CIT’s M&A Group: Taking A Big Bank Approach To The Middle Market

“You’ve got to get him the hell out of the house,” the wife of a semi-retired health-care executive told the head of CIT Group’s health care banking unit back in early 2006. “Find something for him to do.”

So began the series of events that eventually led to a significant advisory fee for the two-year-old mid-market advisory business, CIT Mergers and Acquisitions, said Gregg Smith, a managing director who runs the group. He recalled how at the time, Mike Lindley, a health-care executive that CIT had helped cash out of a business in late 2005, was getting a little restless spending so much time “on the beach.”

The “something” that CIT found for Lindley to do turned out to be running FORBA, a Nashville-based provider of Medicaid-assisted dental coverage for underprivileged children, which had estimated revenue of $165 million in 2006. CIT’s health-care banking group found the company, its bankers assembled senior and subordinated credit facilities to finance the purchase, and its fledgling M&A group found a buyout shop, Arcapita, to write the equity check. When the deal closed on Jan. 15, it marked the largest investment in the United States to date for Arcapita, the Atlanta firm whose home base is in Bahrain.

By putting all the pieces together, CIT was rewarded with fees for its advice, for assembling the credit, and for finding the equity partner. For Randal Stephenson, 46, the head of CIT Mergers and Acquisitions, the FORBA deal showed off the sophistication his group can bring to bear on the middle market. “It was a deal that was created out of whole cloth,” Stephenson said. “That’s what we’d like to do, and that’s what we’d like to be known for in the marketplace.”

CIT is a publicly traded commercial and consumer finance company. The M&A advisory group was born in March 2005, when CIT hired Smith away from Deloitte & Touche. A year later, Smith hired Stephenson, who in 2002 helped found Jefferies’s M&A advisory practice and before that worked as a managing director in Merrill Lynch’s mid-market M&A group. With offices in Chicago and New York, CIT Mergers and Acquisitions looks to advise on deals ranging in enterprise value from $30 million to less than $1 billion, with a $250 million sweet spot. Last July, to beef up its involvement in distressed companies, the firm brought on Deidre Martini, a former federal bankruptcy trustee for the Southern District of New York, a venue that plays home to the nation’s biggest and most complex bankruptcy cases. Stephenson predicted Martini’s presence would bolster CIT in the event of a market downturn.

It’s a very logical thing for CIT to consider. [Success] comes down to the quality of the people and the execution you provide for your clients.”

Ned Valentine

The Martini move is the latest duck the group has put in a row. When Stephenson and Smith talk about success for their advisory practice, much of it is in the future tense. The firm will generate $100 million in revenue by 2009. With 30 professionals in New York and Chicago, it will hire 10 more by summer. It has notched fewer than 10 closed deals, but it will soon begin closing on any number of its 15 transactions in the pipeline. When these tasks are completed, CIT hopes to be established as both an innovator and brand name in a world of advisors whose strategies may be aging.

CIT sees its window of opportunity this way: The temptation for the incumbent advisors is to do what’s worked in the past rather than innovate in preparation for a more difficult future. Most mid-market advisors are process-driven, sell-side firms that “write a book and ship it out to 300 of their closest friends,” said Stephenson. A firm like Harris Williams, for instance, receives almost 100 percent of its business from inbound traffic, from companies seeking out the Richmond firm to run a sale and get the best price possible. Stephenson is the first to admit that sell-side advisors are extremely good at extracting big money for their clients.

But like Wall Street’s biggest investment banks, CIT Mergers and Acquisitions wants to put together deals—not just run auctions—and it’s willing to do whatever it takes to make that happen. Deal flow is one essential ingredient, and the banking side of the firm is supplying that in abundance. To drum up business, professionals from the M&A group often go on sales calls with CIT’s bankers. More than half of the advisory group’s deal flow comes from CIT financing clients, while much of the rest comes from prospective borrowers. (Stephenson is fond of pointing out that just about every private equity firm in the nation, through one or more portfolio companies, owes CIT money.) In addition, the M&A group isn’t afraid of investing equity alongside clients, and the parent bank is willing to grease the deal wheels by putting money into sponsor clients’ funds. Needless to say, CIT will also provide staple financing.

“It’s a very logical thing for CIT to consider,” said Ned Valentine, a managing director at Harris Williams, of CIT’s decision to get into the mid-market M&A advisory business. CIT’s credit prowess, he said, opens an obvious window to deal-making on the buy side in particular. Whether the venture succeeds “comes down to the quality of the people and the execution you provide for your clients,” he said.

Rivals Are Sophisticated

It was a deal that was created out of whole cloth. That’s what we’d like to do, and that’s what we’d like to be known for in the marketplace.”

Randal Stephenson

Even if it appears to be bringing a novel, bulge-bracket approach to the middle market, CIT is entering a field crowded with sophisticated and aggressive competitors. Harris Williams’s Valentine observed that being a sell-side firm these days amounts to doing much more than putting out a “For Sale” sign and waiting for the buyers to come in.

Mid-market advisory executives have a good understanding of valuations, and can provide sound advice on whether to seek out just one buyer, whether to pit three buyers against each other, or whether to run a full-fledged auction that requires lobbing the pitch books. “We know this market well,” Valentine said. Another CIT Mergers and Acquisitions competitor pointed out that mid-market advisory firms have grown more attuned to specific industries, allowing them to become more familiar with management teams at companies. That has let sell-side shops move away from simply running auctions to offering more nuanced and proprietary services.

Firms like Goldsmith Agio Helms, Harris Williams, Houlihan Lokey, Piper Jaffray and Jefferies all have solid brand names and larger market shares than CIT. Entering this stacked field, “CIT’s got a tough row to hoe,” said the competitor.

That’s at least in part because CIT is still fighting the perception of being a marginal player. The move into the mid-market M&A advisory business marks a big shift for CIT. Many considered the firm a lender of last resort before CEO Jeff Peek took over in 2003. A former Credit Suisse First Boston vice chairman who was once considered next in line for CEO at Merrill Lynch, Peek has begun transforming CIT into a fully equipped merchant bank that can provide credit packages, equity and M&A advice all on the same deal. Peek has also emphasized industry specialization, building on the bank’s traditional strengths in apparel, heavy equipment and aerospace, while adding to its strength in health care.

Indeed, the M&A practice might be new, but that doesn’t mean it lacks resources—including CIT’s $80 billion balance sheet and global credit capability. “We’re like an $80 billion start-up,” Stephenson said.