November 5, 2009
By Ken Tarbous
CIT Group looked to remodel itself with the purchase of a middle-market investment banking boutique two years ago, but now that the finance company has filed for bankruptcy the fate of the business unit is uncertain, leading some insiders to speculate that the boutique's original founders may try to buy it back.
That boutique, Charlotte, N.C.'s Edgeview Partners, has lost some key deal makers because of uncertainty at CIT and some insiders believe that the bankruptcy and a steady trickle of news about the firm's financial travails have made it tougher for the M&A firm to snare advisory assignments.
Edgeview managers began shopping their firm looking for potential buyers, and as recently as last month insiders were trying to "liberate" Edgeview from CIT, according to a banker who has done business with CIT and Edgeview but did not want to be named.
CIT resisted the idea of selling Edgeview, to the partners or anyone else, and in February Edgeview founding members Matt Salisbury and Drew Quartapella left the firm.
"I'm certain that they'd like to see this taken out of CIT, not as part of a sale [to a third party], but as an independent entity," a market participant with knowledge of the situation said.
Spokesmen for CIT and Edgeview declined comment. And CIT made clear in a presentation to creditors that Edgeview has a role in the lender's future, and it's not entertaining offers for the boutique, say market participants.
But others suggest the attraction of a sale is too strong for Edgeview's bankers and creditors of CIT, which aims to get through its bankruptcy in 30 to 40 days.
When Edgeview's founders sold their mid-market bank to CIT in July 2007 few details about the transaction were published, but a former employee estimates the cost at $55 million.
CIT is the latest casualty of the credit crisis now in its third year. The company has not had full access to credit markets and it has buckled under a heavy debt load. The banking boutique, say market observers, faces what typically happens during a restructuring to operations not related to a core business: they are jettisoned, either sold or shut down.
But market participants familiar with the situation say that discontent within the banking boutique's dealmaking team grew quickly in the first six months of Edgeview's marriage to CIT.
A deal to extricate Edgeview from CIT may have been delayed by complications tied to CIT's financial difficulties. Its bankruptcy filing on Sunday, though, could clear a hurdle to a sale. With few Edgeview assets to sell, and in the context of the bankruptcy workout amid the current economic climate, it would be unlikely that CIT's bondholders and new managers would want to keep the banking boutique. It makes sense that Edgeview's own professionals would be the preferred buyers, and remaining payments related to the structure of CIT's Edgeview acquisition favor a buyback arrangement, one observer said.
Edgeview's situation has been likened to what Richmond, Va.-based Harris Williams went through after Sirrom Capital picked up the advisory firm in 1995 for approximately $24.5 million. When Finova Group bought Sirrom, Harris Williams bought back control in 2000, just a year before Finova went bankrupt. PNC Financial acquired Harris Williams in 2005.
But in CIT's case, questions still linger about whether it was the right play for the lender to get into the midmarket M&A advisory arena in the first place. Under Jeffrey Peek, CIT aspired to be something more than just a century-old lender to mid-level businesses, starting up its own internal M&A group in March 2005.
In addition to branching out into M&A advisory work, CIT's new management got into the student loan and home-equity loan finance businesses.
When CIT encountered difficulty in building a market presence in the world of M&A advisory work, the lender acquired Edgeview and looked to use its own lending business as a source of assignments in cross-selling efforts, a banker with knowledge of the situation said.
"The best way to make inroads was to buy an existing platform, but it was a major departure from their hallmark and franchise business," a former CIT employee who declined to be named said.
Edgeview has closed more than 300 midmarket transactions in its eight-year history, according to the company. In 2006, Edgeview advised on deals with total enterprise value of $2.5 billion, according to published reports.
There are examples, though, of early success for the middle-market banking team after it was snapped up by CIT.
Edgeview helped family-owned food processor and distributor Michael's Finer Meats and Seafoods of Columbus, Ohio, track down private-equity investors who would be willing to help fund its business expansion. Edgeview linked Michael's with Sorenson Capital in a deal that closed in early 2008. CIT arranged the financing for the transaction.
But for the past year or so, Edgeview's connection to CIT may have hampered it. M&A deal flow this year is generally off from last year and credit conditions still have not thawed enough to allow for much in the way of leveraged buyouts. But CIT's woes have been well documented and this likely impeded the investment banking team's ability to attract new M&A assignments from companies with enterprise values up to $300 million, says a banker who has done business with CIT and Edgeview said.
Amid all the tumult, though, a source within Edgeview said that the banking boutique's dealmakers did close a divestiture of a building products company last week — just days before the CIT bankruptcy filing. And there are other deals in the pipeline, the source said.
"We're not completely at stand-down here, but at the same time we're also cognizant that our deals and deal flow is being hampered by the connection to CIT," the Edgeview professional said.
In addition to problems related to the CIT bankruptcy, the exodus of talent does not bode well for Edgeview's business either, observers say.
Former Edgeview managing director William A. Morrissett, who had run the defense, aerospace, and homeland security practice and assumed much of Quartapella's and Salisbury's responsbilities after their departures, left Edgeview in the summer. Gregg Smith, who had been CIT's man responsible for the advisory firm, has moved to Conway MacKenzie, where he is a senior managing director in the turnaround specialist's New York office.
The high-level departures and defections of cornerstone talent from Edgeview is a telltale sign that the shop faces problems staying focused on attracting and serving clients, a banker who has done deals with Edgeview said.
"That really tells you about their ability to get paid," he said.
But Bill Hobbs, a managing partner at private-equity firm Carousel Capital, which has hired Edgeview as an adviser for past assignments, said that even with the departures, Edgeview has maintained the quality of its work.
While Hobbs said he did not have knowledge of any plans by Edgeview employees to buy back their firm, he thought such a sale would benefit the advisory firm.
"Would I like to see them independent again? Absolutely," Hobbs said.
