Realigning Wall Street
There has been a massive realignment in the U.S. banking system in the last year, one not seen since the Great Depression. Global financial turmoil due to the credit crisis and a massive dislocation of stock markets have caused the collapse of several storied investment houses. Bear Stearns and Merrill Lynch were forced into emergency sales, while Lehman Brothers filed for bankruptcy. Citigroup, the banking powerhouse cobbled together in 1999 as a financial supermarket, is now in the process of selling its Smith Barney division to Morgan Stanley as a way to stay alive. Together, three-fifths of the U.S. investment banking industry's biggest names virtually disappeared overnight?with only Goldman Sachs and Morgan Stanley remaining independent. That leaves a handful of small investment banks, including Lazard and Evercore Partners, to provide services like M&A advice to companies. The hundreds of smaller firms that specialize in middle market deals have gained prominence because they have run into less trouble during the downturn by avoiding betting on risky mortgage-backed securities that vanquished their larger peers.

Meanwhile, the government plans to pump more than $700 billion into the beleaguered banking system in 2009 to shore up bank balance sheets. But with that plan comes restrictions. President Obama has placed drastic restrictions on how much banks that take taxpayer money can pay in bonus compensation for their top bankers. That means the end of Wall Street?s freewheeling days, and the beginning of an exodus. A growing number of veteran bankers are leaving major firms to escape having their compensation scrutinized. Many of them are heading to middle market and boutique investment banks, which are largely private firms that aren?t subject to such restrictions. And these well-known bankers are expected to lift the prospects for smaller firms as they compete against the Wall Street establishment.

Growing in the middle
From billionaire investor Carl Icahn's takeover of TWA in the 1980s to Exxon's $86 billion acquisition of rival Mobil two decades later, the lore of investment banking's greatest hits has become a cornerstone of business school textbooks. But what aspiring bankers might want to take into consideration is that there are more than 13 million companies operating in the United States, a broad swath of businesses spanning from the corner pet store to corporate titans like IBM and General Electric. Not every player in the merger and acquisition landscape fits into a neat category. A select number of deals done between members of the Standard & Poor's 500 index or Dow Jones industrials are certainly plastered across the front pages of leading financial newspapers. But, for each of those transactions, there are thousands more that never capture the media's attention.

The increase in the number of smaller deals, known in the financial world as the middle market, has grown significantly in the past few years. Investment bankers specializing in these kind of transactions say it is a sign of the times. Those family owned businesses whose leadership has been handed down from father to son are now finding the latest generation unwilling to take the reins. In other cases, midsized companies can't compete against bigger rivals who have a more global reach. They comprise the backbone of American entrepreneurship, those companies that cram into business parks along major highways from Indiana to California to New Jersey. And they are ready to make deals.

Where the action is
With all the talk about a global economic slowdown, the conventional wisdom holds that corporate buyouts would be sharply curtailed. But as organic growth stagnates, many companies turn to acquisitions as a way to expand. The buyout party certainly continued in 2008, with bankers perched in corner offices, securing more than $1 trillion worth of transactions. But that was a 27 percent decline from the same period the previous year, despite big global deals like Swiss drugmaker Novartis' recordsetting $39 billion stake in ophthalmology specialist Alcon. Middle market activity showed an increase.

There were 3,417 middle market deals completed last year, up from only 2,403 in 2007, according to data provider Dealogic, which tracks investment activity. And the first quarter of 2009 showed that middle market deals remained on track. There were 500 transactions announced, which is slightly higher than the year ago period. "The middle market is really where all the action is right now," Andrew Apfelberg, a corporate M&A attorney and partner at Rutter Hobbs & Davidoff, told U.S. News & World Report. The rise in these kinds of transactions comes during a very bleak period for the investment banking industry.

Looking beyond the big guys
Industry analysts believe it could be months or even years before the winners and losers of this latest cycle emerge. But, the smaller firms that handle middle market companies have certainly become more appealing destinations for top workers in the industry. And they also are becoming more popular among big and small companies alike, especially since many of their founders are headed by industry veterans. For example, the former Smith Barney chief executive, Robert Greenhill started Greenhill & Co. in 1996; Lehman Brothers banker Roger Altman runs Evercore; and ex-UBS investment bank head Kenneth Moelis runs Moelis & Co. So, those looking to launch their career as an investment banker might be wise to cast a wider net than the textbooks dictate.