As technology M&A transactions are increasingly being driven by strategic rationale rather than simple consolidation, there is a greater demand for specialist M&A firms who have a deeper understanding of their sectors, rather than traditional investment banks, according to a new CB Insights report, “Killing the I-Bank”.

The best example is Qatalyst Partners, which focuses on technology M&A and finished just behind Goldman Sachs, Morgan Stanley, and JP Morgan in the Financial Times’ 2017 fee rankings. Qatalyst handled the sales of OpenTable (to Priceline) and LinkedIn (to Microsoft). Its fees were 50+ basis points above the median rate for $1B to $5B transactions, according to the Financial Times, and have become famous for generating higher-than- average premiums for its specific type of client.

That performance comes from the firm’s focus and expertise. Frank Quattrone, the firm’s founder, cultivated close relationships with founders and VCs in Silicon Valley throughout his years at Morgan Stanley’s tech investing group.

The “traditional M&A” was often driven by a desire to boost EPS (earnings per share), with companies seeking to combine assets with a similar business, merging with a business in a lower-tax jurisdiction, or looking to gain desirable assets owned by other businesses.

Investment banks were ideal partners for these kinds of deals, which fueled the merger mania on Wall Street in the 1980s, because they had spent decades executing M&A from the perspective of increasing earnings per share (EPS), understanding the impacts of a deal on a company’s balance sheet, and identifying synergies, such as expanded production capacities or creating economies of scale.

M&A activity accounted for about 34% of investment bank revenue in 2018, according to Dealogic — down from 44% in 2015, according to Ansarada.

At the same time, fees going to specialised boutique banks like Qatalyst have been increasing, rivaling even the biggest banks like Goldman Sachs.

Today, executives are more focused on strategic M&A, rather than a quick EPS x. While strategic M&A isn’t new, tech companies today are especially focused on building more competitive long-term businesses by buying into new product spaces and expanding their portfolios.

When Facebook bought WhatsApp and Instagram, they were not buying them for their handful of coders or tiny offices. It was buying them as part of a long-term strategy. When Spotify bought the podcasting company Gimlet Media, it was placing a bet on the future of podcasting — not scooping up a high-earnings company to improve their own financials. Making these kinds of deals go forward requires less financial management and more product vision.

Summary from CB Insights report, “Killing the I-Bank”.