Houlihan Lokey is preparing for an era of banking industry consolidation — even if it doesn't happen this year.

The global investment banking firm, noted for its expertise in industries like aerospace and defense, is scheduled to announce Tuesday that it has acquired Milestone Advisors in Washington, D.C.

The move more than triples its financial services group and gives the New York firm more West Coast and Southeastern coverage. The now 28-person group will help banks conduct mergers and acquisitions, raise capital, shed their problem assets and find profitable side businesses.

"The [financial institutions group] space is the second most active sector in all of M&A, and we were underrepresented," Scott Adelson, a senior managing director for Houlihan, said in an interview on Monday. "We've built a more meaningful FIG group over the last five years, but it still wasn't at a scale that was commensurate with opportunity."

Financial terms of the deal, completed Dec. 31, were not disclosed. It is the latest in a trend of M&A advisors pairing up, including Stifel Nicolaus' planned acquisition of KBW. Investment banking firms feel the same competitive forces and regulatory headwinds that their clients face, and it is causing them to partner up.

"Our industry must seek the same kind of economies, scale and revenue diversity that our bank clients are trying to get," Gray Medlin, managing director of Monroe Securities in Chicago, said in an email. Medlin sold his firm, Carson Medlin, to Monroe in 2011. "If those needs cannot be satisfied at a reasonable cost, in a reasonable time, then they have to be satisfied by combination or acquisition."

Eugene Weil, co-founder and chief executive of Milestone, acknowledges those pressures likely will drive consolidation within the advisory world but insists his firm's decision to sell was driven by ambition.  The combination blends the nimbleness of his small firm with Houlihan's greater range of products and capabilities, he says.

"From our perspective, we had decent running room to stay independent, but as the bigger guys like Stifel and KBW combine, we saw a huge growth opportunity," Weil says. "Now we have a much better shot at taking a more meaningful share of the financial advisory market."

Houlihan will seek to add additional advisors, says Weil, who will co-head Houlihan's financial institutions group.

"Given the dislocation we are seeing [among advisors], it is a pretty opportunistic time to hire senior talent, too." 

The pairing was nearly five years in the making. The firms began discussing a combination on the eve of the 2008 financial crisis, executives from both sides said in separate interviews.

"They were preliminary discussions, but once the world went off a cliff in September, we put our heads down and focused on building our business," Weil says.

Milestone in the interim focused on its core business of specialty finance M&A work, and it also moved into helping banks value their nonperforming loans and pair such distressed portfolios with financial buyers.

Meanwhile, Houlihan expanded its financial services arm, too.

Both firms were involved in various transactions in the last few years. Houlihan, for instance, represented the unsecured creditors of Lehman Brothers and advised Springleaf Finance on capital-structure alternatives. It also has advised the Treasury Department as it winds down the Troubled Asset Relief Program.

Milestone advised MetLife on its sale of a $70 billion mortgage servicing rights portfolio to JPMorgan Chase (JPM). It was also involved in six community and regional bank acquisitions in 2012.

Milestone was the top advisor for all U.S. specialty finance M&A transactions from 2004 to 2012 (based on number of transactions, excluding self-advised deals) and ranked within the top 10 M&A advisors to the U.S. bank and thrift sector based on 2012 deal volume, according to SNL Financial.

When asked about his expectations for acquisition activity in 2013, Adelson said he hopes for a continuous build of activity, rather than a year filled with ebb and flow.

"We went into 2012 expecting it to be a good year, and then the market decided to take a quarter off," he says. "I'm just hoping for a solid 12-month year. It doesn't need to be roaring, just a solid year."

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