Forget Google

Greenhill’s IPO lifts the velvet curtain on today’s money culture.

The pending $2.7 billion initial public offering of über-search engine Google is being hailed as a harbinger of the technology recovery, a redemption for Silicon Valley, a huge payday for venture capitalists laid low in 2000 like John Doerr,and a coronation of two thirtysomething billionaires. In short, the Google deal is a moment of great cultural import.

But there’s a much smaller IPO that may take place as early as this week that provides almost as much insight into today’s money culture. It’s the $75 million IPO of Greenhill & Co., a boutique investment-banking firm founded by Robert Greenhill, a legend of the go-go 1980s. If Google is a blaring testimony to the ability of American entrepreneurs to be lavishly rewarded for bold risk-taking, Greenhill & Co. is a muted ode to the somewhat more refined art of wealth without risk.

The technology revolution and the aftermath of the bust have altered the business proposition for many entrenched Wall Street groups. Electronic brokerages and exchanges have eaten into the commissions charged by brokers. New York State Attorney General Eliot Spitzer has forced some mutual fund managers to slash their fees. Even underwriters, accustomed to charging a flat 7 percent fee for midwifing stock offerings, are being challenged by Google’s efforts to short-circuit the system. Across the board, the rights of the nobility are under attack. And to improve their earnings, big investment banks are increasingly using their own capital to take risky trading positions.

But for the true aristocrats of Wall Street—the gray eminences who advise big companies on strategy and help execute deals—it’s still the ancien régime. And the prospectus for Greenhill & Co. affords the unwashed a peek behind the plush velvet curtains, a world in which there’s great upside and virtually no downside.

Greenhill has a gold-plated résumé—Yale University Class of 1958, the U.S. Navy, Harvard Business School, and 31 years at Morgan Stanley, where he formed the mergers and acquisitions department in 1972—and a platinum Rolodex. Greenhill was a major player in many of the defining deals of the 1980s—from Conoco/DuPont to the RJR Nabisco orgy of 1988. In the 1990s he ran Smith Barney for a spell and then hung out his own shingle in early 1996. In the years since, he advised a range of clients, including the Justice Department in the Microsoft antitrust case.

Most merger advisers are either small, privately held firms like Felix Rohatyn’s Rohatyn Associates (so discreet it doesn’t have a Web site) and Lazard or units of giants like Credit Suisse First Boston or Merrill Lynch. As a result, it’s rare to get a clear look at the business. But Greenhill’s & Co.’s prospectus shows how impressive it is.

In 2003, Greenhill & Co. had revenues of $126.7 million, with advisory services accounting for 95.8 percent of revenues. The public is being asked to pay $15 a share for a company that will have a book value—tangible assets minus liabilities—of just $2.62 per share. Sure, Greenhill & Co. has a few desks and fixtures and even an airplane, but its real assets and resources consist of fewer than two dozen smooth-talking, well-dressed bankers. “Our ability to obtain and successfully execute the advisory mandates that generate substantially all our revenues depends upon the personal reputation, judgment, business generation capabilities and project execution skills of our 22 managing directors,” the prospectus notes.

That’s where the cash goes, too. For 2003, Greenhill reported that 50 percent of its revenues went to compensation—or $63.34 million. That averages out to about $590,000 for each of the company’s 107 employees. But the figures are heavily skewed to the top. In 2003, Robert Greenhill alone received a $5 million salary and $13.9 million in profit participation—or nearly 15 percent of total revenues. Other than paying bonuses to senior executives, it doesn’t take a whole lot of cash to run the business. Greenhill’s other expenses—rent, food, professional services, travel—came out to less than $19 million in 2003. As a result, the company reported an operating profit in 2003 of $44.4 million—a whopping 35 percent margin.

Why has Greenhill been able to sustain such profitability while others have had to accept lower wages or assume greater risk to boost revenues? Two reasons. First, unlike so many other financial-services companies that ran into conflicts of interest while trying to serve different classes of clients simultaneously, Greenhill sells essentially one product—its advice. And when you serve clients well, nobody inquires too much about the price. Indeed, advisers never take the rap for mergers that don’t pan out—the CEOs do. Everybody knows that Time Warner CEO Gerald Levin made a massive mistake when he accepted AOL’s bid for his company. But few can name the advisers who were handsomely rewarded for ratifying Levin’s poor instincts.

Second, unlike other professional service firms—lawyers, accountants, management consultants—Greenhill doesn’t charge by the hour. Instead, in the best Wall Street tradition, deal advisers like Greenhill base their fee on the size of the deal. They pick up a few crumbs as gigantic loaves trade hands. On a percentage basis, the figures always come out as rounding errors—say 2.5 cents on every $10—and are hence easily lost in the maelstrom of huge figures. But the cash can pile up quickly. The advisory fees on a $5 billion merger can come to $12.5 million. And best of all, the only real investment advisers have to make in these deals is their time.