Sunday, February 5, 2012

"Old" Wall Street: The Melting Ice Cube

Empires are not often replaced by new ones. What usually happens, the disintegration converts them to many smaller pieces. Look at the Mongols or the USSR as examples (or, in the futuristic USA, will you be in Liberalandia, the Dixie Republic, The Free State of New Hampshire, Mexico-Norte, etc.?). This happens with businesses as well: newsprint is replaced by many formats: web, several mobile, several tablets, social sharing, etc. Coal as a primary energy source of the industrial revolution has been replaced- somewhat- by other sources, some fossil, some not. I have the hunch that "old" Wall Street does not really know what is coming, both from the outside and from the inside.

In no particular order, and with no particular company in mind (some have more lines of business than others):

- Working hard not to be an employer of choice: firing people en masse the week before bonuses, deferring ever greater % of comp, laying off 1st year analysts, etc. employment practices
- Net interest margins are getting killed: borrowing at zero and collecting 2% is worse than borrowing at 3% and collecting at 7%
- Investment management fees are more transparent than ever (and the benchmark is Vanguard at 0.10% or less); the last bastion of gravy, 401(k) plans, are pushed into better disclosure
- Retail brokerage/"financial planning"/"wealth management"- conflicted model is being replaced by independent advisers with fewer conflicts, self-education, mirroring (like AlphaClone or Covestor) and, yes, apps
- Trading volumes/commissions down due to technological advancements (automated market-making, multiple venues, etc.) and the brainchild of corrupt failures Frank and Dodd

Less obvious things:
- Buyside consolidation depresses margins (quite possibly in both debt and equity) as it reduces the value of the "go to market" intermediary and the syndication process. Institutional Investor did a story on how BlackRock is squeezing the underwriters; not hard to see them teaming up with other behemoths that might well account for 60-80% of the market for certain issues (the GM IPO at 75 bps is the target, vs. the old standard of 700 bps)
- Research, already both conflicted and restricted, is getting devalued by Twitter for chatter, SumZero and blogs for long theses and Estimize for the real market consensus
- Financing, as a general concept, is getting more democratized and scattered (now with the likes of Kickstarter and Prosper and Gust and GSVC and Second Market, who knows what will come up later as regulations change)
- M&A expense visibility is higher as it is easier for an activist to spread the word very fast at no cost
- Anecdotally, serial acquirers do more M&A work in-house (i.e. anything under $1 bn is done internally) which means basically zero fees paid to the Street from what would have been bread-and-butter accounts 15 years ago, and there are plenty of bankers willing to move to corporate
- With CapitalIQ, and so on, it is very hard for a banker to show a company that has not been seen by the acquirer before or the multiples paid in similar deals, so the value of the M&A banker is limited to relationships and execution

The ecosystem is evolving rapidly in several directions, and the dinosaurs may continue to be around due to regulations that favor large firms, but they won't be what they were in prominence and profitability.