• Kenny

Spoil market

I must have gotten myself in the "wrong" career 14 years ago.

Last weekend, some guy called me on my mobile saying that he had gotten my contact from his friend who works at a bank. I don't know the banker but I reckoned it was passed on from one of my friends. So this person who called me operates his own business. Private company, SME, typical entrepreneur who founded, grew the business and now kind of stuck in a situation where he basically can't take his foot off the pedal. He had reached a bottleneck and was faced with the choice of either continuing to toil at his company for the rest of his life, or exit and cash out.


"Why don't you hire your banker friend to find you an investor?" Apparently, his friend had felt that the deal was too small for the bank to warrant a proper M&A mandate, which is probably why he decided to called me. But the advice didn't stop there. His friend went on to recommend that he should not pay any fees for advisors who were helping him to find a buyer.

"What should I do? I don't want to pay fees."

I told him (through the phone) that he should hire someone, groom them to help him run the business and who could someday take over his role. I said that it wouldn't be immediate and will take some time, possibly 1-2 years. I also mentioned that he'd need to also invest time to train this person, but the upside is that he would be able to gradually take his foot off the pedal.


"But then lidat it'll hit my bottom line and profits..."

Good grief. You want someone to help you to do the work of finding investors but you don't want to pay them for their time. Not to forget the contacts acquired during the investor search process. You are also not willing to invest in your staff to help you with your business, yet still want to make decent profits by shaking leg? You think everything is free ah?


It feels like boutique and smallish M&A shops were set up to work on deals that fall through the cracks of the large IBs - for free.

The M&A fee model is broken.

To understand and make sense of why this is happening, we must look back in time to the pre-2008 global financial crisis when financial advisors billed their clients based on an upfront fee, a monthly retainer followed by a completion / success fee, depending on the scope of mandate.


This model was broken after 2008, when pure investment banks were rolled into less risky commercial banks as part of a global systemic de-risking process. The consolidation of the functions turned banks into a one-stop-shop for loans, leveraging proprietary industry networks and providing strategic advice for raising capital. They had started to market themselves this way, building the case for getting a foot in an M&A or IPO deal by offering loans to companies.


In the post-GFC low interest rate era of 2009, this accelerated the entire process, resulting in the likes of Stanchart and HSBC emerging as the new kids on the block coming out from that crisis. Many of them even went one step further by working with the private banking side, managing the wealth of business owners, especially those who reaped a bounty from a recent sale of their business or cashed out some from an initial public offering of shares.


It was a complete solution.


Lend to these companies, help them to grow, acquire overseas or sell non-core businesses, find a strategic or financial investor, sell shares in the capital markets as part of an IPO and park the sale proceeds with wealth management. The banking model transformed and the larger, more established market players had figured an ingenious way of getting fees out from every single step in the process.


In doing so, companies also figured they could stop paying retainer fees for sale processes (regardless of how complex the deal was) since they were already existing clients of the bank. And so, the no-retainer-success-fee-only trend just caught on. The advisory market in Asia is not only crowded but incredibly fragmented, in addition to waiving the retainers, banks started to outdo each other in a cutthroat competition of reducing their success fees. I don't blame companies for wanting to pay only success fees on M&A and capital raising deals because the large banks have been spoiling them over the last decade.


The investor search process has also changed dramatically due to globalization and digitization.

Most of the important work in a sale process is really about knowing where to look. Number crunching and beautiful marketing presentation decks just make the exercise look professional. Most sellers don't crave for that. Over the last 10+ years, a lot of people have been travelling across borders, discovering new markets and pools of capital overseas (not so much now due to the coronavirus). This makes it easier for both sellers and buyers across the globe to meet on their own terms. The availability of online investor databases and sensationalized media reporting has also led to sellers being more independent in their search of the right buyer. The process has gotten so dynamic that a lot of 'agents' with decent full time jobs also do "M&A work" on a part time basis, getting a cut of the fees in return.


Is the pure-play M&A advisory still a good business to be in? We can all cry foul over companies not wanting to pay retainer fees, but in the most realistic sense, this is just a consolidation at play where only the bigger players with the full spectrum of banking solutions are able to be in the business. The revenue from commercial lending subsidizes the deal-advisory overheads.


How will this evolve and change over the next 10 years? I don't really know. Will this be the status quo dominated by the larger incumbents? Will we see an onset of 'robo-like' advisors eventually eliminating the traditional financial advisor's role? Will companies be able to do book-building for IPO roadshows without the need to hire bankers?

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