Wall Street's biggest firms have seen their overall share of dealmaking erode over the past decade as boutique and mid-sized firms lure away rainmakers and provide niche expertise.

In the first nine months of this year, the so-called bulge bracket firms claimed a 35.8 share of merger advisory fees, down from 49.1 percent at the start of the decade, according to data from Thomson Reuters and consulting firm Freeman & Co.

Many boutique firms have taken advantage of worries about pay and other restrictions at top investment banks to woo away key bankers, increasing the pace of a trend that was apparent even before last year's financial crisis.

Top M&A bankers would rather work at a boutique where they can practice their craft in a pure-play sort of way and not have to cross-sell a bunch of other banking products like the big firms do, said Michael Hecht, an analyst with JMP Securities.

The changes in market share come at a time when overall M&A activity is at a six-year low.

Announced global M&A totaled $369.3 billion in the third quarter, down 54 percent from a year ago.

In the first nine months of this year, Morgan Stanley grabbed the top spot among global M&A advisers, outpacing rival Goldman Sachs .

In the year-ago period, Morgan Stanley ranked 6th.

Morgan Stanley also had the biggest increase in market share, gaining 1.8 percentage points to 5.2 percent of the M&A market.

That is less, however, than the 6.2 percent share that Morgan Stanley claimed in the first nine months of 2000, according to the Thomson Reuters and Freeman & Co data.

The bulge bracket firms continue to be the leaders in the M&A market, but firms like Centerview, Greenhill , Evercore and others have played, and will continue to play, an outsized role, said Francis Aquila, a partner with law firm Sullivan & Cromwell in New York.

BIG HIRES

Centerview Partners ranks as No. 42 in terms of market share, while Greenhill ranks as No. 18 and Evercore Partners stands at No. 16, the data shows. And boutiques and mid-sized firms have picked up top hires as they've picked up steam.

Increasingly you're seeing teams of two to three guys moving to boutique firms as the larger banks face compensation constraints under TARP or face pressure to have their compensation systems revamped, said Scott Humphrey, head of BMO Capital Markets' U.S. mergers & acquisitions group.

TARP is the Troubled Asset Relief Program, and banks that accepted funding under this program face rules on what they can pay top performers.

Some people are scratching their heads and wondering how they can get paid what they're worth and they're defecting to smaller firms, Humphrey said.

In the past year alone, Moelis & Co hired the former head of Bank of America Merrill Lynch's European investment banking unit and Greenhill hired top financial bankers from UBS and Morgan Stanley.

Mid-sized investment bank Jefferies lured away nearly three-dozen UBS bankers -- the bulk of the firm's healthcare investment banking team.

Top bankers often bring along highly profitable relationships with large companies.

Engagements are relationship-driven and senior bankers with significant relationships are reached out to for their advice and experience, said a top M&A banker who spoke on the condition of anonymity.

The trend can also be seen in one of the quarter's top deals.

While Cadbury Plc has relied on three bulge bracket banks for its defense against an unsolicited bid by Kraft Foods Inc , Kraft has used a mix of advisers that include boutique bank Centerview Partners and restructuring experts Lazard, as well as balance sheet banks Citigroup and Deutsche Bank .

Separately, many corporations have gravitated to smaller firms to get independent advice, analysts said.

While large firms have the advantage of being able to provide financing packages to their clients to help fund deals, smaller firms give corporations an independent viewpoint that is not complicated by funding needs.

The other part is corporate governance and boards of directors wanting a truly independent point of view when considering an acquisition and not just some large bank trying to earn a fee on the deal financing, Hecht said.

The rise in bankruptcies and restructuring also has helped boutique and mid-size firms, such as Lazard, that provide specialized restructuring advice, analysts said.

(Editing by Steve Orlofsky and Ted Kerr)

(For more M&A news and our DealZone blog, go to http://www.reuters.com/investing/news/mergers)

Investment Morgan Stanley