Middle-market companies are itching to gain access to the capital markets, and commercial banks are well positioned to provide it, according to a new study.
One in five middle-market companies is considering an initial public offering, and one in four is considering a public offering of long-term debt, according to a just-released survey by Greenwich, Conn.-based Greenwich Associates.
The study is based on 11,000 interviews conducted during the first quarter of this year, with privately and publicly held companies with annual sales between $5 million and $500 million.
"That's where the commercial banks are going to get the business," said Allan Munro, a partner at Greenwich Associates. "They're not going to displace Goldman Sachs with the Fortune 500 companies.
"It's about existing middle-market relationships."
When it comes to the middle market, commercial banks already have a significant advantage over investment banks, according to the study. On average, middle-market firms use two commercial banks, whereas "only a handful" have or know an investment bank.
"The place where the commercial banks have made the biggest inroads in the underwriting business has been with the lower-rated companies, where the commercial bank has the long-term historical relationship, and where most of these guys haven't even met an investment bank yet," Mr. Munro said.
That bodes well for Bankers Trust New York Corp., which is buying Alex. Brown & Co.; BankAmerica Corp., which is acquiring Robertson Stephens; and NationsBank Corp., which is snapping up Montgomery Securities.
The deals should allow these banks to reap rich equity-underwriting fees from companies that already are commercial banking clients.
"You've seen the largest and best-capitalized commercial banks over the last few months acquire or merge with companies than can bring these very sophisticated products and services down market, into the middle market," said Michael H. Rushmore, vice president and head of loan syndications and trading research at BankAmerica Securities Inc.
Banks that are building their own capital-market businesses also see an increased opportunity to serve the middle market.
"We are seeing the banks' role, both our own and our correspondents, grow in importance," said Laura Bonsett, a vice president in Chase Manhattan Corp.'s U.S. bank client management group.
As bankers grow more savvy about capital markets, they can look at their middle-market clients' circumstances and suggest debt or other balance sheet tools, she added.
Indeed, the survey found that midsize companies are now willing to forego traditional bank loans in favor of public debt or equity issues.
Until recently, companies with annual sales of less than $10 million would have been considered too small to tap the capital markets.
"It's obviously a function of what's been going on in the IPO and the junk bond markets, that these companies can now feel it's legitimate for them to consider raising money in the public market," Mr. Munro said.
"Ten years ago, the great majority would have thought that long-term bank debt or venture capital would have been their only two sources," he added.
Based on Greenwich's estimated total of 40,000 privately held firms in the middle market, about 6,400 companies are considering a common stock offering, while 8,200 are considering a long-term debt offering.
A bank's credibility with the business' owner, chief executive officer, or board of directors was rated the most important factor in selecting a provider of investment banking services by 76% of those businesses surveyed.
Having the best understanding of a client's industry, and the capability of the senior banker covering a client's company, were the second- and third-most important reasons, scoring 68% and 67% respectively.
Revenues from those companies are strong, according to the study. The typical lead commercial bank is paid $430,000 a year for banking services; that figure includes interest paid on debt and fees for all services but excludes earnings on cash balances.
The largest firms pay an average of $1.2 million a year to their commercial banks, and the smallest pay an average of $128,000.
