Midmarket and boutique banks bounce back

Contact: Ben Kolada, Adam Phipps

The US tech M&A advisory market regained a bit of its footing in 2010, and midmarket and boutique banks were the primary beneficiaries of the rise in activity. According to our 2010 Tech M&A Banking Review, midmarket banks took 15% of the total tech advisory market in 2010, up six percentage points from 2009. Turning to the boutiques, their sector also regained lost market share, due in part to the growing trend of boutiques co-advising on larger deals. Last year, the boutique banking sector accounted for 10% of the aggregate advised deal value, up from 6% in 2009.

But the boutiques’ bullish results should not spur too much optimism. In September 2010, we published a report in which we argued that declining sell-side mandates and the increasing number of boutique banks would force consolidation among boutiques. Indicators of this consolidation over the past couple of years include Morgan Keegan & Co’s pickup of Revolution Partners, Signal Hill’s acquisition of Updata Advisors, Pacific Growth Equities’ takeout of Wedbush Morgan Securities and Stifel Financial’s reach for Thomas Weisel Partners, among others.

With the boutique banking market still extremely competitive (some firms are even discounting their fees to get a print), some senior tech bankers expect that consolidation will continue in 2011. In our recent banking outlook survey, 45% of respondents anticipated an increase in acquisitions of boutiques by larger banks, while 46% predicted no change. Asked about the rate of failure in 2011 for boutiques, 44% of bankers forecasted that the number of failures would rise, while 38% expected no change.

Advisory market share, annual

Bank type 2010 2009 2008 2007
Boutique 10% 6% 11% 9%
Bulge Boutique 10% 11% 6% 9%
Full-service Midmarket 15% 9% 14% 15%
Bulge Bracket 66% 74% 69% 67%

Source: The 451 Group’s 2010 Tech M&A Banking Review

Signal Hill draws a bead on Updata

Contact: Brenon Daly

The aftershocks just keep reverberating across the tech banking landscape. Three months after Stifel Financial acquired midmarket bank Thomas Weisel Partners, another non-tech bank has used M&A to build up its tech advisory practice. On Tuesday, Signal Hill announced that it has purchased Updata Advisors, with all six of Updata’s bankers joining the Baltimore-based firm that has its roots in Alex. Brown.

The deal marks the fourth acquisition of a bank with at least one tech advisory credit so far in 2010. That compares to just six acquisitions in all of 2009. However, this year’s activity trails the massive consolidation we saw during the Wall Street turmoil of 2008, when no less than 14 banks – ranging from boutiques to multibillion-dollar financial giants – got snapped up.

Financial terms weren’t disclosed. But we understand that Updata’s partners rolled over their equity into Signal Hill and now hold a minority stake in the bank. Talks between the two sides played out rather quickly, just over the past three months or so. The firms are neighbors, and are relatively well-known along the mid-Atlantic seaboard. (To be clear, Updata Advisors – the M&A wing of Updata – will be moving under the Signal Hill brand, while the investment arm, Updata Partners, will continue doing business on its own.)

For Updata, the deal comes at a time when it has rung up a fair number of recent advisory credits. The boutique has five prints so far this year, including advising ChosenSecurity on its sale to PGP and PurchasingNet’s sale to Versata. Last year, Updata had sole buyside credit for Compuware’s $295m purchase of Gomez. Overall on our league table, Updata ranked 16th in 2009 and 10th in 2008 in terms of number of advised transactions.