Cashing out is costing more these days.
As banks consider their odds of survival in the weak economy and tough regulatory environment, more are calling on investment bankers to help them expand their balance sheet or exit the business.
Those advisors, however, are taking a larger bite out of the wallets of buyers and sellers than they did a decade ago.
Buyers who disclosed their fees paid their advisors on average 0.49% of the deal value in 2003, while sellers paid 0.84%. In 2012 buyer rates had risen to 0.85%, and sellers' fees to 1.57%, according to data from SNL Financial, with some additional analysis by the Kafafian Group, a New Jersey bank advisor.
No, the investment bankers have not anointed Gordon Gekko, the villain in "Wall Street," as their patron saint. Instead, the fee increases reflect a new M&A environment where pairing banks involves a lot more work.
Deals have been smaller and are harder to strike since the financial meltdown. Additionally, advisors are confronting the same economic pressures as their customers face and are consolidating, too.
Several investment bankers who declined to comment on the record for this story contended that fees only appear higher, because buyers are reluctant to pay top dollar anymore and thus the basis for the fees is smaller.
In the run-up to the crisis, two times tangible book value was common, if not low in certain parts of the country. But median price to tangible book value for deals valued at more than $50 million was 1.4% in 2012, according to data from KBW.
It is the denominator that has changed, the investment bankers say, not necessarily the numerator.
That is an incomplete argument, says Jeff Marsico, executive vice president of the Kafafian Group. The average fee as a percentage of deal values is up, so it means the advisors are trying to maintain their income.
"The transactions are smaller, so there is an upward pressure on fees," Marsico says. "When you consider the amount of work to get a deal from start to finish, an $80,000 fee is not a profitable endeavor for most advisors."
Marsico's firm is not a broker/dealer, but it provide M&A advice. His firm's fees have increased in the last decade, mostly because it has one team dedicated to doing fairness opinions for the board and another team involved making the deal happen, he said.
In a rosier economy, bank M&A was a much easier endeavor as culture and price were the two largest components of making good matches.
Now, advisors have to reconcile wide bid/ask spreads to ink deals. Then, they have to worry about either party's ability to close a transaction, regulators' willingness to bless a deal and the economy's expected performance between announcement and closing.
For example, the fees advisors charged sellers jumped to 2.55% in 2009, when M&A was dominated by attempts to save good franchises from failure and a few healthy deals. A lot of that work was wasted; a third of the deals announced that year were terminated, according to data from ParaCap Group, a Cleveland-based boutique investment bank.
"Five to ten years ago, we could be nearly sure the deal would get done," said Charles R. Crowley, a longtime community bank dealmaker who recently joined Boenning & Scattergood in Cleveland as a managing director. "But now there is a tremendous amount of work, and there are some deals that are deemed to be a little bit more difficult to do."
Though advisor fees are higher in banking, they are still relatively low compared with those paid in other industries. Most M&A involving midsize businesses is priced around 1% to 3% of the deal value, says Terry Keating, a managing partner at Amherst Partners in Chicago.
"There are more bankers than there are deals, and that has kept downward pressure on the fees," Keating says.
Keating focuses on helping banks diversify their revenue streams and balance sheet, which often means helping them acquire ancillary businesses like equipment-finance companies or other specialty-finance arms.
He says he decided to go that direction because the bank-to-bank advisory field is saturated. With the number of banks expected to dramatically shrink over the next decade as institutions merge and the pipeline of new charters remained largely closed off, the long-term prospects are poor.
"The industry already has a bunch of entrenched competitors, and the world of banks is shrinking. It would have been a bad model to try and crack into," Keating says.
The number of investment banks that focus on banks has shrunk, too. Several boutique firms, like Carson Medlin and Milestone Advisors, have been acquired in the past several years.
"Our industry must seek the same kind of economies, scale and revenue diversity that our bank clients are trying to get," Gray Medlin, now a managing director at Monroe Securities, said in an email. "These pressures had much to do with the merger of Carson Medlin Co. and Monroe Securities in 2011."
Rules of supply and demand say that the consolidation of advisors should translate to higher prices. However, most observers are skeptical that it will pan out that way. As they see it, a lack of deal activity is a major force in investment bankers pairing up. They need the banks to want to buy others or sell themselves. Hiking prices too much could discourage such behavior. In fact, the fees could come down as the M&A market return to historical levels.
"As deal values gravitate upward and additional healthy sellers work their way into M&A, I think you could see those percentages come back down over the next few years," Crowley says.
To be fair, several observers say they haven't noticed a hike in prices and that fees are reasonable.
"We really haven't noticed that as a trend," says David Baris, executive director of the American Association of Bank Directors. "We believe that banks are normally well served when they work with a qualified investment bank on acquisitions."
However, fees might climb if inexperienced bank sellers do not comparison shop, says Baris, who is also a partner at the BuckleySandler law firm.
"Some banks may just assume that the price is non-negotiable. They are often wrong," Baris says. "It's not just the amount but how the percentages are applied."
Though all banks are sensitive to expenses, Baris says, advisory work is a necessary component of a successful deal.
"It is important to provide a reasonable incentive for the investment bank to act in the best interests of the bank's shareholders," he says.
Steve Gardner, chief executive of Pacific Premier Bancorp in Costa Mesa, Calif., presses his advisors for a flat rate, versus one that is a percentage of the deal value. In October, his company announced it would pay $53.7 million to acquire First Associations Bank in Dallas.
"I don't think the fees have or are going to change materially," he says. "We negotiate flat fees up front so we know exactly what we are paying."
Ray Davis, the CEO of Umpqua Holdings in Portland, Ore., also said he hasn't noticed a change. Umpqua has acquired roughly a dozen open and failed banks in the last decade.
Fees "are negotiated and there is no set standard," Davis says. "But you do get what you pay for."