Thursday, March 1, 2007

Woe Is Me

I’d lay my head on the railroad tracks
And wait for the Double “E”
But the railroad don’t run no more
Poor, poor pitiful me

— Warren Zevon

In the news category of “Sympathy for the Devil,” or “Schadenfreude for Breakfast,” The Wall Street Journal regaled its readers today with the sorry tale of poor little rich investment bankers sobbing into their bourbon about how none of their clients love them any more. Perhaps like you, Dear Reader, my first reaction was—in addition to a rueful smirk—puzzlement: Is this news? Or even, after we have all cruelly snickered at the dashing of overcompensated young investment bankers’ naive dreams of socioeconomic relevance, really that interesting?

At least the pompous piffle out of the anonymous Goldman Sachs spokesman that “the advisory business is at the center of our franchise” did trigger a reflexive snort of amusement over my morning roll. If the advisory business ever was at the center of that hulking behemoth, it has been many years since it has migrated completely to the surface, resembling nothing so much as too little butter scraped over too much toast. Goldman still wears its M&A pedigree like a fine (if slightly threadbare) silk robe, but the hairy legs and bulging belly of the hedge fund juggernaut underneath have been too obvious for even the casual observer to overlook for some time now. But really, it is far too easy to take potshots at corporate spokesmen nowadays, especially at investment banks. My interest waned.

But later, after my second bourbon of the evening, I remembered a nifty little treatise1 I read not too long ago that seemed to capture some of the reasons for i-bankers’ current anomie. The amusing thing, from my perspective, is that this book, which talks about the replacement of the old one-bank, one-client relationship model of yore with the vicious, mercenary transactional i-banking model of today, was written in 1988. (For those of you arithmetically challenged tadpoles out there in the audience, that is closer to the prelapsarian Golden Age of pre-1973 merchant banking than it is to our present moment.) The fact that this trend has been around for nigh on 20 years is not something an uninformed reader would pick up from the WSJ piece, what with all its references to Google and the deals of the day.

Anyway, the clever geezers who penned this piece—which, as far as I can figure it, was intended as a management screed for would-be Titans of Wall Street—lay the blame for today’s bankers being in their cups squarely on... everybody. It seems that both clients and bankers want the benefits of close relationships, but neither is willing to forgo the advantages of today's transactional world.

In the interest of space and my limited attention span, I will condense the book’s argument for you in simple bullet point form:

1) Markets for capital and strategy get more diverse and complex, leading to more threats and opportunities

2) Formerly monogamous Company XYZ begins to talk with more than one investment bank to identify, analyze, and take advantage of these market threats and opportunities

3) Investment banks which have never had a shot at breaking into Company XYZ before gladly start lobbing in ideas and golf trips to get XYZ’s business

3) XYZ’s CFO and finance staff get smarter about the markets and cleverer at playing the i-banks off against each other for better deal pricing, better ideas, and better golf trips

4) I-banks begin to see they are getting played and begin to play back, lobbing completely unoriginal Ideas of the Week in on a regular basis on the off chance one of them will hit and pestering XYZ’s CFO to let them visit the CEO with A Really Big M&A Idea

5) XYZ’s CFO realizes the i-banks are no longer really paying attention to him and gets pissed, doing everything he can to prevent said i-banks from getting into the CEO’s office and screwing them even harder in pricing negotiations

6) Both XYZ and the i-bankers start bitching to The Wall Street Journal and anyone else who will listen that the other is no longer interested in building relationships, but only wants to do deals

Skip steps 1 and 2 and start with an already clever financial deal guy in place of a company CFO, and the same model applies to our friends in private equity. Simple, huh?

Well, you can see where this all leads:

Contained within [the mutual dependency of investment bankers and their customers] is a certain hostility. Investment bankers believe that customers are somewhat dull witted and unappreciative, more concerned with low prices and free services than with building a long-term relationship, and, at times, inclined to do deals that make no sense. Customers believe that investment bankers are arrogant, obnoxiously aggressive, and more interested in getting deals to make themselves wealthy than in understanding and satisfying customer needs.2

Who can disagree?

1 R. G. Eccles and D. B. Crane, Doing Deals: Investment Banks at Work, Harvard Business School Press, 1988.
2 Ibid., p. 70.

© 2007 The Epicurean Dealmaker. All rights reserved.