Where Boutique Bankers Still Struggle on the New Wall Street

The planned IPO of 7-year-old investment bank Moelis & Co. is a signal of just how far boutique bankers have yet to come — that, in spite of all their hopes in the immediate aftermath of the financial crisis, they’re still stuck in their niches while the largest institutions are more dominant than ever.

In its filing with the Securities and Exchange Commission, Moelis & Co. cited the growing demand for independent advice as a reason it should continue to grow revenues and gain market share. Moelis has played a key part in some of the biggest recent mergers and acquisitions, including Anheuser Busch’s $ 61 billion deal to buy InBev SA and the $ 28 billion purchase of Heinz by Berkshire Hathaway and 3G Capital. “We believe the shift toward independent advice has been driven largely by the actual or perceived conflicts at the large financial conglomerates where sizable sales and trading, underwriting and lending businesses coexist with an advisory business that comprises only a small portion of revenues and profits,” the company said it its filing. 

Yet instead of rivaling Goldman Sachs, Moelis is turning to the banking giant (and to its arch-rival, Morgan Stanley) to underwrite its own just-announced public offering.

Many boutique bankers expected that, whether as a result of increased regulation or simply in response to changing industry fundamentals, banks would reshape themselves. The industry as a whole, they hoped, would become more diverse, more “multipolar” — and offer more opportunities for firms like Moelis’s to follow the pattern laid down by Goldman and Morgan Stanley in the 20th century, parlaying investment banking expertise into a broader role in finance.

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Yes, Moelis is an underwriter of its own IPO, but it’s not the underwriter, which is what founder Ken Moelis might have hoped would be the case back in 2007. The financial world is full of boutiques, but none have yet shown an ability to go head-to-head with mega-institutions. Capital still rules, making giant institutions like JPMorgan Chase king of the hill.

Still, a niche isn’t a bad place to be, at least when it’s this particular niche. In 2013, Moelis’s IPO prospectus notes, 80 percent of the top 10 M&A deals included a boutique investment banks among the roster of advisors, while 75 percent of the 20 largest deals did so.

Moelis is launching its IPO on the heels of own of its own very best years, after advising HJ Heinz’s board during last year’s $ 23 billion buyout of the food services company. Moelis & Co. has been profitable since its inception, and was exceptionally profitable last year, after which the bank doled out $ 35 million to its owners.

The IPO will enable the 55-year-old Moelis to monetize some of the value he has built up in his firm and to diversify; it also will make it easier to hang on to key employees via grants of publicly traded shares and stock options.

In the past, however, Moelis has publicly opposed an IPO – for some of the same reasons other members of his team may have eagerly sought it out. Moelis and the firm itself need long-term loyalty; as he himself told the Financial Times in 2011, “the good news about long-term vesting is that you can look to your right and left and know that your support crew is not going to leave you.”

The deal is very likely to be a slam-dunk success for Moelis and his bankers, and even for those who line up to buy the stock. Investors love rival boutique Evercore, whose share price has soared 436 percent over the last five years. (The S&P 500 index is up 163 percent in the same period.) The bank’s simple and straightforward business model – no proprietary trading or “market making,” no complex side businesses to muddy the waters – is alluring to both clients and prospective shareholders.

Prospective investors might want to ask how that Moelis culture might change in the wake of an IPO. Many Wall Street bankers who remember the days of the big investment banking partnerships will admit that while the reasons for going public remain valid – the need to access capital, to give bankers a stake in their companies that could be widely traded – the evolution from partnership to publicly traded corporation changed the business.

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One former Goldman Sachs top banker told me that this change was dramatic, and not necessarily for the better. Once, he said, Goldman was quite prepared to walk away from questionable deals or clients that didn’t “smell” right, regardless of the size of the short-term profits. Post-IPO, that became tougher to do, given that the bank’s managers had become accountable to outside shareholders requiring them to maximize profits. It wasn’t that Goldman or other banks deliberately sought out risky transactions or sketchy clients; more a matter that when it came time to make a call, they tilted toward taking a risk.

This ex-Goldmanite drew a direct line from this transformation to the now-infamous case brought by the SEC against Goldman Sachs in early 2010, alleging that the bank misled investors about the nature of a subprime real estate security it had structured and sold. To settle those allegations, Goldman paid out $ 550 million in fines, a figure that at the time was a record. “I can recall a time that we would never have contemplated doing this kind of transaction at all, because it raised questions in the minds of some” partners, the former Goldman banker told me.

Now, Moelis & Co. too is making the tradeoff, swapping access to capital for the scrutiny of outside investors whose goal isn’t necessarily the same kind of long-term, thoughtful growth Ken Moelis has been able to deliver in the few short years of his boutique’s existence. There likely will remain plenty of profits to spread around, delighting all those shareholders. But as we saw in the years leading up to the financial crisis, what’s in the short-term interests of a group of investors isn’t necessarily in the long-term interests of the industry or the financial system.

There’s no reason to become alarmed by this IPO filing, but it’s worth using the occasion to stop and ponder where our financial system stands, five years after the recovery from the last crisis began.

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Wall Street gains on GDP data; on track for strong week

By Ryan Vlastelica

NEW YORK (Reuters) – Stocks rose on Friday, putting the S&P 500 on track for its best week in five months, as unexpectedly strong data on economic growth increased confidence that the recovery was accelerating.

Gross domestic product grew at an annual rate of 4.1 percent in the third quarter, the fastest pace in almost two years, and exceeding the 3.6 percent pace reported earlier this month. Business spending was also stronger than previously estimated.

Until recently, investors have viewed positive data as a negative, as it suggested that the Federal Reserve would begin to trim its stimulus program. The central bank had said it would start tapering its monthly bond buying when certain economic indicators met its targets.

The Fed, however, on Wednesday said it would pare its market-friendly monthly asset purchases by $ 10 billion to $ 75 billion, starting in January. It also suggested that its key interest rate would stay at rock bottom longer than previously promised.

“If tapering had not been announced, I don’t think this news would be as welcomed by the market as it is right now,” said Nicholas Colas, chief market strategist at the ConvergEx Group in New York.

“But now, there’s no real risk that there will be more tapering any time soon, and on top of that, growth is absolutely stronger than many were expecting.”

Fed Chairman Ben Bernanke said that if U.S. job gains continue as expected, then the bond purchases would be cut at a “measured” pace through much of next year, and would probably be wound down “late in the year, certainly not by the middle of the year.”

The Dow Jones industrial average <.DJI> was up 103.54 points, or 0.64 percent, at 16,282.62. The Standard & Poor’s 500 Index <.SPX> was up 13.55 points, or 0.75 percent, at 1,823.15. The Nasdaq Composite Index <.IXIC> was up 50.56 points, or 1.25 percent, at 4,108.70.

The benchmark S&P 500 has soared more than 27 percent this year and is on track for its best year since 1997. The Fed’s aggressive economic stimulus program has been the major catalyst for this year’s rally.

For the week, the Dow has climbed 3.3 percent – its best week since the first week of the year. The S&P 500 has gained 2.6 percent this week, marking its best week since July. The Nasdaq has also advanced 2.6 percent this week.

Volume is expected to be active as investors deal with the last “quadruple witching” day of the year, which marks the quarterly expiration and settlement of December contracts for stock options, stock index options, stock index futures and single stock futures.

In addition, most U.S. index funds will adjust their portfolios as a result of quarterly rebalancing by index providers. Credit Suisse expects the rebalancing to result in over $ 30 billion in total trading at today’s close.

Red Hat Inc jumped 16.6 percent to $ 57.12 and ranked as the S&P 500’s best performer after the world’s largest commercial distributor of the Linux operating system reported third-quarter results above analysts’ estimates and raised its full-year forecast.

Blackberry Ltd reported a massive quarterly loss on Friday due to an inventory writedown and asset-impairment charges. Still, BlackBerry’s U.S.-listed shares shot up 15 percent to $ 7.16.

Walgreen Co advanced 3.5 percent to $ 58.91 after reporting higher first-quarter sales.

Oracle Corp was unchanged at $ 36.60, pulling back from an earlier modest gain to $ 36.79, after the No. 2 software maker it would buy Responsys Inc in a deal valued at $ 1.5 billion. Responsys shares surged 38.8 percent to $ 27.09.

Jones Group Inc climbed 5 percent to $ 14.83 after the company said on Thursday that it had agreed to be bought by Sycamore Partners for $ 1.2 billion.

(Editing by Bernadette Baum and Jan Paschal)

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News Summary: Google’s 1Q earnings top Street view

MOBILE EVOLUTION: Google’s first-quarter earnings rose 16 percent to $ 3.3 billion as the Internet search leader made further progress in its effort to boost the prices for ads distributed to smartphones and tablet computers. That helped lift Google’s earnings above analyst projections.

THE CHALLENGE: Marketers haven’t been willing to pay as much for ads on mobiles devices because their display screens are smaller than those on personal computers. But Google’s first-quarter numbers indicated the gap between mobile and PC ads is gradually narrowing.

OTHER POSITIVES: The losses in the Motorola Mobility division that Google bought last year for $ 12.4 billion are easing.

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Accenture 2Q profit rises, tops Street estimates

NEW YORK (AP) — Consulting firm Accenture said Thursday that its fiscal second-quarter net income climbed 59 percent, helped in part by a reorganization benefit.

Its adjusted profit beat analysts’ estimates, but its overall revenue just missed expectations. The company forecast net revenue for the third quarter that was below Wall Street’s expectations. It also narrowed its fiscal 2013 revenue guidance.

Accenture also announced that Chief Financial Officer Pamela J. Craig will step down from her post on July 1 and retire from the company on Aug. 31. The company said that the 52-year-old David Rowland, senior vice president of finance, will succeed Craig as CFO in July.

For the three months ended Feb. 28, Accenture PLC earned $ 1.18 billion, or $ 1.65 per share, up from earnings of $ 704.5 million, or 97 cents per share, a year ago.

Removing a reduction in reorganization liabilities and benefits from final determinations of prior-year tax liabilities, earnings were $ 1 per share.

Analysts surveyed by FactSet expected earnings of 97 cents per share, on average.

Total revenue increased 3 percent to $ 7.49 billion from $ 7.26 billion as outsourcing revenue rose. Wall Street forecast revenue of $ 7.51 billion.

New bookings totaled $ 9.1 billion. Outsourcing new bookings — which comprised 52 percent of total new bookings — were $ 4.7 billion. Consulting new bookings — which made up 48 percent of total new bookings — were $ 4.4 billion.

Accenture anticipates third-quarter net revenue — a measure that excludes reimbursements — of $ 7.25 billion to $ 7.5 billion. Analysts expect $ 7.62 billion.

The company also said that it now foresees fiscal 2013 sales at the lower half of its prior outlook for a 5 percent to 8 percent increase. It maintained its adjusted earnings forecast of $ 4.24 to $ 4.32 per share.

Wall Street predicts full-year earnings of $ 4.28 per share.

Shares of Accenture added 45 cents to $ 75.33 in midday trading. Its shares have traded in a 52-week range of $ 54.94 to $ 78.46


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China’s Focus Media sees 4Q profit miss Street

NEW YORK (AP) — Focus Media Holding Ltd., a flat-panel screen advertising network that operates in elevators and office buildings in China, said Monday that its fourth-quarter net profit more than doubled despite a slight revenue decline, as it didn’t repeat an investment loss from a year ago.

The adjusted earnings were below the expectations of analysts.

The company also set a special shareholders meeting on April 29 to vote on the plan it announced in December to be acquired by Giovanna Parent Ltd. for $ 27.50 per American depositary share and go private.

U.S.-listed shares fell 46 cents, or 1.7 percent, to $ 26.22 in after-hours trading, after gaining 53 cents, or 2 percent, to close at $ 26.68 in the regular session.

Net income in the three months to Dec. 31 came to $ 76.7 million, or 57 cents per ADS, compared to $ 37.1 million, or 27 cents per ADS.

A year earlier, the company booked a loss of $ 38.9 million due to its investment in VisionChina.

Excluding expenses for paying executives with stock and other items, earnings came to 71 cents per share, below the 75 cents expected by analysts polled by FactSet.

Revenue fell 1 percent to $ 250.2 million from $ 252.7 million a year ago. Analysts expected revenue of $ 249.1 million.

CEO Jason Jiang said the company’s results were in-line with its expectations but said the company continues to be affected by “slower overall advertising spending in China.”

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