Evercore Builds Market Share In M&A Field


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Evercore Partners ( EVR ) derives almost 90% of its revenue advising companies on mergers, acquisitions, divestitures and other forms of corporate restructuring. The merger market has been flat of late, actually, a bit disappointing. But weakness in its major market has barely held back Evercore.

Since 2005, Evercore has been gaining M&A advisory market share, notes Jeff Harte, an analyst with Sandler O'Neill & Partners. In 2003, reports Harte, Evercore commanded just 1.04% of the global advisory revenue pool. By 2012, Evercore had quadrupled its share to 4.22%.

Merger advisory revenues can be lumpy, depending on the timing of deal closings. That's why quarterly results in this sector can sometimes be misleading.

Evercore reported quarterly earnings Wednesday of 65 cents a share compared with a consensus view of 54 cents. That was 33% above the year-ago report of 49 cents.

Some analysts noted the results offered little confirmation of an overall upturn in merger activity.

"It seems the revenue of independent advisory banks is holding up much better than overall M&A industry volumes would indicate," said Morningstar analyst Michael Wong.

Market Share

He noted that Evercore executives were "a bit elusive" when asked about the outlook for the second half of 2013. Still, analyst Harte likes Evercore's long-term potential. "They'll continue to gain share," he said. "They're the right player at the right time for gaining market share and being a leader," he added.

Evercore was founded in 1996 on the premise that corporate clients might prefer a small firm focused on merger advice to the investment giants who then and now dominate M&A. The giants of M&A, firms like Goldman Sachs, JPMorgan and Morgan Stanley, typically underwrite and trade, along with dispensing advice on deals. This can create conflict of interest issues, according to the Evercore pitch.

Evercore founder and Chairman Roger Altman was no babe in the M&A woods. He had risen to lofty oversight positions at Lehman Bros. and Blackstone, and had also served as deputy Treasury secretary in the Clinton administration.

The M&A business is all about who you know. And Evercore started with a bulging Rolodex. Altman said at one recent meeting with analysts: "I'm in touch with as many companies as probably any banker on earth."

Since 2007, Evercore has more than doubled its roster of banking pros, notes Wong. It continues to hire M&A pros, often from larger rivals, and now has 63 partners, CEO Ralph Schlosstein told analysts in April.

Evercore bankers are bringing rain. Senior managing directors averaged more than $10 million each in advisory revenues over the last year, said Schlosstein. Those are productive totals for investment bankers, especially at smaller firms, notes Wong.

Though GAAP revenue in 2012 totaled just $642 million, Evercore has in recent years been in on some big deals. It advised Burlington Northern Santa Fe on its sale toBerkshire Hathaway (BRKA) andSanofi ( SNY ) on its acquisition of Genzyme.

This year,AT&T ( T ) andBlackRock ( BLK ), among others, turned to Evercore for acquisition advice. Though Evercore began with industry strength mainly in technology, media and telecom, it is now diversified, across many industries, said Harte.

Worldwide merger dollar volume in the first half of 2013 was essentially flat with the prior year, according to S&P Capital IQ.

How well would Evercore do if M&A activity heated up?

"Out of all the publicly traded investment banks, Evercore is probably second to Greenhill in terms of upside earnings momentum from a pickup in merger activity," said Wong.

Generally, merger activity does heat up as equity market prices rise. Potential acquirers who were scared to buy in at lower prices jump in when markets get frothy. And since their own shares are likely frothing, too, deals with heavy stock contributions are cheaper for buyers. But this time around, buyers have not jumped en masse on to the bull market bandwagon.

"A lot of the normal indicators have been flashing green," noted Harte. But the pace of M&A recovery "has not been what we're used to seeing," he added.

Buyers have held back for a number of reasons.

"There's been a lack of confidence after the deep recession. Companies are much more inwardly focused," said Harte. And the broader economic recovery has been too weak to fortify buyer confidence. "We haven't really had much economic growth," he said.

"We're not sure why M&A has held back so much," said Kenneth Leon, an analyst with S&P Capital IQ.

Revenue Growth

Still, Evercore was able to grow revenue last year from $524 million in 2011 to $642 million. One reason, some argue, is that in the aftermath of the financial crisis there has been a trust issue for larger rivals that underwrite and trade, along with advising.

By contrast, said Leon: "Evercore is not likely to make direct investments in something they advise on. At the large banks that have huge trading operations as well as merger advisories, "there's a potential for information leakage," added Wong.

As Evercore grows, its relative lack of presence outside the U.S. could become an issue. Though Evercore has been trying to muscle up overseas, it is still mostly dependent on the Americas. This hasn't hurt much thus far as Europe and Asia have both had to work through problems that have held back merger activity.

"Americas M&A has done very well for the first half of this year as opposed to Europe and Asia," noted Leon. This trend will "probably" continue through the rest of this year, he adds

Meanwhile, Evercore has diversified with an asset management operation that contributed 12% of revenue last year. Morningstar's Wong points out that margins in this business will improve as assets under management -- now $13.6 billion -- grow. Even so, said Leon, asset management won't be a big enough business to "move the needle."

The needle needs deals.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas
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