Banking on Boutiques

A new breed of investment bank pitches M&A advice to the middle market. What's the advantage over a brand name?

When Mark Wattles, founder and former CEO of Hollywood Entertainment Corp., decided to buy the assets of bankrupt Ultimate Electronics Inc. in April, there was no shortage of investment bankers willing to assist with the deal. In fact, his prior connections at the parent of the Hollywood Video chain made Wattles a candidate for advice from several top-tier New York banks.

Instead, he chose a one-year-old, 17-person, Dallas-based firm, Challenger Capital Group Ltd. Weighing the pros and cons of enlisting a major investment bank for a deal worth about $40 million, Wattles, now chairman of Ultimate Electronics, says he “probably could have gotten attention from the partners [at a big establishment], but it’s not like they’d be jazzed about it.” With Challenger, though, he believes that not only will he get their attention, but “they’ll be enthusiastic.” One partner in particular that he depends on is former CS First Boston banker Mark Stephens, Challenger’s founder, CEO, and executive director, with whom Wattles had previously worked on Hollywood Entertainment M&A projects.

Other executives, without the ready access to the big investment banks that Wattles had, find themselves drawn even more powerfully to a new crop of middle-market specialist banks. For some acquirers, it’s because they have little choice. Many middle-market bank specialists of years past, including such distinguished outfits as Robertson Stephens, Alex. Brown, and Montgomery Securities, were swallowed up during the manic banking consolidation of the late 1990s. And while some larger banks profess an interest in smaller deals, in the current environment most feel pressure to do larger ones. “The consolidation of the banking sector has made it very hard for middle-market companies to find good advice for deal-making,” says Challenger’s Stephens.

How Low Do They Go?

Some smaller banks suggest that their larger competitors won’t take M&A deals below $200 million, though banks certainly make exceptions during slow markets or when a deal represents a strategic opportunity. “Big banks look at middle-market deals and say that doing those means they can’t chase a multi-billion-dollar deal,” says Challenger managing director Robert Bielinski. But, he notes, for many companies, “$200 million is a very big number.”

Sensing the market void, new boutiques have rushed to the space. Along with Challenger, newcomers include Pacific Growth Equities, Thomas Weisel Partners, ThinkEquity Partners, America’s Growth Capital, and Revolution Partners (see “Thinking Small,” below). Despite being new, many have at their core a collection of experienced bankers who once worked at the former middle-market specialist bank, or the major New York banks that snapped them up.

JMP Securities LLC, for example, was founded five years ago by three alumni of Montgomery Securities (acquired by NationsBank in 1997), and focuses on small and midsize growth companies. “We lived through Montgomery being bought by NationsBank, and watched them refocus the platform on larger-cap companies,” says Carter Mack, co-director of investment banking and one of the founders. “We saw a big opportunity to serve the small-to-mid-cap growth market.”

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