Korbin Dallas: “We need to find the leader. Mangalores won’t fight without the leader.”
Mangalore Leader: “One more shot, we start killing hostages.”
Korbin Dallas: “That’s the leader.”
Mangalore Leader: “Send someone to negotiate.”
Security Chief: [to Dallas] “I I I I I’ve never negotiated I…”
Korbin Dallas: “Mind if I… try?”
Security Chief: “No, no, sure, sure. Sure. [to Mangalores] We’re sending somebody in to negotiate!”
Korbin Dallas: [walks into room, shoots Mangalore leader between the eyes] “Anybody else want to negotiate?”
Security Chief: “Wh-wh-wh-where’d he learn to negotiate like that?”
— The Fifth Element
Unlike many of you, O Dearly Beloved, I am old enough to remember a time when air travel did not offer wireless internet in flight. As a result, when junior bankers like me did not have work papers to review or spreadsheet modeling or presentation editing to do on our laptops,1 we were thrown back on our own devices when it came to entertaining ourselves with something other than the crappy movies playing on low res CRT screens hanging from the ceiling. Normally I would bring some combination of newspapers, magazines, equity research reports, and a book or two to occupy my time, but occasionally said distractions would fail to engage me or I would simply run out of material to read before the flight ended. On those occasions, in desperation for something to distract me from the grim environs of a 30-year-old narrow body aluminum tube stuffed with sweaty tourists and bedraggled business travelers, I would sometimes stoop to leafing through the airline magazine jammed conveniently in the seat back pocket in front of me.
This rarely offered much relief, but I do recall frequently encountering the same stiff, glossy multipage ad for a well-dressed chap named Chester Karras, who generously offered to teach the ambitious road warrior the secrets to becoming a master negotiator, for a hefty price. “You don’t get what you deserve,” his tagline warned, “You get what you negotiate.” Putting aside the wisdom of advertising such services to the rumpled middle manager wedged into the middle seat of aisle 32 on the 9:18 pm flight from Dallas to Abilene, these ads always reminded me that true negotiating skill is surprisingly rare among most businesspeople.
For spectacular anecdotal proof of this observation, we need only turn to last week’s article in DealBook about the nasty bollocking mustachioed technology advisor extraordinaire Frank Quattrone’s firm Qatalyst Partners delivered to its erstwhile client, Trulia, in the latter’s recently announced sale to competitor Zillow. To an aficionado of the dark arts of M&A, there are many odd and interesting nuggets to be gleaned from this brief article about the behavior of Trulia and Qatalyst, which I thought you kindly people would find amusing to review with me on a languid Saturday afternoon.
First, there is the apparent fact that, after hiring Qatalyst three years ago to sell itself to (presumably) Zillow and perhaps one or more other potential buyers, Trulia apparently never terminated the engagement when it failed to lead to a sale. This, as we technically describe it in the trade, was Just Fucking Stupid. Engagement letters between clients and financial advisors are normally open-ended contracts which describe reciprocal duties and obligations which do not expire until the transaction contracted for occurs or one or both of the parties explicitly terminate them. The notion that Trulia could hire Qatalyst to sell itself, have that process fail, and subsequently move on to an initial public offering and other activities for three years without bothering to terminate an open-ended sale contract is just ludicrous. For this mistake alone, somebody in the executive suite of Trulia—the General Counsel or Chief Financial Officer are the most likely candidates—should have their head handed to them.
Second, there is the matter of Qatalyst’s original fee, which the DealBook article describes as “about 2 percent.” Now, I don’t know (or care) what Trulia’s purported enterprise value was three years ago when it first engaged Quattrone’s merry band, but I would be surprised if it was much below a billion dollars. (Remember, they just got sold for $3.5 billion this past week.) Now I understand that the technology world operates in its own reality distortion field, but I have to confess I was stunned by that fee percentage. In the normal business world, where industrial logic and economic pressures operate in place of the moonbeams and unicorn piss of tech land, a billion dollar sale mandate should earn the sell-side advisor flogging it significantly less than one percent of transaction value. Advisor success fees are heavily negotiated on a deal-by-deal basis, but they normally have some relation to normal fees normally earned by normal advisors normally. This one looks like Trulia’s CEO just hiked up his skirts and asked his Qatalyst banker how far he wanted him to bend over the barrel.
Third, there is the matter of the fee Trulia negotiated with JPMorgan for the current mandate which resulted in its sale to Zillow. This DealBook reported as about 1.5 percent. You might think JPMorgan was mighty gentlemanly to accept a lower percentage fee for the higher sale amount, until I inform you it is somewhere between four to five times the normal fee for a three billion plus dollar transaction outside tech land. The rack rates which investment banks try to achieve in M&A transactions are based on advisory fee schedules which in turn are based on competitive fees earned by them and their competitors in hundreds of transactions annually. In other words, a market. These fees decline as a percentage of transaction value as the size of the transaction increases, and most financial advisory firms’ fee schedules show transaction fees of fractions of a percent at these levels.
Now perhaps Qatalyst Partners’ and JPMorgan’s technology bankers really are the sort of special snowflakes who can deliver $50 to $70 million of advisory value to Trulia. Perhaps Frank Quattrone and his colleagues use secret photos of every Silicon Valley founder, CEO, and venture capitalist engaged in unnatural acts with scrofulous barnyard animals to boost their negotiating leverage when it comes to striking terms on engagement letters and actual transactions. Barring that, however, I am skeptical, as a technology outsider, that any of these clowns can offer anything special enough to merit fees which are many multiples of the fees which highly talented M&A advisors outside the technology bubble would be delighted to work for. Especially if both transactions were targeted primarily or solely at one buyer, Zillow, which makes many of the deal dynamics and negotiating complexities much less burdensome. After all, it’s not like the companies involved are particularly technical or require particularly specialized skills from their advisors.
I take this as yet more proof that the denizens of Silicon Valley think they are special, and the normal rules of gravity and economic interactions do not apply to them. Perhaps the executives and owners of technology firms are delighted to spread higher than normal fees around to their pals and enablers in the banking world in exchange for extracting ridiculous sums from the pockets of widows, orphans, and idiot venture capitalists to fund their fantasy business models in the first place. I’m not sure I would be so happy to pay an extra $40 million in success fees to bankers who sold my company because my CEO and his staff were too inept to negotiate their way out of a paper bag with a map and a blowtorch, but then again I am not Silicon Valley’s demographic.
And this, in the end, has clearly been my mistake. Effective immediately, I am rebranding myself as an M&A advisor for technology companies, offering skilled buy- and sell-side services at a mere 300% of retail.
Shit, I use Twitter and Blogger.com. I’m a friggin’ natural.
David Gelles, Old Attempt to Sell Real Estate Website Trulia Rewards Ex-Adviser Qatalyst Now (DealBook, July 29, 2014)
Killing People Is a Bad Habit (August 28, 2009)
1 You might think plane flights would be an excellent time to get tasks like this done: no interruptions by clients or superiors, relative quiet, and few distractions of interest. In actual fact, bankers often forgo catching up on pressing work due to the risk competitors or strangers on the plane might look over their shoulder and get a glimpse of confidential information. Quarters are close in economy class, and unless your immediate neighbor is a co-worker who can shield you from prying glances, most serious work should be deferred until you get back into the office. So, once again, junior bankers are screwed.
© 2014 The Epicurean Dealmaker. All rights reserved.