Wednesday, January 19, 2011

A Good Start

Q: What do you call 10,000 lawyers and 10,000 investment bankers chained together at the bottom of the sea?
A: A good start.

— (Apologies to) Anonymous

Not content with instigating a racial and cultural bar brawl over the only proper way to raise children in the United States, Rupert Murdoch's Wall Street Journal now appears determined to create news any way it can. In the most recent instance, the Journal's editors seem to have taken a look around and asked themselves, "Which are the two most-hated groups in America, and how can we pick a fight between them?" Given that Republicans and Democrats seem to being doing a fine job bashing in each other's heads without the media's help (and an even better job with it), the WSJ appears to have settled on everyone's favorite serial kitten killers: lawyers and investment bankers.

Accordingly, they have lined up Mean Street's Evan Newmark, former Goldman Sachs banker [hiss] and current gadfly about town, and former M&A deal lawyer Ron Barusch to do the honors. Sadly, it is a bit of an unequal contest, since Mr. Newmark, whom this blog has gently mocked in the past, delivers an effort which is a distinct weight class or two lighter than that of Mr. Barusch. Evan's piece seems to boil down to asking why anyone would want to work on Wall Street without making as much money and as much fame as possible. Suffice it to say only a banker—and a not particularly reflective one at that—would find that a compelling argument or even a very interesting question.

On the other hand, Mr. Barusch turns in a clever and funny piece which mostly takes investment bankers to task for character and behavior quirks that he and his fellow deal lawyers find irritating. His roast is recognizable to anyone who has worked with or across the table from an investment banker on a deal. Even I, paragon of well-behaved reasonableness that I am, recognize myself in the counselor's portrait.

Were I a less disputatious man, I might let Mr. Barusch's good-natured ribbing lie. But then I would not be true to myself. And, if you are honest with yourselves, Dear Readers, you would be disappointed if I did. Am I right?

Well then.

* * *

Mr. Barusch titles his piece "6 Ways Bankers Drive Lawyers Nuts." He enumerates these irritations and offers explanatory commentary on each. I thought it would be amusing to address his criticisms directly, while responding to his points with countercriticisms which investment bankers commonly level against lawyers.

1. Bankers are wimps. Mr. Barusch complains that investment bankers never say anything substantive about the deals they work on on the record. This is absolutely true, whether the remarks appear in public filings or on the witness stand. Read simply from their public statements, investment bankers are mealy-mouthed purveyors of empty, meaningless, convoluted verbiage, which conveys nothing of the true drama of real dealmaking or the actual force and substance of any recommendations they make to their clients in the course of a transaction.

Counterpoint: Lawyers are castrating Bowdlerizers. Mr. Barusch alludes to the source of this curious irritant himself: lawyers themselves prevent bankers from saying anything. Bankers' public disclosure documents and courtroom testimony read like Vogon VCR manuals for the simple reason that all substance, spirit, and fact has been thoroughly and religiously bleached out of them prior to their release by an army of lawyers: bankers' in-house lawyers, client counsel, and even attorneys on the other side of the deal. No-one involved in an M&A deal has any incentive to recount its ups and downs and dirty details, nor what was said, whispered, or screamed in Boardroom deliberations. It's just too messy and confusing. Give me a partial transcript of one negotiation or an internal discussion of a merger or acquisition and even I, a lowly legal virgin, could construct the plaintiff's suit to end all plaintiff's suits.

Furthermore, it is not investment bankers' primary task to be opining on anything in public. Our job is to help a client find and execute a transaction. If a deal is done, it is the client's deal, not the bankers'. (Remember, bankers don't live with a deal: the client does.) The only reason bankers do opine is because Boards of Directors demand such legal bubblewrap to cover their asses in the case of subsequent shareholder or third party lawsuits. We do this reluctantly, with extensive provisos, carve-outs, and weasel words for the very reason that we want to attract as little as possible of the litigious ire and consequences directed at a deal and its principals—the companies and investors involved—to ourselves. Banks do offer standalone fairness opinions when they can't get a piece of more lucrative advisory assignments, because they usually get paid some fee to do so and also league table credit, but it is not a preferred business line for us.

Conclusion: Fight fire with fire, Mr. Barusch, and lawyers with lawyers. If the world were not populated with flesh-eating securities litigators chomping at the bit to prove malfeasance because a banker was caught on record alleging the sun is hot, we bankers wouldn't have to wrap our every public utterance in 50 pounds of cotton wool. Physician, heal thyself.

2. Never get between a banker and his fee. Are you serious? This is a gripe? You might as well complain that sharks like to eat things.

Counterpoint: Never come between a lawyer and a billable hour. I mean, if we're gonna take cheap shots, let's take cheap shots. Oh, and Mr. Oh-So-Valued Corporate Client, don't even dream of not paying your devoted counsel's bill timely and in full, unless you would like to see your former consigliere unleash the slavering hounds he keeps in the back room for just such an eventuality.

3. Bankers are quick to volunteer unreasonable schedules—for others. And? Where do you think the time pressure comes from, buster? It comes from deal dynamics, competitors and regulators breathing down our collective necks, and from the client CEO's looming, uncancelable plans to take the mistress skiing in Gstaad. Dealmaking is client service, buddy, and bankers are more often the messenger than the instigator.

Counterpoint: Unreasonable schedules make for more billable hours. See #2 above. We're just trying to help you send Junior to Harvard Medical School, pal. Cut us some slack.

4. "We are working on the model." I'm not quite sure what Mr. Barusch finds irritating about this, actually. Helping frame the valuation of the company is, at the end of the day, one of the primary ways an investment banker helps his or her client come to a reasoned conclusion about whether or not to accept or pursue a particular deal. "Working on the model" is also an integral part of the way bankers do due diligence: we come to understand our client's business and financial prospects by detailed investigation, testing, and discussion of each financial line item with company management. This bears directly on the determination of value.

We transfer the company's figures into our own models because ours are typically more powerful and flexible in analyzing different business and capital structure scenarios. And, yes, investment bankers often encourage company management to revise and clarify their own projections because we challenge them in ways potential buyers do. Many is the company which has modified its financial projections during the course of a deal based upon a more realistic and market-tested view of their assumptions. But at the end of the day, the projections belong to the company. If the client does not sign off on the projections, we do not use them. We can't, and we won't. Financial projections are the responsibility of company management, and no-one else. Whose model or format they happen to be in is beside the point. Finally, unlike the activities of certain other advisers in a deal process [ahem] (see below), the model is almost never the bottleneck in terms of timing.

Counterpoint: You want delays? I'll give you delays. Meanwhile, 25,000 pages of constantly wordsmithed, constantly changing, constantly argued-over supporting legal documents later, the clients and the bankers are still sleeping on couches in the law office waiting room while counsel for each side kickbox over semicolons. And the press release announcing the deal is due to hit the tape in 20 minutes. Delays? Hah!

5. Where did they all come from? I have seen this phenomenon with bankers, too. Usually it comes from large firms, where the only person on the banking team who actually knows what's going on is the second year Financial Analyst. The senior client Managing Director, the senior M&A Managing Director, and their respective Vice Presidents and Associates are just there to schmooze the client and get credit. All I can say is, work with better firms and smarter MDs who actually know what they're doing. Like me.

Counterpoint: Where are all the lawyers who showed up on the billable hours summary? Cause you sure won't see them in the room. Or anywhere else during the deal. Hmmm...

6. Bankers are eternal optimists. Uh, duh. That is the most critical component of our job. If we weren't, no deals would ever get done. As Mr. Barusch points out, bankers are only paid if the deal closes, so we have complete incentive to make it happen. That's why clients hire us. Besides, someone has to counteract the lawyers (see below).

Counterpoint: Lawyers are eternal pessimists. Which is their job. Lawyers are there to protect their clients, to say no, to anticipate and plan for the worst. They are paid by the hour, which means they have no disincentive to cratering a deal and, interestingly, every incentive to drag out negotiations as long as possible. Unfortunately, if they got their way all the time, no deals would ever get done. Mergers and acquisitions are risky business: financially, strategically, and legally. All business is. Lawyers are professionally and genetically disposed to hate risk. So eventually, if a client really wants to take a risk and do a deal, he or she has to overrule their attorney. I've seen this time and time again, when company counsel goes along with something against his or her better judgment because the client insists. It's how deals get done.

Conclusion: Every deal needs a Yin and a Yang, a good cop and a bad cop, a saint and a fool. Lawyers and bankers are both necessary to a successful process, but our working methods, incentives, and personal predilections all conspire to put us in tension, if not opposition, all the time. This is a good thing.

For without this Hegelian dialectic, who would feed the fishes?

© 2011 The Epicurean Dealmaker. All rights reserved.