A Pioneering M&A Boutique Looks to Prove Naysayers Wrong

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(Bloomberg) -- The skies are still dark when Scott Bok’s plane lands in New York on a rainy Friday morning in late February. He’s coming from Washington, where he’d been for a client meeting. Now he’s heading to the Park Avenue headquarters of Greenhill & Co., the boutique investment bank he runs, where he’ll meet a potential recruit. His firm’s stock has fallen 31 percent in the past 12 months, but his spirits are up.

By midmorning, Bok is in a conference room at Greenhill’s offices for an interview with two reporters. The company is adding dealmakers and is poised “for a whole new chapter,” the chief executive officer says. The window beside him looks out on Park Avenue buildings, some of them home to rivals that didn’t exist a decade ago.

To many outsiders—and to a number of current and former employees speaking anonymously—Greenhill is facing a make-or-break year. The mergers-and-acquisitions adviser has watched its market share shrink for much of the past decade amid a global boom in deals. It’s under mounting pressure to prove that a business model it pioneered can work in the long term. Bok, 58, is betting every ounce of his energy, and a slug of his own wealth, that it can. “In my view, we likely caught the bottom,” he says.

The M&A boutique—named for its founder, star dealmaker Bob Greenhill—was the first of its kind to go public, in 2004. Unlike storied Wall Street partnerships that sold stock to catapult themselves into a new class of banking giants, as Goldman Sachs Group Inc. did, Greenhill would have few assets and no businesses beyond providing advice on corporate takeovers and other transactions. Every day its dealmakers would show up, ply their connections, and bring in contracts. If one day the contracts stopped coming, the company’s revenue would dry up, too. And there would be little left to sell but the desks and computers.

Taking the company public made good sense then, and still does, Bok says. A crop of boutique investment banks in the 1980s, including Wasserstein Perella & Co. and Wolfensohn & Co., ended up getting sold to larger companies. Going public gave Greenhill a currency—stock—to pay new star bankers, while also allowing it to endure after its founder leaves. “We wanted to have our own firm for the long term,” Bok says.

After the firm sold stock at $17.50 in its initial public offering, shares quintupled to a high of $95.63 in 2009. That proved investors were willing to buy into an M&A boutique, blazing a path for others, such as Roger Altman’s Evercore Inc. and Ken Moelis’s Moelis & Co., to go public. But unlike Greenhill, many of those boutiques have pushed into additional businesses or opened their wallets to lure big names in investment banking. Their successes have been a challenge to Greenhill: At least 40 percent of the managing directors it had at the start of 2013 have left, two people say. Often they went to work at rival upstarts.

What went wrong? Interviews with about a dozen senior bankers who left the company paint a picture of a series of missteps by Bok, in both strategy and recruitment, with a board that let it go unchecked and allowed dissenting voices to be sidelined. The board does remain supportive: At every firm on Wall Street, “there will be turnover,” says John Liu, a director. “The vast majority of people at the firm are his supporters.”

With Greenhill sliding down the league tables that rank M&A advisers by their work, bankers keep leaving. Disillusioned, many question whether Bok, feted for his organizational skills, was the right pick to succeed a charismatic founder with deep ties to billionaire financiers.

Last year the company posted its first annual loss since going public. It dropped to No. 52 in global mergers and acquisitions, after being among the top 15 in 2007 and 2008, according to data compiled by Bloomberg. “It’s something that’s left many scratching their heads,” says Brennan Hawken, an analyst at UBS Group AG who recommends investors sell the stock.

The current and former employees agreed to describe tensions within Greenhill on the condition they not be named. Some senior dealmakers, they say, have battled with Bok for years on strategy, arguing that the company would be better off recruiting big-name, albeit highly expensive, bankers. Others say the M&A business should have diversified by going further downstream and working on smaller transactions to steady its earnings. Bok kept the company focused mostly on what made Bob Greenhill famous: highly complex, cross-border megadeals.

For that, Greenhill needs rainmakers. Yet many longtime bankers left after the company’s initial success. Bob Greenhill and Bok have sold more than $500 million of their stock in the firm. The founder, 81, isn’t as involved in day-to-day operations as he was in the firm’s early years, according to people familiar with the matter. Altogether, half of the eight members of the early management team have left since the company’s IPO, inevitably calling attention to a warning tucked into the offering’s regulatory filings that any departure of a senior dealmaker “could materially adversely affect our ability to secure and successfully complete” transactions. From October to early March, four bankers who spent at least eight years at Greenhill left for rivals. Bok says he now spends most of his time with clients, both for his own deals and to help colleagues around the world. He says the firm’s attrition rates, when annualized, are healthy and similar to competitors’. And longtime clients such as grocer Tesco Plc and newspaper publisher Gannett Co. have stood by the boutique.

Some assert that Bok was too attached to the dividend he was paying shareholders and that the cash should have been redirected to recruiting. Several senior bankers say the IPO made it easier for them to leave, as it turned their stakes in the firm into valuable stock they could cash out after a five-year lockup. As their departures mounted, the stock entered a slide from which it never fully recovered.

One thing Bok sought to do is preserve the firm’s collegial culture, which could be disrupted by hiring big egos. Several top performers who left say they would’ve preferred moving in that direction to generate more business. Instead, they grew frustrated watching amicable replacements struggle to land deals, hurting the firm’s bonus pool.

Hiring packages for top-tier bankers can be expensive and could have reduced the 45¢ quarterly dividend that Bok maintained from 2008 until it was slashed to a nickel last year. Former executives argue that diverting some of that cash to recruiting would have paid off in the long run. Instead, Greenhill sought to pay recruits mainly with equity, a practice that risks creating a negative feedback loop: The stock falls, and people leave; the stock falls again, and more people leave. Such a cycle makes it all the harder to attract and keep top talent. Bok disagrees. “I don’t think we did any better when the share price was high. I don’t think we’re doing any worse when the share price was low,” he says. “One could argue, if you want to be logical about it, that the time to join and take the stock is when it is low.” A recent hire says he agrees.

Greenhill’s heavy use of stock to pay bankers—a cost that’s booked over several years—makes it harder for outsiders to track underlying earnings, three people say. Many other firms have backed away from the practice; Morgan Stanley CEO James Gorman once said it “created a burden” on future profits. Bok says that based on conversations with recruits, Greenhill’s pay practices are normal and shareholders like aligning bankers’ incentives with stock performance.

The fight over whether to shell out for rainmakers all comes back to a question facing every boutique: Can such companies outlive their founders? Eric Gleacher, who like Greenhill was a Morgan Stanley veteran, formed his own company, too, but it eventually wavered as he grew older and stepped away from regular operations. Gleacher & Co. liquidated in 2014, ending a five-year stint as a public company.

Still, the concept of a shareholder-owned boutique remains popular. After the 2008 financial crisis, publicly traded advisory companies lured dealmakers away from giant investment banks that were under pressure from investors and the government to curb lavish bonuses in the wake of taxpayer-funded bailouts.

The M&A market, meanwhile, reached new heights thanks to low interest rates and ample funding for takeovers. Global M&A volume reached $3.4 trillion in 2017, according to Bloomberg data. Boutiques have won roles on many of the biggest deals of the past decade. But some doubt the sector will be able to grab much more. “A lot of that market share gain is behind us,” says Mark Conrad of Algebris Investments, which owns Lazard Ltd. stock. “I don’t think that suggests necessarily that growth is done. I just think perhaps the easy gains are in the rearview mirror.”

The companies that have sought to diversify by adding other sources of revenue have had varying success with those businesses. Lazard, the largest independent merger adviser and almost 200 years old, now generates about half its fees from asset management. Evercore bought ISI Group, a research, sales, and trading operation that recently lowered projections for profitability.

Bok made a move late last year that many on Wall Street found clever. He hired Goldman Sachs to line up $350 million in borrowing from investors, then used that money to buy back Greenhill stock at a higher price. That lifted the market value and allowed the CEO to pay down some debt. This year, in the first weeks of March alone, he announced four hires. Now, he says, “our current team is 100 percent behind our strategy.”

Bok has a lot at stake. In a sign of confidence, he and Bob Greenhill each committed $10 million of their own money to help recapitalize the company. Together they hold $60 million of the company’s stock, ranking them among its top-five shareholders, February filings show. That doesn’t include equity awards that haven’t vested or can’t yet be sold. One of the firm’s largest outside investors says privately it’s betting Bok can turn things around within half a decade, as Lazard once did. Many new investors, though, are seeking short-term gains, says UBS’s Hawken, which puts pressure on Bok to show progress soon. Bettors are lining up against him, shorting 30 percent of the company’s stock to profit if it falls.

Bok, who’s now on a search for talent, realistically has less than 12 months to show signs of success, Hawken says, noting that recent recruits are promising. Still, “you’ve got pretty big questions around when things will actually turn around and get better.”

Basak covers Morgan Stanley and boutique banks, and Porter covers deals at Bloomberg News in New York. With assistance from Anders Melin and Gillian Tan. 

©2018 Bloomberg L.P.

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