapidly changing dynamics of Wall Street: While investment banks still mint millions helping corporate chieftains buy each other's businesses, mergers-and-acquisitions advice is no longer the crown jewel of their operations.

Instead, firms like Goldman and Morgan Stanley make much more from buying companies themselves or even trading bonds and stocks -- often of companies in transition -- for themselves and clients, including hedge funds.

"The M&A business is no longer a profit center at most firms," says Roy Smith, professor of finance at New York University's Stern School of Business and a former partner at Goldman. These days, he says, M&A is valued mainly because it attracts ancillary assignments like underwriting.

Indeed, Goldman and Morgan Stanley, which compete for the top deal-making slot, have dismantled M&A as a separate business unit and sprinkled their bankers among other corporate-finance groups. The companies say this has ended years of internal battles over who gets credit for generating business as well as costs.

Goldman booked advisory fees of $800 million in its first half -- less than half of its total investment-banking revenue and a sliver of the $7.2 billion it captured from trading and merchant banking -- investing for its own account -- or the $2.3 billion of revenue from asset-management and securities-services fees. The breakdown is equally stark at Morgan Stanley. Advisory fees in its first half totaled $611 million; revenue from trading stocks, bonds and commodities was $5.7 billion.

Meantime, other firms have bowed out altogether. "We have managed well without M&A," says Robert Diamond, president of Barclays PLC, who shed Barclay's deal unit after he took control of the firm's U.S. investment bank in 1996.

Contrast this with the M&A heyday of the 1980s and 1990s: Mr. Greenhill, Morgan Stanley's Eric Gleacher, Lazard Freres & Cie's Felix Rohatyn, Lehman Brothers Holdings Inc.'s Peter Solomon and deal makers Bruce Wasserstein and Joseph Perella were legend, their deals held in awe.

Many of these aging bankers -- Mr. Greenhill is 69 years old; Mr. Rohatyn, 77; and Mr. Solomon, 66 -- now run their own shops. They also preach the virtues of offering pure advice to corporate chieftains, unadulterated by other activities.

"How can you manage a hedge fund or merchant-banking fund that is buying and selling major companies and not create conflicts with clients?" asks Mr. Greenhill, who started his eponymous firm in 1996 after almost 35 years at Morgan Stanley and Citigroup Inc.'s Smith Barney.

In an initial public offering last year, Greenhill & Co. Inc. shares made their debut at $17.50. Yesterday, the company's share traded up $1.05 at $43.75 in 4 p.m. composite trading on the New York Stock Exchange.

Mr. Greenhill employs 150 people, who, he says, generate more revenue per employee than deal makers at publicly traded banks. He also operates two merchant-banking funds with about $1.3 billion, but says he avoids conflicts by investing only in smaller businesses of little interest to his larger corporate clients.

For their part, the bigger firms say they can still square any conflicts between merchant banking and advisory assignments.

Goldman, for instance, said this week it advised Siebel Systems Inc. on its $5.85 billion planned sale to Oracle Corp.

Meanwhile, the old turf still looks golden to some veterans. Simon Robertson, 64, who was president of Goldman's European banking unit, resigned in August to form his own advisory shop.

And Mr. Perella, 63, who stepped down as a vice chairman of Morgan Stanley in April, sounds like he'll be following soon. "There are a lot of companies out there who want a confidant," he said recently. "In our business, the older and more experienced you get, the more valuable you are."


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