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I-banks in a transatlantic arms race

D.A. Davidson & Co. and MCF Corporate Finance GmbH hope their transatlantic investment banking partnership helps them keep up with the competition.

Great Falls, Mont.-based D.A. Davidson and Hamburg-based MCF announced in February that they would work together when advising clients on the origination and execution of transatlantic mergers. The partnership should give each investment bank greater exposure overseas.

Several of their rivals have expanded internationally in recent years. In January, Los Angeles-based Houlihan Lokey Inc. announced that it agreed to purchase London-based advisory firm Quayle Munro Ltd. and St. Petersburg, Fla.-based Raymond James Financial Inc. in 2016 established a European advisory practice with the purchase of Munich-based Mummert & Co. Corporate Finance GmbH. In April of that year, Boston-based Downer & Co. LLC merged with Madrid-based N+1 to create Alantra LLC. In December 2016, Chicago-based Lincoln International LLC announced an expansion of its European presence with the opening of an office in Munich.

Back in 2015, Houlihan Lokey purchased London-based advisory firm McQueen Ltd. U.S. investment banks Richmond, Va.-based Harris Williams & Co. and Chicago-based William Blair & Co. LLC each opened offices in Frankfurt in 2013; Milwaukee-based Robert W. Baird & Co. Inc. had done the same in 2005.

While others made acquisitions or opened offices, D.A. Davidson and MCF each sought partnerships to expand their international reach. D.A. Davidson Head of Investment Banking Rory McKinney said his company had been looking in Europe for several years and considered acquiring a company. But McKinney preferred a partnership, saying that investment banking M&A deals fail to meet expectations because top dealmakers exit for other opportunities after the transaction closes.

"Most partners tend not to be at the firm after they get their payout," McKinney said in an interview.

A benefit of a partnership is that it faces fewer regulatory and tax hurdles than an M&A transaction, said MCF Managing Partner Hans-Christoph Stadel. He added that his company has no interest in selling.

"We rate very highly our independence," he said in an interview.

MCF could have been a buyer, and the company did execute an acquisition in 2016 with the purchase of Stockholm-based M&A adviser Keystone Advisers AB. Stadel said his company has further interest in acquisitions and that Germany is one region where MCF could pursue a deal.

MCF saw a partnership as the best way to gain exposure to the U.S., and Stadel said that a goal of the company's expansion plan was to have several U.S. offices. MCF did not think it was large enough to purchase an investment bank that could offer that size. Stadel added that his company was not interested in opening a U.S. office because it would likely have the capacity to open only one location. That would not give MCF the scale it wanted; operating a single U.S. office from Europe could also pose challenges.

"It's quite difficult to work across the Atlantic," he said.

Along with finding a partner that had multiple locations in the U.S., Stadel said his company was looking for an investment bank that was a good culture fit and offered some complementary vertical coverage. MCF is an M&A advisory firm whose sector coverage includes business services, capital goods, materials and energy and renewables.

D.A. Davidson offers M&A and capital markets services and focuses on five industry groups: consumers, financial institutions, industrials, real estate and technology. McKinney said about 25% of D.A. Davidson's deal flow in consumers, industrials and technology has a cross-border element. He believes those verticals can benefit the most from the partnership because MCF has similar coverage.

The partnership could prove especially helpful for serving private equity clients that are looking to exit investments. In the past, potential private equity clients for MCF and D.A. Davidson could tell them that they preferred to work with investment banks that had greater exposure on both sides of the Atlantic. This arrangement is an attempt to end that argument, Stadel said.

"We can offer them more than we did before," he said.