|Re: Evercore: The Google of I-Banking|
Despite a tough IPO market, EvercorePartners (NYSE: EVR) posted a strong public offering, as its stock price surged 18.3% to $24.85. Then again, the firm's margins look more like Google's (Nasdaq: GOOG), not an investment bank's. The challenge is whether the firm can continue its flawless execution, given the increased competition and risks of a slowdown in the mergers & acquisitions (M&A) market.
Evercore's business model contradicts the major trend in financial services to provide diversified offerings. Giants like Citigroup (NYSE: C) and Goldman Sachs (NYSE: GS) have analysts, investment bankers, asset managers, and a myriad of other groups that present conflict-of-interest issues. For example, if Goldman Sachs is advising management on a going private transaction and is also providing financing through its private equity fund and its analysts are covering the stock, whose interests does the firm represent?
As for Evercore, it focuses primarily on advisory services for M&A, divestitures and restructurings, and also has its own asset management arm. Because of the limited conflicts, corporate clients see the value in the firm's advice. Furthermore, with increased regulations ? such as Sarbanes-Oxley ? a client is likely to have more legal protection.
It seems to be working. Over the past two years, the firm has advised on more than $300 billion of announced transactions, involving companies like AT&T (NYSE: T), EDS, Accenture (NYSE: ACN), and General Motors.
More importantly, Evercore's model is optimized for extreme profitability. From 2003 to 2005, revenues surged from $60.1 million to $125.6 million, with profits zooming from $34.3 million to $63.1 million. Yes, the firm generates 50% net profit margins.
What could possibly be wrong with Evercore? There are definitely risks. The firm is trying to expand its business into global markets, such as with its acquisition of Protego Asesores, an investment bank in Mexico, and the acquisition of Braveheart Financial Services Limited, which provides advisory services in the U.K. However, the track record of investment bank mergers is spotty; after all, there are usually major culture clashes (especially when the banks are based in different countries).
Moreover, there are several factors that are likely to put pressure on Evercore's margins. First, there are talent wars for top-notch investment bankers, which are driving up salaries. Second, competition is also coming into the market, as a myriad of investment banks have completed their own IPOs, such as Thomas Weisel Partners Group, Greenhill, and Lazard (NYSE: LAZ). Keefe, Bruyetee & Woods recently announced its intention to go public as well.
Investing in Evercore is taking a bet on the direction of the M&A market, which has certainly been growing nicely since 2003. But with a slowing economy and increasing interest rates, the M&A market could come under pressure. In such an environment, Evercore's laser-focus is likely to become a major liability for shareholders.