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By Ronald Fink
Predictions that corporate finance clients of Goldman Sachs might turn elsewhere as a result of the bank's conflicts of interest appear to be coming true, at least among smaller ones, according to data obtained by CFOZone today.
Though Goldman retains its overall lead over other banks as a mergers and acquisitions advisor, the bank has slipped to fourth place this year in M&A advice on transactions valued between $25 million and $750 million, according to data provided by Dealogic. The larger figure is the top of what's considered the range of middle-market deals.
The bank, which settled SEC fraud charges earlier this month involving its underwriting efforts of collateralized debt obligations that went bad during the financial crisis, still leads all other financial institutions in the total volume of deals it has advised on so far in 2010, with $162.3 billion, Dealogic reported.
Morgan Stanley and JP Morgan are in second and third place in the rankings this year, with $148.3 billion and $140.4 billion, respectively.
Goldman has led the overall M&A advisory rankings for at least the past three years, going back to 2007, before the financial crisis materialized. And the bank's lead extended to deals in the $25 million-to-$750 million range until last year, according to Dealogic. In 2009, Goldman fell to third place in deals of that size, with its advice on $18.4 billion in M&A volume in that range placing it behind Morgan Stanley and JP Morgan, which advised on $19.7 billion and $19.2 billion in deals of that size, respectively.
This year, Goldman has advised on only $11.6 billion in such deals, placing it behind Bank of America Merrill Lynch, with $14.9 billion, Morgan Stanley ($13.4 billion) and Credit Suisse ($12.5 billion).
Goldman's fall in the rankings in middle-market deal advice is indicative of a larger trend, according to Greg Fresh, a former corporate dealmaker at Bank of America and ABN Amro who recently joined Chartwell Capital Solutions, an advisory firm that specializes in middle-market finance.
Although this hasn't shown up yet in the Dealogic data, Fresh says big banks besides Goldman are losing middle market share to so-called "boutiques" and other investment banks that focus on smaller companies and, as he put, are "unbiased as to the outcome" of their advice. In contrast, big banks are assumed, unfairly or not, to be biased in favor of a deal whether it makes sense or not, because of the financing that often accompanies it.
However, Fresh said that such conflicts in M&A advice "are more perceived than real," in so far as, in his experience, "clients always thought the capital had to come with it." He added that in half the deals he was involved in at ABN, for example, the financing came from another bank.
Still, he said, smaller banks are using clients' perceptions to their advantage.
Not that the bigger banks mind all that much, Fresh adds. He noted that as banks like Goldman grow in size, they have less "bandwidth" for smaller deals, because they need bigger deals to generate fees large enough to sustain their profits, Fresh explained.
"A lot of middle-market business is being abandoned," Fresh said. "Middle- market banks are able to pick up that business."
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