Middle-market companies are increasingly open to selling themselves in 2019, and that is welcome news to banks with M&A advisory shops. Regional banks have been gobbling up merger-and-acquisition advisory firms in recent years both to provide a broader array of services to corporate clients and capture the hefty fees those firms collect when they advise buyers, sellers or both. Activity has been strong of late and M&A advisers say they expect it to pick up even more in 2019 as owners approach retirement age or their firms look to divest units that are no longer core to operations. “We see our fee income rising in M&A this year and I think it would be a healthy increase from a previous record year,” said Ralph Della Ratta, head of M&A advisory for capital markets at Citizens Financial Group. Della Ratta joined Citizens in May 2017, when the $160.5 billion-asset bank bought an M&A advisory firm, Western Reserve Partners, that he co-founded. ![]()
Several of Citizens’ competitors, including PNC Financial Services Group in Pittsburgh, Cleveland-based KeyCorp and Fifth Third Bancorp in Cincinnati, have recently acquired small M&A advisory firms as well. In 2017, PNC bought Fortis Advisors, a San Diego-based M&A shop that represents shareholders in private M&A deals and Key acquired Cain Brothers, a boutique investment bank focused on the health care industry. Early last year, Fifth Third beefed up its own M&A services with its purchase of Coker Capital Advisors, a boutique firm that also serves the health care industry. Those deals may be small, but bankers say they have been important for diversifying fee income, particularly at a time when some more reliable sources of fee income, such as mortgage banking, have leveled off or declined. Bankers also say that having an M&A advisory shop enhances their overall commercial banking services and provides other cross-selling opportunities. “There’s an M&A fee to earn, but there’s also private wealth, and there’s financing [for the acquirer] and interest rate protection,” said Terry Katon, head of capital markets at the $126 billion-asset Regions Financial in Birmingham, Ala. “That M&A advice can spin off into other business for us on either side of the transaction.” In 2015, Regions bought BlackArch Partners, a Charlotte, N.C.-based M&A advisory firm focused on middle-market companies. For the $146 billion-asset Fifth Third, having an advisory arm means more opportunities for bankers to meet and network with decision makers and experts in the fields the bank serves, said Bill Tyson, Fifth Third’s head of M&A. “This business is not just about earning the fee income associated with it, although that’s nice,” he said. A recent survey of middle-market companies conducted by Citizens suggests there may be more demand for M&A services in the year ahead. The survey found that 62% of potential middle-market sellers are either actively looking to sell themselves in 2019 or would be open to a deal if the right offer came along. In a similar survey last year, only 48% of respondents said they would consider selling. The percentage of buyers who said they are shopping declined to 71% from 79% a year ago, a finding that Della Ratta attributes mostly to higher seller valuations. Still, he said he believes that companies’ desire to grow or acquire new technology will motivate those companies to consider deals, in spite of higher asking prices. Also promising for banks: 65% of potential sellers and 63% of potential buyers said they would prefer to work with an adviser on a deal. Citizens defines middle-market companies as those with $50 million to $3 billion in annual revenues. The survey polled 601 executives at such firms. Factors that could discourage deal making include increased acquisition cost stemming from rising interest rates, an economic slowdown or recession and the uncertainty surrounding the 2020 elections. At the moment, though, many middle-market firms are motivated to make deals. “We have a record pipeline going into 2019,” said Fifth Third’s Tyson. “We certainly recognize there are some exogenous factors that weigh a little bit on the overall market, but generally speaking, we have a cautiously positive outlook for M&A in 2019.” Banks do not typically break out M&A advisory income, but in fourth-quarter earnings announcements both Citizens and Fifth Third said that growth in advisory revenue helped offset declines in other fee areas, such as mortgage banking. At Fifth Third, for example, M&A advisory fees helped to boost corporate banking revenue 69% to $130 million, even as overall noninterest income remained flat. At Citizens, capital markets fees increased 7% to $45 million, thanks in part to a 56% increase in M&A fees. On the buyers’ side, the increased M&A activity has been driven in large part by companies’ desire to increase their technology capabilities or find new revenue streams. Among sellers, Citizens’ Della Ratta said that many firms are run by baby boomers who are nearing retirement age and don’t have children or grandchildren who are interested in running the business. “The aging and graying of America certainly does contribute,” he said.
Several of Citizens’ competitors, including PNC Financial Services Group in Pittsburgh, Cleveland-based KeyCorp and Fifth Third Bancorp in Cincinnati, have recently acquired small M&A advisory firms as well. In 2017, PNC bought Fortis Advisors, a San Diego-based M&A shop that represents shareholders in private M&A deals and Key acquired Cain Brothers, a boutique investment bank focused on the health care industry. Early last year, Fifth Third beefed up its own M&A services with its purchase of Coker Capital Advisors, a boutique firm that also serves the health care industry. Those deals may be small, but bankers say they have been important for diversifying fee income, particularly at a time when some more reliable sources of fee income, such as mortgage banking, have leveled off or declined. Bankers also say that having an M&A advisory shop enhances their overall commercial banking services and provides other cross-selling opportunities. “There’s an M&A fee to earn, but there’s also private wealth, and there’s financing [for the acquirer] and interest rate protection,” said Terry Katon, head of capital markets at the $126 billion-asset Regions Financial in Birmingham, Ala. “That M&A advice can spin off into other business for us on either side of the transaction.” In 2015, Regions bought BlackArch Partners, a Charlotte, N.C.-based M&A advisory firm focused on middle-market companies. For the $146 billion-asset Fifth Third, having an advisory arm means more opportunities for bankers to meet and network with decision makers and experts in the fields the bank serves, said Bill Tyson, Fifth Third’s head of M&A. “This business is not just about earning the fee income associated with it, although that’s nice,” he said. A recent survey of middle-market companies conducted by Citizens suggests there may be more demand for M&A services in the year ahead. The survey found that 62% of potential middle-market sellers are either actively looking to sell themselves in 2019 or would be open to a deal if the right offer came along. In a similar survey last year, only 48% of respondents said they would consider selling. The percentage of buyers who said they are shopping declined to 71% from 79% a year ago, a finding that Della Ratta attributes mostly to higher seller valuations. Still, he said he believes that companies’ desire to grow or acquire new technology will motivate those companies to consider deals, in spite of higher asking prices. Also promising for banks: 65% of potential sellers and 63% of potential buyers said they would prefer to work with an adviser on a deal. Citizens defines middle-market companies as those with $50 million to $3 billion in annual revenues. The survey polled 601 executives at such firms. Factors that could discourage deal making include increased acquisition cost stemming from rising interest rates, an economic slowdown or recession and the uncertainty surrounding the 2020 elections. At the moment, though, many middle-market firms are motivated to make deals. “We have a record pipeline going into 2019,” said Fifth Third’s Tyson. “We certainly recognize there are some exogenous factors that weigh a little bit on the overall market, but generally speaking, we have a cautiously positive outlook for M&A in 2019.” Banks do not typically break out M&A advisory income, but in fourth-quarter earnings announcements both Citizens and Fifth Third said that growth in advisory revenue helped offset declines in other fee areas, such as mortgage banking. At Fifth Third, for example, M&A advisory fees helped to boost corporate banking revenue 69% to $130 million, even as overall noninterest income remained flat. At Citizens, capital markets fees increased 7% to $45 million, thanks in part to a 56% increase in M&A fees. On the buyers’ side, the increased M&A activity has been driven in large part by companies’ desire to increase their technology capabilities or find new revenue streams. Among sellers, Citizens’ Della Ratta said that many firms are run by baby boomers who are nearing retirement age and don’t have children or grandchildren who are interested in running the business. “The aging and graying of America certainly does contribute,” he said.
