Vault Guide to Middle Market Investment Banking (2)

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Acknowledgments

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Table of Contents

INTRODUCTION

THE SCOOP 3

Chapter One: The Middle Market Niche 5

The New Landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

The Downturn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

The Differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Chapter Two: Deals and Dealmakers 9

M&A Big and Small . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

A Family Affair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Ramping Up, Here and Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

In Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Chapter Three: Research Below the Radar 15

The Niche . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

The Job . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Chapter Four: Middle Market Models 19

Boutique Shopping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19The New Crop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

More Flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

Private Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

GETTING HIRED 27

Chapter Five: Education and Internships 29

Educational Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

Internships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

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Chapter Six: Preparing for the Search 33

Cover Letter and Resume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

Sample Cover Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

Sample Resume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

Headhunters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

Chapter Seven: Acing the Interview 41

Studying Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42

The Interview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Sample Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46Expertise Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

ON THE JOB 5

Chapter Eight: Career Paths, Compensation and Lifestyle 53

The Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53

Lifestyle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

Diversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58

Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58

Uppers and Downers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59

Chapter Nine: Days in the Life 63

Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63

Managing Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66

FINAL ANALYSIS 7

FIRM PROFILES 73

Allegiance Capital Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75

Alpha Omega Capital Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77

Baird . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79

BCC Capital Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83

Bengur Bryan & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85

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Boenning & Scattergood . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87

Breckenridge Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89

Brisbane Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91

Brookwood Associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93

Brown Gibbons Lang & Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95

C.V. Lemmon & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97

Caymus Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99

Curtis Financial Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101

Dominion Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103

Edgeview Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105

Evercore Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107FOCUS Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112

Fox-Pitt Kelton Cochran Caronia Waller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116

Gemini Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .119

Growth Capital Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121

GulfStar Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123

GW Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .125

Harpeth Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .127

Harris Williams & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129Headwaters MB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131

Heritage Capital Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133

Herrera Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .135

Hyde Park Capital Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .137

Ironwood Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139

Janes Capital Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141

Jefferies & Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .143

JMP Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147

JPS Capital Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .151

Keefe, Bruyette & Woods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .153

KPMG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .156

Ladenburg Thalmann & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .160

Lazard Middle Market (Goldsmith Agio Helms) . . . . . . . . . . . . . . . . . . . . . . . . .163

Leerink Swann . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .165

Lighthouse Capital Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .168

Lincoln International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .170

McColl Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .172

McGladrey Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .174

Morgan Joseph & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .178


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Mosaic Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .180

Newbury, Piret & Company, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .182

P&M Corporate Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .184

Penn Capital Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .186

Piper Jaffray . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .188

Prairie Capital Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .192

Provident Healthcare Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .194

Robertson & Foley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .196

Shoreline Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .198

SPP Capital Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .200

St. Charles Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .203The DAK Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .206

Trenwith Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .208

Triangle Capital Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .210

Vercor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .212

Verdant Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .214

Watermark Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .216

William Blair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .218

APPENDIX 22

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .223


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Introduction

The idea of a high-powered investment banker’s lifestyle has been shaped by

Hollywood for decades, extolling a culture of corporate raiders with a "greed is good"mentality. Those hunting for a job on Wall Street imagine a future guiding Fortune

500 companies through dramatic multibillion-dollar hostile takeovers. And history

has done little to shake that image—until now.

Realigning Wall Street

There has been a massive realignment in the U.S. banking system in the last year,

one not seen since the Great Depression. Global financial turmoil due to the credit

crisis and a massive dislocation of stock markets have caused the collapse of several

storied investment houses. Bear Stearns and Merrill Lynch were forced into

emergency sales, while Lehman Brothers filed for bankruptcy. Citigroup, the banking

powerhouse cobbled together in 1999 as a financial supermarket, is now in the

process of selling its Smith Barney division to Morgan Stanley as a way to stay alive.

Together, three-fifths of the U.S. investment banking industry's biggest names

virtually disappeared overnight—with only Goldman Sachs and Morgan Stanley

remaining independent. That leaves a handful of small investment banks, including

Lazard and Evercore Partners, to provide services like M&A advice to companies.

The hundreds of smaller firms that specialize in middle market deals have gained

prominence because they have run into less trouble during the downturn by avoidingbetting on risky mortgage-backed securities that vanquished their larger peers.

Meanwhile, the government plans to pump more than $700 billion into the

beleaguered banking system in 2009 to shore up bank balance sheets. But with that

plan comes restrictions. President Obama has placed drastic restrictions on how

much banks that take taxpayer money can pay in bonus compensation for their top

bankers. That means the end of Wall Street’s freewheeling days, and the beginning

of an exodus. A growing number of veteran bankers are leaving major firms to escape

having their compensation scrutinized. Many of them are heading to middle market

and boutique investment banks, which are largely private firms that aren’t subject to

such restrictions. And these well-known bankers are expected to lift the prospects for

smaller firms as they compete against the Wall Street establishment.

Growing in the middle

From billionaire investor Carl Icahn's takeover of TWA in the 1980s to Exxon's $86

billion acquisition of rival Mobil two decades later, the lore of investment banking's

greatest hits has become a cornerstone of business school textbooks. But what

aspiring bankers might want to take into consideration is that there are more than 13million companies operating in the United States, a broad swath of businesses

spanning from the corner pet store to corporate titans like IBM and General Electric.

Not every player in the merger and acquisition landscape fits into a neat category. A

select number of deals done between members of the Standard & Poor's 500 index

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or Dow Jones industrials are certainly plastered across the front pages of leading

financial newspapers. But, for each of those transactions, there are thousands more

that never capture the media's attention.

The increase in the number of smaller deals, known in the financial world as the

middle market, has grown significantly in the past few years. Investment bankers

specializing in these kind of transactions say it is a sign of the times. Those family

owned businesses whose leadership has been handed down from father to son are

now finding the latest generation unwilling to take the reins. In other cases, midsized

companies can't compete against bigger rivals who have a more global reach. They

comprise the backbone of American entrepreneurship, those companies that cram

into business parks along major highways from Indiana to California to New Jersey.

And they are ready to make deals.

Where the action is

With all the talk about a global economic slowdown, the conventional wisdom holds

that corporate buyouts would be sharply curtailed. But as organic growth stagnates,

many companies turn to acquisitions as a way to expand. The buyout party certainly

continued in 2008, with bankers perched in corner offices, securing more than $1

trillion worth of transactions. But that was a 27 percent decline from the same period

the previous year, despite big global deals like Swiss drugmaker Novartis' record-

setting $39 billion stake in ophthalmology specialist Alcon. Middle market activityshowed an increase.

There were 3,417 middle market deals completed last year, up from only 2,403 in

2007, according to data provider Dealogic, which tracks investment activity. And the

first quarter of 2009 showed that middle market deals remained on track. There were

500 transactions announced, which is slightly higher than the year ago period. "The

middle market is really where all the action is right now," Andrew Apfelberg, a

corporate M&A attorney and partner at Rutter Hobbs & Davidoff, told U.S. News &

World Report . The rise in these kinds of transactions comes during a very bleak

period for the investment banking industry.

Looking beyond the big guys

Industry analysts believe it could be months or even years before the winners and

losers of this latest cycle emerge. But, the smaller firms that handle middle market

companies have certainly become more appealing destinations for top workers in the

industry. And they also are becoming more popular among big and small companies

alike, especially since many of their founders are headed by industry veterans. For

example, the former Smith Barney chief executive, Robert Greenhill started Greenhill& Co. in 1996; Lehman Brothers banker Roger Altman runs Evercore; and ex-UBS

investment bank head Kenneth Moelis runs Moelis & Co. So, those looking to launch

their career as an investment banker might be wise to cast a wider net than the

textbooks dictate.


Introduction

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THE

SCOOPVault Career Guide to Middle Market Investment Banking

The Middle Market NicheDeals and Dealmakers

Research below the Radar

Middle Market Models


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The Middle Market Niche

The lure of Wall Street

Most people looking to break into the world of high finance have long sought out jobs

at some of Wall Street's most venerable investment banks. For generations, these

firms have done everything from finance the nation's industrial revolution to ponying

up the cash to launch the latest high-technology company. The big investment banks

handle a variety of tasks for corporate America. Chief among their roles has been to

buy and sell companies, but that's not where it ends. Companies also turn to

investment banks to raise capital, either through massive loans, bond offerings, or

even going public on a major stock exchange. They are the counselor to every

member of the Standard & Poor’s 500 index, and the privately held companies that

form the backbone of American business.

Everyone's heard of Wall Street's biggest investment banking names like Goldman

Sachs or Morgan Stanley. And, a massive consolidation craze in the late-1990s

forced some key firms into the arms of even bigger retail banks, such as Smith Barney

having been folded into Citigroup. But, there has never been more change in the

industry than what occurred in 2008 -- a year that will be remembered as the start of

the biggest financial crisis to hit the world since the Great Depression.

America's biggest investment banks took some huge gambles in the securities

market, and lost. This caused the oldest and most revered names to vanish almostovernight. Lehman Brothers, a securities firm that got its start in 1844 as a dry goods

store in Montgomery, Alabama, filed for Chapter 11, which instantly became the

biggest bankruptcy in the nation's history. Bear Stearns was sold at a fire-sale price

to retail banking giant JPMorgan Chase & Co. And, Merrill Lynch & Co.—the world's

biggest brokerage—agreed to sell itself to Bank of America to avoid a collapse.

THE NEW LANDSCAPE

These names are what the industry calls the "bulge bracket firms." But, the biggest

changes on Wall Street since the 1930s have left it with a stark new landscape. While

thousands of investment bankers have found themselves working for a new firm or

looking for work, there's an important niche in the investment banking world that

continues to thrive. Enter the middle market, those smaller firms are scattered across

the country and do everything their bigger rivals can—just on a smaller scale. Middle

market firms like Keefe Bruyette & Woods in New York, Oppenheimer in Toronto,

Canada, and Thomas Weisel Partners in San Francisco are all smaller-sized securities

firms that are making some big money, despite the deepening malaise.

Thomas Weisel, who started his firm in 1998 after a previous middle market

investment bank he launched was bought by Bank of America, sees opportunity amid

the industry's chaos. And his company has steadily been hiring throughout the

downturn. "With the demise of several large Wall Street firms and the redirection of

[the] business models of others, opportunities in investment banking have never been

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greater," he told analysts recently. "On the brokerage side, based on U.S. trading, we

estimate that the average middle market firm could see brokerage revenue grow

incrementally by up to 20 percent. This presents opportunities to gain market share

in both investment banking and brokerage, and we expect to capture theseopportunities."

Weisel’s firm and other middle market players offer pretty much what the giant Wall

Street firms do. On the investment banking side, they offer advice to midsized

companies looking to buy a rival or sell out. They’ll offer the companies they advise

services like raising capital, either through underwriting loans or issuing debt. And

some of their clients might even be on the path to going public on a regional or major

stock exchange. There are middle market firms that often invest in their clients’

businesses in the hopes of cashing out at a premium down the road. And full-service

middle market investment banks even act as research houses and offer stock advice

on small publicly traded companies that aren’t on the radar of bigger competitors.

THE DOWNTURN

Major Wall Street firms tend to have their best quarters during the big growth spurts

in the U.S. economy. That’s when their army of bankers, who negotiate deals and

lead big capital-raising campaigns, collect those eye-popping paychecks. But when

the economy cools off, so do the deals. Lenders in the past year have grown wary of approving transactions on concerns these companies might go belly up and not be

able to pay them back. But, middle market deals—which typically range from $500

million to $1 billion—have kept rolling along.

These deals aren't going to be bragged about on television stations like Fox Business

or CNBC, nor will they make the front pages of The Wall Street Journal or the

Financial Times . The stock market's record Bull Run pushed corporate valuations to

sky-high levels by the time 2007 rolled around, making merger and acquisition deals

much more expensive to complete. But, the financial crisis has, in a sense, let the

air out of the market and brought prices back down to earth. That's opened up

opportunities for middle market deals, which some believe remains fairly insulated

from economic ups and downs.

With valuations returning to normal, midsized public and private companies are a bit

more willing to put themselves out there. "Despite what's going on with the market

and the economy, a lot of the businesses that we look at are still very good

businesses. There will be opportunities, certainly, in a distressed world, and

recessions don't last forever," said Sean Traynor, a partner at private equity firm

Welsh, Carson, Anderson & Stowe in New York, speaking at a conference at theWharton School of Business.





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Holding steady

According to Dealogic, megadeals slowed nearly to a stop in 2008. Deals in the

middle market continued, though at a slower pace. Separate surveys from Ernst &Young and Thomson Reuters found the same pattern. While overall volume remained

down, middle market deals continue to be relatively strong in relation to the broader

market downturn.

THE DIFFERENCES

The world's biggest investment banks have suffered losses so steep that they are

balking at making loans or backing M&A deals. And, those blockbuster M&Aagreements that once stunned the financial world because of the prices paid are

falling apart. The biggest example in 2008 was the collapse of mining behemoth BHP

Billiton's $188 billion acquisition of rival Rio Tinto. That added to a startling statistic

during the fourth quarter of the year that the value of busted mergers during the

period was nearly equal to the value of the deals that went through.

According to Thomson Reuters’ data, there have been $322 billion of withdrawn M&A

deals in the fourth quarter of 2008 as the credit crisis worsened, compared with $362

billion of announced deals. For every 100 mergers or acquisitions announced in the

fourth quarter, seven were called off. That means the big investment banks on thesedeals will lose out on the coveted merger fees that once propelled their earnings. But,

the dead deals might also give bankers some piece of mind these days. A

combination like BHP Billiton and Rio Tinto would have meant the 16 or so banks

involved would have had to underwrite tens of billions of dollars of loans for which

there are few buyers as credit has dried up on Wall Street.

Regional advantage

Middle market transactions don't really have this problem. While the firms in thisindustry still collect the same high fees for advising on a deal, they often obtain

financing through regional and community banks that haven't racked up the kind of

massive losses that the nation's biggest financial institutions have during the crisis.

These smaller banks, in many cases, are still willing to lend, though, they are doing

so with a much more cautious tone. These deals are also being struck for entirely

different reasons than those megadeals that are falling apart these days.

All in the family

Acquisitions are most often sought out for economic reasons. As an example, Bell

Canada has been struggling financially and finally agreed to be acquired by a number

of private equity firms for about $42 billion. That deal is among those that likely won't

go through because it is so difficult for the acquirers to raise the financing for it. On

the contrary, middle market companies tend to be quite solvent and are being put on



7Visit Vault at www.vault.com for insider company profiles, expert advice,



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the auction block for other considerations. In many cases, these are family owned

businesses that choose to sell for reasons such as succession or estate planning.

We are the world

Another big push for midsized companies has been globalization. Smaller companies

have felt the need to grow overseas to compete with bigger rivals, and that's kept

investment banks with a middle market bent quite busy. Booming economies like

China and India represent opportunities for American companies. These countries

might be perceived as only exporting goods and services to the more developed

world, but they also need equipment and expertise. That's where partners in the U.S.

come in. Even midsized U.S. manufacturers, so frequently written off as dinosaurs,

can continue to compete by teaming up with partners from abroad.





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Deals and Dealmakers

M A BIG AND SMALL

The main role for middle market firms around the country is to serve the needs of

businesses looking for merger and acquisition advice. They put buyers and sellers

together, helping companies grow geographically or just unload a business entirely.

In some cases, middle market firms will even invest their own money into an

acquisition in the hopes of cashing out at a bigger profit later. In a sense, these firms

act similar to the large private equity companies that have dominated M&A for the

past three years. Private equity shops tend to buy a company, own it for about five

years, and then cash in with a splashy initial public offering later down the line. Most

of the companies middle market firms invest in tend to be too small to garner anyattention in a public flotation, so bankers will instead try to sell them to other

companies once valuations climb higher.

There are a number of reasons why the chief executive of a midsized firm might want

to get a deal done. The main motivation has always been growth, a way companies

can expand both product lines and geographic footprint. The past few years have

seen the emergence of other factors, such as tax reasons, accounting standards,

social reasons, structural issues and the need to raise more capital to keep the

business going. Turning to a middle market firm might be not just the best solution

for companies looking to for some M&A advice, but in many cases their only solution.The big Wall Street investment banks, while they have field offices around the world,

might not have the same specializations on Main Street as their smaller brethren.

Middle market firms often specialize in specific regions of the country, industries or

types of deals. They also provide a level of attention and detail that the big investment

banks cannot offer to midsized companies. That, in itself, is the biggest reason why

middle market firms are thriving despite the intense competition in the investment

banking industry.

A FAMILY AFFAIR

Interviews with the heads of middle market investment banks have turned up one

main reason why midsized companies are looking to do deals. Many midsized

companies these days are family owned operations that might be reluctant to seek

out investment advice from an investment bank thousands of miles away. Take a look

in any town in the United States and you’re bound to find businesses that have been

handed down from one generation to the next. They might be auto parts makers in

Ohio or Michigan that feed products to Detroit’s big automakers. They could be oil

services companies in Texas and along the Gulf Coast states. They are agricultural-

based companies in America’s farm belt. These companies exist in every city, county

and state that once dominated the nation’s backbone during a time when industrial

companies ruled the business landscape. And, as the U.S. began to shift to a more

services-oriented business culture, these companies began to diminish. Today, only

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the strong survive. And, the owners are finding that they need help if they want to

stay in operation. These companies turn to middle market investment banks to make

a sale. “As middle market interest grows, private equity and strategic buyers will do

well to focus their sights on what makes these deals unique if they want to increasetheir success in bidding for and completing them,” said Mitchell S. Ames, an M&A

partner in the New York office of law firm Pepper Hamilton LLP. “It’s important to

match the financial expertise of the investor with the operating expertise of the owner-

operator with sensitivity, whether it involves the introduction of a new finance officer,

the addition of debt to the target’s balance sheet or the creation of incentive-based

compensation plans where there were none.”

The need for “sensitivity” comes into play because many of these companies are

used to wheeling-and-dealing on their own. Here’s a typical case study: Bill Kirk,

president and CEO of Virginia-based Associated Asphalt, wanted to raise some capital

by attracting a private equity investor. The company has been in existence since

1948, and is one of the biggest asphalt suppliers in the Southeast. But, when it came

time to infuse the company with new capital, Kirk was uneasy. “I was initially

reluctant to hire an investment bank because I had been approached by various

strategic purchasers. I felt that I knew what the value of our company was in the

marketplace,” he said. He turned to middle market firm ICG Capital Partners in

Charlotte, North Carolina, for a recapitalization. The firm quickly found a match with

private equity firm Thayer Hidden Creek Capital Investors in a multimillion-dollar deal.

Increasingly sophisticated

Making an acquisition a decade ago might have been as simple as having an attorney

draw up papers, and sitting down with a loan officer at a local bank to put the

financing together. But, today’s midsized company faces furious demands and a

whole new level of competition. The deals have also become much more

sophisticated. That local factory that needed to expand might have simply bought a

competitor a few counties away to take care of growing capacity needs. Now, it might

be looking to cement a deal in not only different states, but abroad. Those lookingfor a job that entails scouting out businesses and putting deals together for a middle

market firm might want to make sure their passports are up to date. There’s a

growing indication that the next wave of investment banking deals might be coming

from overseas, where local currencies dwarf the U.S. dollar and make American

companies look cheap. Meanwhile, the tightening of the credit markets, and the

resulting sharp decline in highly leveraged megadeals, has shifted much of the M&A

activity toward smaller, easier-to-finance deals.

RAMPING UP, HERE AND ABROAD

Leland J. Lewis, a managing partner at Greenwich, Conn.-based Key Principal

Partners, expects the boom in middle market deals will only ramp up in the coming

years. He also agrees, with firsthand knowledge that the trend for overseas





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transactions will only pick up speed in the years and months ahead. Going out on

the road and meeting with many owners, Lewis said he expects this will be a growing

part of the business. “Manufacturing companies in particular have been feeling

pressure from their customers to be global. Many older owners are intimidated by theidea of trying to implement such a strategy, and this may be the tipping point for them

to decide to sell the company. Sometimes they may have kids in the business but

they still sell because they don’t want to put this burden on their kids either and think

that cash today may be a better thing to pass on. “

Pennsylvania to China

The vast majority of M&A transactions that Lewis puts together are still domestic. But

there was one recent deal that not only might represent the future for middle marketinvestment banking, but sounds almost like the screenplay of a Hollywood movie. His

firm held a controlling interest in a small company located in Ridgeway, Pennsylvania,

that made metal components used in small engines such as lawnmowers or

transmissions.

Ridgeway is a small, somewhat isolated town with about 4,000 residents located in

the Northwest part of the state. It’s a part of the country in which you wouldn’t exactly

expect a company to be thinking globally. But, that’s exactly what this metals

components maker did when the owners wanted to start up a plant—7,200 miles

away in Yizheng, China. The company scouted out plants in the Chinese city to helpgrow its business, install its technology and train workers there how to use it. That

created quite a culture clash, Lewis said, when it came time to dispatch workers from

Ridgeway clear across the world to meet their new colleagues from the East: “Two of

the folks sent over there not only did not have passports prior to the trip, but actually

had never flown before. One of the workers was a mountain of a man with a tattoo,

beard and a penchant for wearing cutoff sleeve sweatshirts and black construction

boots. He requested the assignment. It was pretty entertaining watching him

interacting in Yizheng, China.”

In 2008, there were 2,398 announced China M&A deals involving middle market

companies, an 11.8 percent increased compared to a year earlier, according to a

study by investment bank Robert W. Baird & Co. Dollar volume in 2008 totaled

$117.5 billion, up 42.3 percent from the prior-year period. That shows the intensity

of transactions in China, especially with a backdrop of declining deals throughout the

rest of the world.

On the domestic front

Domestically, companies are also faced with a number of regulatory, accounting and

governmental issues that might spur them into selling or buying a company. Financial

advisory firm PricewaterhouseCoopers’ transaction services group issued a report in

2008 outlining a number of factors that may drive a further increase in middle market

deals—and possibly all deals—in the months ahead. Among them:






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• The possible increase in the capital gains tax under President Barack bama, a

move that will end the breaks that business owners have received in deciding to

cash out. More importantly, if passed by Congress, hiking capital gains could

prompt private equity firms to sell off some of their holdings and might evendiscourage some midsized business owners from selling their businesses.

A large part of private equity earnings come from carried interest, in which a fund's

manager claims a percentage of the total profits earned of the fund when an

investment is sold. Management fees are taxed as high as 35 percent, the carried

interest is regarded as capital gains in the U.S. tax code. Instead of the average

capital gains tax of 15 percent, private equity fund managers could see their carried

interest taxed up to 35 percent. The opposition to the current tax treatment argues

that managing a fund is a service and should be taxed in the same way as other

service providers like, say, teachers or mechanics.

• There’s also a host of new accounting rules that went into effect in 2009 that has

left the M&A community spinning. Midsized companies will turn increasingly to

investment banks to gain expertise in how to pursue acquisitions while navigating

through a number of new rules, known in the industry as Financial Accounting

Standards. Among them is FAS 141R, a rule on business combinations that

requires more up-front reporting about the nature of business deals, and the fair

value of the assets and liabilities that are changing hands. Business owners also

must grapple with FAS 157, which goes over the dos and don’ts of measuring howthe fair value of a company is calculated.

• The U.S. Treasury Department’s $700 billion bailout of the nation’s banking

industry allows financial institutions to tap the fund with the requirement that the

new capital be used for lending. With the extraordinary turmoil that has been

experienced in the nation’s capital markets and in the investment banking sector,

commercial banks have become more important than ever to the U.S. economy.

Since middle market deals rarely depend on using the bond or stock markets to

raise money for an acquisition, that’s put even more significance on bank lending.

Midsized companies rely on commercial banks of all sizes to extend loans as a wayto finance deals, and that slowed in 2008 due to the credit crunch. The early

stages of the government’s TARP program has indicated banks are still hesitant to

loan out money, even after obtaining capital from the government.

This must change if middle market deals are to flourish, and there are some

indications that bank chiefs realize this. “As a strong regional bank with a major

focus on financing small and middle market businesses, we are pleased to have

this additional capital to better serve the lending needs of customers throughout the

Western United States,” said Zions Bancorp Chairman and CEO Harris Simmons

after his company received $1.4 billion under the government program late lastyear. “We expect to deploy this new capital in the form of prudent lending in the

markets we serve.”





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IN DEMAND

There was a time when those looking to join the investment banking field’s ranks

would have settled for nothing less than a top-notch Wall Street firm. All that changed

with the great tumult of 2008, and instead recruiters are placing candidates at

boutique and middle market investment firms that offer more job stability. The deals

you’ll work on will certainly be smaller in size, but the experience is similar in nature

to what you’d find at the bigger firms that carry more cachet in the investment

banking world. Many first-time bankers are being advised to ride out the bear market

at middle market firms, where they can build an impressive resume with the ultimate

goal of landing that perfect job on Wall Street. Peter Kies, head of the investment

bank recruiting committee at Baird told The Wall Street Journal that there has been

a 50 percent increase in interest from MBA graduates over 2008. He said the firmis appealing to students on a national level rather than just at business schools from

the Midwest and East Coast. "We're sort of like kids in a candy store right now in

terms of tracking high-quality folks," he told the newspaper. That also means that

middle market firms can be much more discerning about who they bring on board.

Big Wall Street banks, during the high-rolling bull market days, would hire a thousand

new recruits a year from America’s business schools. Their collapse has certainly left

a big void in the industry. But the good news is that there are hundreds of middle

market investment banks around the country, with the number of employees varying

from a few dozen to hundreds. These firms are hiring as more attention trends towardmiddle market deals, the CEOs of these firms told Vault. The kind of jobs out there

vary, but still closely mirror the functions that you’d find at a premier name like

Goldman Sachs. Here are some career paths in the middle market niche:

• Mergers and acquisitions

The bread-and-butter of any middle market firm, those working in this area advise

clients, value transactions and hammer out deals. Your duties could involve

analyzing deals. So, expect to begin running lots of valuation models on

spreadsheets and gradually get more client focus as you progress. You might also

be asked to recommend to the management team whether or not they should

participate in a deal the firm is working on. Many middle market firms take

investments in the companies they advise, an area known in the business as

merchant banking.

• Advisory

One subset of an investment bank’s M&A business is the advisory services

business. Positions on this team might provide areas like risk management to

clients. Other times, analysts on the team will be asked to determine a client’s

value, options for creating value or tracking conditions in the client’s industry.






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• Corporate finance

Positions in this group work to help companies raise the capital they need, whether

it be to finance new projects or operations. They look to identify the amount and

structure of the funds needed for the client, and that could take the form of loans,equity investments or securing more sophisticated forms of debt like bridge

financings. Starting analysts in corporate finance work might be asked to prepare

the necessary paperwork for the capital financing, and even be asked to attend the

“road shows” used to pitch investors.

• Trading

Some of the biggest middle market firms might just be a notch down in size from

the big Wall Street banks, and could be involved in businesses such as sales and

trading. After the investment banking side lands a deal that involves underwriting

equities or bonds that finance the transaction, their traders are asked to sell them.

Trading is one of the toughest jobs on Wall Street where one must have a thorough

knowledge of the markets, financial instruments and an almost sixth sense about

how to buy and sell. The bottom line is that any job on a trading desk demands

the ability to convince other traders why they should purchase your stock.

• Institutional sales

Some of the bigger middle market outfits that deal with small publicly traded

companies might also have an institutional sales business. Those hired for these

jobs would be responsible for pitching securities to institutional investors, likeportfolio managers at mutual funds or pension funds.





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Research Below the Radar

The history of stock advice

For as long as stocks have traded on an exchange, investors have relied on the advice

of others to tell them what to buy and what to sell. The roots of The Wall Street

Journal , America’s leading publication covering all things business, stretch back to

1882 under the masthead Customers’ Afternoon Letter. That publication helped

investors obtain investment advice in the days when the New York Stock Exchange

first set up shop at the corner of Wall Street and Broad Street in lower Manhattan. A

few years later, reporters Charles Dow, Edward Jones and Charles Bergstresser

converted the letter into its current incarnation. They also added as a regular feature

the Dow Jones Industrial Average, the first of several indexes that tracks the biggest

U.S. companies. For more than a century, investors have been relying on anythingwritten about stocks to guide them in their investment decisions. In the Internet Age,

finding this kind of stock advice is just a click away. Investors with online brokerage

accounts can tap into resources from the biggest U.S. investment banks just as easily

as a wealthy investor leaning on the knowledge of his high-profile broker. While the

face of investment banking might be changing radically around the world, the one

constant will continue to be solid investment advice.

Driving the business

This has been one of the most lucrative businesses for Wall Street’s elite banks. Stock

analysts, some making millions of dollars a year, are paid to pore over the balance

sheets of major companies and find out what is really driving revenue. They earn a

living trying to discover which companies might become the next Enron, shifting

around assets to hide the fact they are losing money. They try to identify the next big

company to become the darling of Wall Street, like a Google or an Apple. Most of the

big research houses track America’s biggest companies, those that fall under the

Dow’s 30 members or the Standard & Poor’s 500. But, that begs the question: What

about the other 10,000 companies that list some form of security on American stock

exchanges?

Listing shares

Many U.S. companies don’t even trade on a major exchange, instead listing their

shares elsewhere. Until acquired by the New York Stock Exchange in 2008, the once

mighty American Stock Exchange was home to about 600 public companies.

Hundreds of others, labeled as “small-cap,” traded on regional exchanges in

Chicago, Boston, Philadelphia, Miami and dozens of long-defunct ones in cities like

New Orleans and Los Angeles. Then there are those tiny companies that don’t even

trade on an exchange, and instead rely on electronic quotation systems that display

real-time quotes and information for many “over-the-counter” (or OTC) securities.

For instance, the “Pink Sheets” is an alternative exchange that got its start in 1913.

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Pink OTC Markets to this day facilitates the exchange of securities electronically

between brokers for securities that don’t trade on any brick-and-mortar exchange.

Research matters

There is a reason why major investment banks and brokerages don’t push their

research departments to cover midsized, publicly traded companies. It is all about

demand. When putting merger and acquisition deals together, investment banks

typically cater to larger companies that can afford high-priced fees. They collect

more money advising a member of the Dow Jones Industrial Average rather than a

smaller company grouped into smaller indexes. So, when it comes to providing

research to clients, the big investment banks usually stick to companies that they

might do business with. And, with a limited number of analysts, these firms also wantto cover the most actively traded stocks. Their retail brokerage customers will most

likely want to buy shares of a big conglomerate like General Electric rather than a

small up-and-coming company that isn’t widely known. But, that doesn’t mean

covering midsized companies is not a lucrative field. In fact, it is very much in

demand.

Middle market investment banks have research departments specializing in

companies that aren’t covered by their bigger rivals. From covering small retail

chains to upstart biotechnology firms, the middle market investment banks have

carved out a very important niche. Stock pickers are coveted throughout the entirefinancial industry, but even more so for those companies that fly under the radar.

And they are winning accolades for it, one example being Piper Jaffray, a

Minneapolis-based middle market investment bank and securities firm that was

recently given top honors in The Wall Street Journal ’s 2008 Best on the Street

analysts survey. A number of its analysts were recognized with awards, resulting in

a 14th place ranking overall in 2008. The newspaper chose 220 award winners in

45 industry groups from more than 1,700 eligible analysts. Joel Denney, head of

investment research at Piper Jaffray, said the awards were “a great example of how

our investment research team is fully dedicated to continually providing clients withproprietary and unique research, as well as high-quality stock analysis across various

industries.”

THE NICHE

Providing that high-quality analysis of midsized public companies is a hot commodity

on Wall Street these days. Not only are middle market firms hiring analysts, but there

are a number of privately run trading operations, such as hedge funds or privateequity firms, willing to pay top dollar for analysts that can focus on smaller

companies. This means that big investment houses like Morgan Stanley or JPMorgan

or Citigroup’s Smith Barney aren’t the only places to send your resume. There are

dozens of middle market firms – like Piper Jaffray – that are on the hunt for analysts





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who can break down a Dow component as well as a member of the broader Wilshire

2000 index of smaller companies.

The small-cap universe

Investors are constantly in search of good stock picks for smaller companies. In fact,

indexes like the Wilshire 2000 are often the first group of stocks to move higher when

a bear market begins to wane. While these stocks might be a bit more volatile, they

often provide bigger gains for investors. That’s why a simple search of the internet

will turn up hundreds of different websites catering to investors who crave information

about small-cap stocks that are ready to take off. Reading some of these sites might

be a good way to familiarize yourself with what the industry calls the “small-cap

universe.” Smallcapinvestor.com or smallcapcenter.com are two places to start.You’ll quickly see why analysts covering these companies are in high demand.

To become a securities analyst at a middle market shop, you have to gain specific

knowledge about an industry or a region. This means not just the large companies,

or “big-cap” stocks, that are covered by the major research firms. Instead, middle

market investment banks tend to specialize in small-caps. But, don’t let the labels

fool you. The growth of stock valuations over the years, despite the recent bear

market, has elevated small-cap stocks into some pretty big companies. Market

capitalization is calculated by multiplying the price of a stock by the number of shares

outstanding. This represents the market’s value of a stock, without taking intoaccount assets, how much cash the company might have or the value of any publicly

traded bonds. And, these days, small-caps carry the same kind of value that the big

S&P 500 companies did just a few decades ago.

Big-cap vs. small-cap

The definition of big-cap and small-cap might differ between various investment

banks, though the differences are mostly minor. Big-cap generally refers to major

companies like General Electric or IBM, which are also called “blue chip” stocks inmarket lingo. They are considered to carry less risk during market downturns, but

also have the least upside potential during a bull market. However, these represent

a minority of publicly traded stocks. Small-cap stocks are generally considered to be

more risky because of their size, but offer the most upside potential. They also attract

a distinct group of investors. While many people hold blue chips for years, those

sinking money into small-caps are often considered momentum investors. They pick

stocks of companies whose earnings are growing rapidly, and whose stock-price

charts indicate strong upward momentum. These investors rely on good research to

find stocks where they can ride the momentum for a short period of time, then cashout at the first sign of trouble. Stocks like Allscripts Healthcare Solutions, which offers

hardware and software for the medical community, or personal products company

Smith & Wesson, have been cited as just a few small-cap names that are being

closely followed. Both trade on the NASDAQ Stock Market’s small company

exchange, and are followed mostly by middle market analysts.






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While stocks that fall below blue chip size might not attract the attention of analysts

at big research houses, there’s still a real need to cover smaller companies. The

classifications between different classes of stocks are important because mutual

funds use these rankings to determine which stocks to buy. Here’s a rough definitionof the various stock rankings:

Big-cap—Market cap of $10 billion and greater

Mid-cap—$2 billion to $10 billion

Small-cap—$300 million to $2 billion

Micro-cap—$50 million to $300 million

Nano-cap—Under $50 million

THE JOB

Many job seekers applying to major research houses might start off as a junior

analyst, and get a limited amount of hands-on experience in how to cover stocks. At

a middle market firm, which doesn’t have the staffing levels of bigger firms, be

prepared to hit the ground running. They are looking for analysts that are already well

versed in specific industries and sectors, and can immediately get on the telephone

and begin contacting institutional investors. Middle market shops also aren’t just

looking for recent MBAs or undergrads. Experience in the industry can be a big plus.

For instance, someone in the restaurant field might be able to use that as aspringboard to becoming a restaurant industry analyst. Knowing an industry inside

and out, and the ability to spot trends and provide accurate forecasts, is key to the

job. Analysts are often referred to as either quants or fundamentalists.

Fundamentalists make recommendations based on what's going on at a company –

how's the CEO, what are the earnings, etc. Quants look at computer programs that

identify undervalued securities, markets or even whole countries. There are fewer

quant jobs, but they often pay more because the required skills are greater.

A bachelor’s degree is essential for analysts, who might also benefit from a specialty in

business administration, accounting, finance or statistics. In addition, an understanding

of administration and accounting are strongly suggested. Additional recommendations

include courses on bond valuation, risk management and options pricing.

Beyond trying to join an investment bank, those looking to become analysts also have

another option. One way to break into the business is to start as a ratings agency

analyst. The pay is relatively low and advancement opportunities aren't great, and

the investment banks know it and use the agencies as hunting grounds for new

analysts. Moody's Investors Service rates $5 trillion worth of securities and has 560

analysts. Standard & Poor’s rates $2 trillion worth of securities and has 800 analysts.These agencies are highly profitable and grade the credit quality of companies

accessing the markets. They collect most of their revenue from issuer fees. "We are

not auditors and we don't use lie detectors, so it's up to our analysts to be smart

enough to ask the right questions," Edward Emmer, executive managing director and

head of S&P's corporate ratings department, said in a recent interview.


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The bulge bracket model that dominated Wall Street for generations has collapsed in

on itself. This has led to a total reshaping of the industry, and given rise to middle

market firms trying to solidify a niche in the world of investment banking. Some have

just a few departments being run by a dozen or so employees. Others count

hundreds on their payrolls. But this unexpected and sudden power shift brings

opportunity. For potential bankers, it opens up an entirely new segment that’s looking

to hire. And, for the owners of these middle market firms, it is a golden opportunity

to forge an investment bank that serves the needs that beleaguered Wall Street banks

no longer can.

Want to get a job in this expanding sector? Better get to know their business models.There are firms that focus only on mergers and acquisitions for a variety of industries,

and some of them offer research. Others combine M&A with private equity. Still

others toss in brokerage capabilities to their offerings. But there are also niche

models that focus on a specific sector in a move to “own” the industry they track,

known in the industry as boutique investment banks. Others not only put together

M&A deals for a specific sector, but also actively invest their own money through

private equity plays.

BOUTIQUE SHOPPING

Despite the economic downturn, one thing has remained a constant for Wall Street’s

investment banking business: Boutique firms. These are small banks specializing in

mergers and acquisitions for a specific field, and they are often the first place the

industry turns to for advice. They’ve also carved out a very important niche over the

years, and, in many cases, the owners have sold their shops to bigger investment

banks and then have gone on to form new firms.

A decade ago, the financial world was abuzz about firms that zeroed in on thetechnology industry – and there’s some evidence that there is about to be a major

resurgence in this field. Companies these days are discovering that smaller firms that

focus all of their attention on one field often help make the best merger matches, are

able to time the market right for an IPO and have the kind of institutional knowledge

to help provide better advice.

The tech sector

The most well-known boutique firms have come from the technology sector. And the

best way to show their influence on the industry might be through a little history

lesson. In the late 1990s emerged what bankers called “the Four Horsemen” firms:

Robertson Stephens, Hambrecht & Quist, Montgomery Securities and Alex. Brown.

They focused primarily on technology companies during the go-go internet days when

a small, unknown startup would routinely explode into a global player almost

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overnight. None of them exist as independent firms today, with all four swallowed up

by bigger banks as the technology boom began to wane. However, they illustrate how

much influence boutique firms have over the entire industry. And they also indicate

how this sector sometimes rises from its own ashes, much like mythology’s phoenix.

How it works

The best example might come from Sandy Robertson and Thomas Weisel. Both men

have been among the fiercest rivals in Silicon Valley investment banking circles, and

their moves have been among the industry’s most tracked. Robertson, along with

Robert Coleman and Ken Siebel (who later went on to found Siebel Systems) formed

Robertson, Coleman & Siebel in 1969. That firm focused on middle market

investment banking, and in 1971 Weisel joined the firm, rebranded with his name inits title. Seven years later, Weisel pulled off what was described later as a “mutiny,”

ousting Robertson and Coleman, and renaming the firm Montgomery Securities.

Robertson went on to form a new firm that was later named Robertson Stephens. The

two duked it out through the 1980s and 1990s, dispensing M&A advice to early

technology companies.

Middle market and boutique investment banks have always operated under the

careful eye of Wall Street’s bulge bracket firms. Eventually, both Robertson and

Weisel found their firms swallowed by larger rivals. NationsBank acquired

Montgomery Securities and Bank of America snapped up Robertson Stephens. Andafter NationsBank and BofA combined, Robertson Stephens was sold yet again.

After changing owners a few more times, the firm was eventually liquidated, and

Montgomery Securities was later rebranded Banc of America Securities. Their

founders didn’t just vanish. Weisel opened up Weisel Partners, which remains one

of the middle market’s biggest firms. Robertson helped form private equity shop

Francisco Partners, which owns technology companies like AdvancedMD and API

Software.

The tale of these two storied firms demonstrates that the middle market and boutique

M&A business plays a crucial role on Wall Street. And though some firms ultimately

don’t remain independent, their leaders often go on to launch other financial

companies. This means that getting a job with a niche firm could lead to an entrance

into a bigger firm down the line. And, there is evidence that boutique firms are in the

midst of a reawakening.

THE NEW CROP

There’s a new breed of boutique investment banks making significant inroads thesedays, and, ironically enough, in the technology industry. Sure, the tech-heavy

NASDAQ Stock Market finished 2008 down about 43 percent in 2008—and has

slipped another 16 percent in the first quarter of 2009. But with the American

economy still ruled by companies like IBM, Apple and Google, technology continues





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to be one of the nation’s biggest economic drivers. This industry also remains in

consolidation mode as it matures, and middle market investment banks have not lost

sight of this. Companies like Robertson Stephens and the other major boutique firms

focused in the 1990s on research, stock sales and initial public offerings in additionto M&A. This new crop of boutique firms are focusing more narrowly on M&A advice,

and are also actively engaged in raising private equity money into the most lucrative

deals.

Addressing the IPO draught

Sticking with the example of technology companies and the firms that focus on them,

Silicon Valley produced just one initial public stock offering in 2008, the skimpiest

number in more than two decades and down from an average of 28 IPOs a year since1985. Boutique firms once were able to bring companies public in splashy IPOs that

created legends on Wall Street. They did that with Netscape in 1995, Google in 2004

and VMware in 2007. ArcSight, a relatively obscure systems security firm, was the

only Silicon Valley IPO of 2008. In the first quarter of 2009, the IPO market remainef

frozen with only one major deal coming to market.

That’s decimated the world of venture capital firms, which identifies fledgling

companies and invests seed money in them. The VC firms bank on the fact that,

eventually, the companies they invest in will go public in multimillion-dollar IPOs.

That’s when the VC firms cash out and distribute the proceeds to their own investors.The new wave of boutiques has become a welcome presence at a time when the IPO

drought has made it tough for anybody to make money. Getting the attention of the

big Wall Street firms for IPOs and other major deals has become almost impossible,

industry analysts say. "We can't get our companies out, and one reason is we can't

get the attention of the investment bankers," says Mark Heesen, president of the

National Venture Capital Association.

That’s opened the door to boutique firms that can arrange private equity dollars or

targeted M&A deals. "We're not trying to be everything to everybody," Brian Roberts,

a senior managing director at Evercore Partners, told BusinessWeek . His New York-

based firm is one of those offering M&A advice along with a $1.2 billion investment

fund that sinks private equity cash into companies. "We would much rather have a

dialogue with the CEO about what keeps him up at night."

That might be why Yahoo! Inc., one of the world’s leading search engines, hired

boutique middle market firm Moelis & Co. to provide advice to defend itself against a

hostile advance by Microsoft Corp. The firm was formed in 2007 by former UBS

investment banking head Ken Moelis. Emboldening the case for middle market

boutique banks was the man Google hired—Frank Quattrone another M&A luminarywho worked at Morgan Stanley, Deutsche Bank and Credit Suisse before forming his

own firm. He participated in some of the biggest deals in Silicon Valley, including the

initial public offerings of Netscape, Cisco and Amazon.com.






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MORE FLEXIBILITY

Boutiques use longstanding industry relationships and small teams that assign senior

staff to deals. They offer flexibility to dart in and out of smaller buyouts to win

business. They're gaining prominence as some of the top banks have cut or

reassigned bankers due to the credit crisis.

Take a look at Allen & Co. Long known for its media expertise, the firm is making a

name for itself as a matchmaker between Silicon Valley web companies and East

Coast sources of capital. The New York-based company advised CNET Networks on

its $1.8 billion sale to CBS, and advised social networking website Bebo on its $850

million sale. Allen is also tied to brokering other high-profile tech industry financings,

helping widget software company Slide secure $50 million.Evercore Partners is another firm that has also carved a niche in Silicon Valley. (?)

The firm advised Electronic Data Systems on how to structure its $13.9 billion sale to

Hewlett-Packard. Evercore has been among the top-25 banks based on M&A

transaction value for the past four years, after ranking 104th in 2003.

Here are a handful of others that are recognized in the industry for providing niche

services:

• Leerink Swann - www.leerink.com

The company specializes in the health care field by offering institutional sales,research, corporate finance and asset management services.

• Caris Company - www.cariscompany.com

The firm is a full service investment bank headquartered in Del Mar, Calif., that

focuses on technology, health care, consumer and energy companies.

• Fox Pitt Kelton - www.fpk.com

The boutique investment bank specializes in the financial services sector.

• JMP Securities - www.jmpsecurities.comJMP was founded in 2000 by ex-Montgomery Securities (now part of Bank of

America) managers to fill a void left by acquired smaller, research-driven

investment banks.

Picking up volume

To be sure, the major investment banks are still the most powerful deal brokers on

Wall Street when it comes to acquisitions and investments, and the credit crisis and

recession in 2008 has certainly cut into business. A slowdown in M&A activity has

also put dents in some prominent boutiques. Companies worldwide completed 2,000

M&A deals in 2008, 11 percent fewer than 2007, according to Thomson Reuters.





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But, M&A lawyers say volume could pick up again, particularly in the internet sector,

as the slower U.S. economy forces Web 2.0 startups to sell, and “angel” investors

look to liquidate their portfolios. Boutique banks have been able to thrive by

competing for the largest deals, while having the flexibility to reach down and scoopup business on smaller deals sometimes bypassed by larger firms. But the little guys

are able to charge rates comparable to those of their larger competitors. "Their

premise is not that the fees are lower, it's that the service is better," says a law firm

partner who has advised tech companies on dozens of M&A deals. "This used to be

the guy who ran tech M&A at Goldman Sachs, Credit Suisse or Morgan Stanley, and

now they're focused on you."

PRIVATE EQUITY

The boom in mergers and acquisition helped more than just investment banks

flourish during the

Vault Guide to Middle Market Investment Banking (2)

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