Blackstone Group LP, the world’s largest alternative asset manager, has announced plans to divest its merger advisory business. The recently announced plans will spin off Blackstone’s financial advisory business with the split expected to be finalized in 2015. Blackstone’s decision to spin off the firm’s oldest division came as somewhat of a surprise in the industry, as Wall Street firms have generally been reluctant to split in the past.
The advisory business will become part of PJT Partners, a financial advisory firm led by former Morgan Stanley investment banking executive Paul J. Taubman. Blackstone plans to acquire PJT Partners, combine the independent company with its advisory business, and spin off the combined unit as an independent firm. Stephen A. Schwarzman, the CEO, Co-Founder, and Chairman of Blackstone framed the split as one aimed at actively growing the advisory business.
The move contradicts traditionally held beliefs among Wall Street’s biggest firms that a large variety of business divisions are more favorable than a more focused business model stressing efficiency. The timing of Blackstone’s split is particularly interesting in the wake of recent splits by technology companies like HP and eBay. Analysts have long pondered the reasoning for a financial firm’s hesitation to divest certain divisions in order to create a more efficient firm that is easier to manage.
Although Schwarzman noted that the decision to spin-off the company’s advisory business was difficult, it only contributed a small fraction to the firm’s overall revenue. In the first six months of 2014, Blackstone’s advisory business posted revenue of $185 million, while the firm as a whole generated revenue of $3.7 billion over this time period. Blackstone’s advisory business was able to remain competitive with leading investment banks but was constantly held back by conflict-of-interest problems within the company.
Blackstone’s primary business of real estate assets, buying and selling companies, and credit has restricted the company’s advisory division from participating in business deals that the division otherwise would pursue. As an independent firm, the advisory group will no longer have to avoid clients because of conflict-of-interest considerations due to the asset management side of the company’s involvement with the client. The independent company is poised to put the advisory division in a position to aggressively grow.
Speculation is rising that Blackstone’s spin-off could set off a trend among other independent merger advisory firms. It has been suggested that we could see some of the strong independent advisory firms merge in order to prosper long-term. As global mergers continue to rise, many speculate that a major bank will try to enter or expand its advisory business through the acquisition of one of these independent firms. Regardless of what happens, it is clear that the new independent Blackstone advisory boutique will be a strong and lasting player in the advisory market.
Conflicts of Interest Spur Blackstone’s Divestiture of Merger Business (PDF)