Vice President: Sahil Kumar
Analysts: Luca Moretto, Abhishek Gopinath, Jason Tu
Deal Overview
Acquirer - Mizuho Financial Group, Inc.
Acquiree - Greenhill & Co., Inc.
Deal Size - Approximately $550 million
Buy-Side Advisors - Citi and Mizuho
Sell-Side Advisors - Houlihan Lokey
On May 22, 2023, a pivotal announcement in the financial sector echoed across global markets. Mizuho Financial Group, a Tokyo-based banking titan, declared its intent to acquire Greenhill & Co., Inc., a prestigious independent investment bank with a rich legacy in mergers, acquisitions, restructurings, and capital raising. The acquisition, set at $15 per share in an all-cash transaction, values Greenhill at an approximate enterprise value of $550 million, inclusive of assumed debt.
This acquisition is a strategic move for Mizuho, signaling its ambition to further solidify its foothold in the investment banking arena. By bringing Greenhill under its umbrella, Mizuho is not just acquiring a company but integrating nearly three decades of expertise in advising on significant global transactions.
Post-acquisition, Greenhill's identity and brand will remain preserved. The firm will continue its operations from its 15 global offices, serving as Mizuho's dedicated M&A and restructuring advisory arm. Scott L. Bok, Greenhill's Chairman & CEO, will lead this advisory business, with the support of Kevin Costantino and David Wyles, the current Co-Presidents of Greenhill, as Co-Heads.
Jerry Rizzieri, President and CEO of Mizuho Securities USA, accentuated Greenhill's impeccable track record in spearheading intricate global transactions across a myriad of sectors. He also underscored Mizuho's commitment to broadening its investment banking capabilities, with Greenhill poised to play a pivotal role in this expansion.
Scott Bok reciprocated this sentiment, highlighting the enhanced value proposition for Greenhill's clients, who will now have access to Mizuho's comprehensive suite of financing, capital markets, and other financial products. For Greenhill's team, this transition promises continuity with the added advantage of Mizuho's extensive global network and product offerings.
Masahiro Kihara, President and Group CEO of Mizuho Financial Group, and Shuji Matsuura, Chairman and CEO of Mizuho Americas, jointly conveyed their optimism about the acquisition. They emphasised the acquisition's potential to redefine the investment banking landscape.
Subject to approval from Greenhill stockholders and requisite regulatory clearances, the acquisition is slated for completion by year-end, marking a new chapter in the annals of investment banking.
Business Overview
Mizuho Financial Group, Inc
Mizuho Financial Group, Inc. (MHFG), headquartered in Tokyo, Japan, is a banking colossus with a storied lineage that dates back to the establishment of Yasuda-ya in 1864. Today, Mizuho stands as a beacon of financial stability and innovation, with assets that have burgeoned to exceed $1.8 trillion USD. This impressive financial stature has earned Mizuho the recognition of being a systemically important bank by the Financial Stability Board.
In terms of its financial performance, the latest data for FY2022 reveals:
Revenue: ¥5.78 trillion (approx. $52.2 billion USD based on current exchange rates)
Net Income: ¥219.20 billion (approx. $1.98 billion USD)
Mizuho's service spectrum is vast, encompassing a comprehensive suite of financial services. This includes:
Retail Banking: Tailored financial solutions for individual customers.
Corporate Banking: Strategic financial services for businesses of all scales.
Investment Banking: Advisory and capital market solutions for institutional clients.
Global Wealth Management: Customied wealth management strategies for affluent individuals and institutions.
Mizuho's global operations are expansive, with a presence in major financial epicentres such as New York, London, and Singapore. This global footprint is a testament to Mizuho's commitment to serving its diverse clientele across different geographies.
Greenhill & Co., Inc.
With its inception in 1996, Greenhill & Co., Inc. has carved a niche for itself as a leading independent investment bank. Listed on the New York Stock Exchange under the ticker GHL, Greenhill's expertise lies in offering unparalleled financial advice on significant mergers, acquisitions, restructurings, financings, and capital raisings. Their clientele is as diverse as their service offerings, catering to corporations, partnerships, institutions, and governments alike. A glance at their recent financial performances reveals a firm that's not just resilient but also adaptive to the dynamic global financial landscape. In 2023 alone, their Q2 reports indicated revenues of $71.4 million, showcasing their ability to navigate challenges and seize opportunities. With a global footprint marked by 15 strategic locations, Greenhill's commitment to delivering top-tier financial advisory services remains unwavering.
Industry Overview
The global banking sector has experienced a series of unprecedented challenges and transformations in recent years. The combination of macroeconomic volatility and geopolitical disruption in 2022 and 2023, including factors like inflation, war, rising interest rates, and supply chain disruptions, ended a period of relative stability that the banking sector had enjoyed for over a decade. Despite these challenges, bank valuations remained consistent, with many banks continuing to trade at a significant discount compared to other sectors. This is indicative of the fact that over half of the world's banks still earn less than their cost of equity.
Key Insights:
Macroeconomic Landscape: The banking sector witnessed a series of shocks in 2022, including macroeconomic shocks from soaring inflation and potential recessions, asset value shocks from declines in markets like the Chinese property market, and supply chain disruptions that began during the pandemic. Additionally, geopolitical tensions, such as the Russian invasion of Ukraine, have added to the sector's challenges.
Bank Profitability: Despite the challenges, bank profitability reached a 14-year high in 2022. Global banking revenues grew by $345 billion, driven largely by a sharp increase in net margins as interest rates rose. The global banking system boasted Tier 1 capital ratios between 14 and 15 percent, the highest ever recorded.
Divergence in Performance: There's a growing divergence in the performance of banks based on their geographical location and specialisation. While many banks in Europe struggled with profitability, banks in emerging economies like India, Indonesia, Mexico, and South Africa performed exceptionally well.
Valuation Gap: The banking sector's valuation remains significantly below other industries. About half of all banks are net destroyers of value, with many facing challenges of slow growth and low profitability expectations. Traditional banks account for half of the total global market capitalization in the sector, with fintechs and specialists making up the other half.
Future Outlook: The future outlook for banks is shaped by two potential macroeconomic scenarios: inflationary growth and stagflation. In either scenario, the initial stage is expected to be positive for banks, with rising interest rates boosting net interest. However, the long-term effects could vary, with potential slowdowns in volume growth, higher costs, and increased delinquencies.
Geographical Factors: Geography plays a crucial role in a bank's valuation. For instance, while many European banks faced challenges in profitability, banks in emerging Asia, Latin America, and North America showed strong performance.
Specialisation: Banks specialising in certain products, such as deposits, payments, and consumer finance, have seen better valuations compared to traditional banks. This has led to a two-speed system where traditional banks lag behind.
The global banking sector is at a crossroads, with various challenges and opportunities shaping its future. While macroeconomic and geopolitical challenges have introduced uncertainties, there are bright spots, especially for banks that specialise and operate in high-growth regions. As the industry navigates these complexities, innovation, adaptability, and a keen understanding of global trends will be crucial for success.
Financial Analysis
DCF Valuation
Our revenue growth projection relies on the compounded average annual revenue growth rate, serving as a foundational metric for subsequent calculations. EBIT and Cash Flow Items for future periods are determined based on historical percentages of sales, while taxes are calculated using historical percentages of EBIT.
The Unlevered Free Cash Flows and the Terminal Value, computed solely through the Perpetuity Growth Method with a TGR of 2.1% (reflecting the US Bureau of Economic Analysis estimate for 2023 US GDP growth), are discounted to present value using a Weighted Average Cost of Capital (WACC) of 7.30% (derived using Damodarans’ estimates for Beta and Risk Premium).
The summation of the present values of Free Cash Flows and the Terminal Value results in an Enterprise Value of $854,287,693. After incorporating Cash and removing Debt, this translates to an Equity Value of $519,007,693.
By dividing the Equity Value by the number of outstanding shares, we arrive at an implied value per share of $27.66. This represents a substantial potential upside compared to the current share price, amounting to nearly 87%.
Comparable Company Analysis and Precedent Transactions
In valuing Greenhill, we also used a relative valuation approach by comparing it to companies with similar growth rates and risk. The analysis includes seven comparable companies in the same industry with similar market dynamics. The data used is the most recent.
The analysis of financial institutions is particularly challenging because they operate and generate profits differently than most other businesses. Namely, it is hard to define what constitutes as debt for a financial institution, as it is treated more as raw capital. Therefore, we avoided using EBITDA since it takes into account the market value of debt. Instead, we used the Price to Earnings, Price to Sales, and Price to Book ratios. Additionally, ROA and ROE were used because they indicate the per-dollar profit the company earns on its assets, which consist mostly of money and bank loans.
To arrive at the implied share price, we took the median of all these multiples, as the mean would be skewed due to extreme values. The medians were subsequently multiplied by their respective metrics to calculate market cap and then divided by the shares outstanding to determine the implied share price. The implied share price suggests that Greenhill, trading at $7, was undervalued at the time of its purchase.
In addition to the comparable analysis, we also used a precedent transaction approach to cross-check the relative valuation. This method involved examining five recent mergers with companies in the same industry and similar acquisition values. For the same reasons, we used the Price to Earnings and Price to Sales ratios.
Once again, we observed that the Price to Earnings ratio provided the most conservative value. After following the same steps, we arrived at an implied share value of $10.53. While this is lower than our previous estimate, it is still higher than what the shares were trading at before the acquisition. The difference can be attributed to the market pricing in the synergies of the acquisition.
Deal Rationale
Revenue Synergies
The acquisition serves as a rapid acceleration of Mizuho’s investment banking growth strategy, acquiring a premier M&A entity. Greenhill’s 27-year history will serve as a solid foundation to Mizuho to build its reputation in investment banking. Mizuho will gain access to Greenhill’s valuable clients and to Greenhill’s global operations, which expands to 15 locations across the world, vastly increasing Mizuho’s global reach and presence. As the new core pillar of the investment banking growth strategy, Mizuho will be able to offer Greenhill’s expertise in M&A and restructuring capabilities to their clients and offer their full range of products to Greenhill’s valued clients, resulting in a more than proportional growth in revenue income streams for Mizuho. Having access to established client relationships translates into more fees. We expect revenue growth to grow 11-17% in 2023 and 2024, then see a sharp drop in following years to around -0.6% in 2027. Our justification for this will be explained more in the risks subsection.
Cost Synergies
With the existing Greenhill’s leadership team and its 370 global employees to remain onboard, Mizuho will be able to leverage their combined years of valuable experiences across M&A and restructuring. The acquisition is akin to an ‘acqui-hire’, where Mizuho has managed to hire and retain talented and experienced professionals, saving them huge costs that would have been incurred from replacing management and integrating Mizuho and Greenhill employees. Rather than this, Mizuho strategically left Greenhill to retain the Greenhill brand, which enables confidence that Greenhill’s history of excellence won’t be disrupted and if anything, it will be sure to rapidly grow with Mizuho’s support. Greenhill will gain access to a wide range of financing, capital markets, and other products offered by Mizuho, which is sure to generate value for both shareholders. This results in an estimated EBIT growth of around 17% YoY from 2025 onwards, despite revenue growth slowing down dramatically in this period. It gives a strong indication that the Mizuho will be able to efficiently utilise the acquisition of Greenhill to remain strongly profitable, despite fluctuations in revenue generation.
Other Synergies
With a seamless transition for the two companies, Mizuho will be able to capitalise on the lucrative potential of the M&A and restructuring, with a strong potential to demonstrate profitability with increased shareholder value.
With high interest rates, whilst M&A may not be particularly attractive right now, the restructuring business has the potential to be quite attractive. Debt interest repayments will prove to be a source of potential financial stress for many companies that are highly leveraged and so creating a primal need for restructuring services to be employed to reduce their leverage.
M&A has been a missing piece of the puzzle in Mizuho’s product offerings, which range from debt, equity, capital markets, derivatives, fixed income and equity sales, trading, and securitisation. The acquisition of Greenhill is definitely set to generously compliment and synergies with these product offerings. With $2 trillion AUM, Mizuho is one of the big 3 banks in Japan, without an M&A division so this addition is set to propel them ahead of the competition. Greenhill now has the backing of a large balance sheet to leverage into their deals.
Risks
Mizuho will acquire Greenhill in an all-out cash transaction at $15 per share, reflecting an approximate enterprise value of $550 million. This is equivalent to a 121% premium as of closing trade prices on May 21st 2023.
One key risk that both Mizuho and Greenhill face is the current landscape of the economy. With central banks making it clear that future hikes are not outside the question to curb the rapidly growing inflation pressures, the outlook of M&A is not looking particularly healthy, with the global M&A deal flow down 44% year to date.
The main focus of Mizuho’s investment banking growth strategy is expansion into US territory. Even as the 15th largest bank in the world, Mizuho will face intense competition from major household names such as J.P Morgan, Goldman Sachs, and Morgan Stanley.
Another notable risk is that Mizuho is making a $550m bet that it can retain its newly acquired talent at the investment bank. At the end of 2022, Greenhill has 79 managing directors and generated $258.5m in revenue, which is around $3.3m average for each MD. PJT Partners comparatively had 66 partners who generated $823.5m revenue, which equates to $12.5m each. The onset of competition and new entrants into the investment banking industry has made it difficult for Greenhill to retain talent, especially when their talent takes clients with them to competitors.
Conclusion
The acquisition of Greenhill by Mizuho is driven by an investment banking growth strategy and the need to expand and consolidate a position in the US investment banking region. The integration of Greenhill’s M&A and restructuring advisory services into Mizuho’s products and services will create a full and comprehensive portfolio that is bound to generate value for the shareholders and clients alike.
The deal unlocks avenues for international expansion with M&A and restructuring and establishing a presence in more diverse regions will open doors to promising clients and businesses. M&A is a vital cornerstone of corporate strategy and financial markets, as evidenced by this transaction itself, and being able to offer high-level expertise in this division can provide lucrative rewards. The seamless transition combined with revenue synergies in the form of expanding income streams positions Mizuho to generate huge growth, as it leverages Greenhill’s rich history and expertise.
In conclusion, the acquisition of Greenhill marks the start of Mizuho’s ambitions to expand and establish a presence in the global investment banking industry. Once the economy moves away from a period of high interest rates and deal flow begins to rise, Mizuho will be poised and ready to capitalise on this using their latest and advanced acquisition. The main concern is whether Mizuho will be able to attract and retain talent will keep revenue fees growing and will Mizuho be able to afford it. Investment banking is an industry where monetary metrics are king and not being able to draw in significant client fees will spell trouble for this acquisition.
References
Mizuho Group (2023). Investor Relations [online]. Available at: https://www.mizuhogroup.com/investors [Accessed 20 Oct. 2023]
Greenhill (2023). Investor Relations [online]. Available at: https://www.greenhill.com/en/investor [Accessed 20 Oct. 2023]
McKinsey (2023). Global Banking Annual Review [online]. Available at: McKinsey’s Global Banking Annual Review, 2022 [Accessed 20 Oct. 2023]
Financial Times (2023). Greenhill boss set for $78mn payout in sale to Mizuho
[online]. Available at: https://www.ft.com/content/6de142a4-2e4c-4c15-a0b2-32546877434f [Accessed 20 Oct. 2023]
Reuters (2023). Japan's Mizuho expands in US banking with $550 mln Greenhill deal
[online]. Available at: https://www.reuters.com/markets/deals/japanese-lender-mizuho-buy-greenhill-550-mln-deal-expand-us-footprint-2023-05-22/ [Accessed 20 Oct. 2023]
The opinions expressed in the reports are those of the members of the Junior IB team and are not affiliated with any university or institution. The financial recommendations provided are for educational purposes only and the Junior IB team takes no responsibility for any losses that may occur from implementing any ideas presented in the reports. The Junior IB team is not authorized to provide investment advice. The information, opinions, and estimates presented in the reports reflect the Junior IB team's judgment at the time of publication and are subject to change without notice. The price, value, and income of any securities or financial instruments mentioned in the reports may fluctuate. The Junior IB team has no business relationship with any of the companies mentioned in the reports and does not receive any compensation for their inclusion.
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