Thursday, July 31, 2008

Das Gift

Schwarze Milch der Frühe wir trinken sie abends
wir trinken sie mittags und morgens wir trinken sie nachts
wir trinken und trinken

— Paul Celan, Todesfuge

Poor Carlyle Group.

I am almost beginning to feel sorry for them. David Rubenstein and his partners must begin to tire of drinking the "black milk of daybreak," more colloquially known here as Bad Shit Which Happens to You When You Stray from Your Knitting.

We learned today that the legendary buyout shop has begun liquidating its Blue Wave hedge fund, which it launched as a joint venture in March 2007 with two former Deutsche Bank traders and in which it invested its own money. Apparently the fund assets have shrunk by a third to around $600 million, which puts it near the rounding-error column in each of Messrs. Conway, D'Aniello, and Rubenstein's personal checking accounts.

While DealBook is trying to characterize this as "the second major black eye for the giant alternative-asset manager this year," it pales in comparison to the $16 billion, highly-leveraged cluster fuck at Carlyle Capital, for which I have excoriated the Three Musketeers sufficiently elsewhere. I would characterize this one as a stubbed toe: painful, true, but hardly rising to the level of a black eye.

To their credit, the Trio Who Must Be Obeyed apparently pulled the plug on Blue Wave before it splashed more than a few gallons of water over the gunwales. I guess this time they remembered one of the key principles from their buyout business: better to fail fast than slow. (They must have gotten over their reflective, introspective phase.)

No, I blame the Germans.

After all, it was holier-than-thou Deutsche Bank which supplied the Blue Wave goons in the first place. (Sure, sure, their names are supposedly "Goldsmith" and "Reynolds," but that's just a smokescreen, I tell you. "Goldschmied" and ... —whatever—are far more likely.) We all know those Frankfurters have been beyond jealous that their pathetic little mittelstadt never made it into the finance big leagues like New York and London. I posit to you that this is just one more piece of evidence that they intend to steal into first place by bankrupting the rest of us first.

Fuckin' Krauts.

Der Tod ist ein Meister aus Deutschland.

© 2008 The Epicurean Dealmaker. All rights reserved.

Tuesday, July 22, 2008

With Friends Like This ...

... who needs enemas?

Okay, okay. Being the self-appointed expert on investment banking compensation on the worldwide web, I guess I have a professional obligation to comment on Evan Newmark's recent cherry bomb post on M&A fees over at the WSJ Deal Journal.

Summary: He wrote a doozy.

I have to say, I kinda like Evan. He's brash, opinionated, and unafraid to publish his smirking picture in a town and a time when the average investment banker hides his Wall Street Journal under a Daily News on his subway commute to work and carries a bounty on his head. He's got cojones, that guy, I'll give him that. And he usually does a respectable job pitching his commentary and explanations of Wall Street to the cheap seats.

But this time I think he forgot he wasn't regaling a bunch of industry buddies at the Bull & Bear. Judging by the tone and content of the majority of comments left on his post, I think he really stepped in it. He might want to hide out a little in the Hamptons for a few weeks or so for this to blow over. Either that, or take to wearing a mustache, wig, and sunglasses at his regular day-trading venue.

Now his argument—that M&A bankers occasionally really do earn their mouthwatering fees—happens to be one that I agree with. If memory serves, I have written as much one or two times in the past.

But illustrating his contention with anecdotes like this falls short—in my opinion—of driving the point home:
Almost a decade ago, as a Goldman Sachs banker, I advised a European client on buying a U.S. publicly traded company for a couple of billion dollars. We had worked for months on the deal, and in a few days of negotiations, hammered out the terms with the board of the U.S. company.

Our client was overjoyed. We had negotiated hard for a purchase price that was 6% above where the shares were then trading.

Effectively, a no premium deal. An M&A banker’s dream. Or nightmare.

It turned out that none of the U.S. company’s large institutional shareholders tendered their shares. They didn’t like the price. We had an agreement to buy the company, but no company.

So now we had to go back to the U.S. shareholders with another price. But how much to offer?

We talked to about a dozen large shareholders. Forget the 6% premium. Now, it was highway robbery. The shareholders demanded takeover premiums of 50% to 75%. That meant another $500 million straight out of my client’s pocket.

That was unacceptable. So my client asked me at what price we could get the deal done. A tough judgment. The team talked it over. We consulted colleagues. In the end, the call was based on gut instinct. Another 25%. No more. No less.

At the close of the tender, we gathered about 55% of the shares, just barely above the 50% needed to close the acquisition.

The good call saved our client several hundred million dollars.

Now, as an M&A practitioner myself, I appreciate that every deal is different, and it is practically impossible to critique a banker's advisory performance from the outside, since one never has access to all the pertinent facts. This generic problem is exacerbated, in this instance, by Mr. Newmark's playing rather fast and loose with the numbers in his illustration, creating the unfortunate effect of generating more fog and confusion that true understanding. But I have to agree with some of his interlocutors that he does not appear to have covered himself in glory in this transaction.

For one thing, it is a rather elemental error in M&A negotiation to fail to consider the motivations and likely behavior of parties which have an important say, or vote, in a deal but which, usually for regulatory or legal reasons, do not have a seat at the bargaining table. As I said, I do not know the complete set of facts, but it does appear to me a rather significant blunder not to have better anticipated the likely reaction of the target company's large institutional shareholders to the 6% takeover premium agreed with the target's Board. (One also might wonder whether the target Board was so easily persuaded to accept this unusually low premium because they knew full well that their shareholders might very well create the conditions for another, much larger, bite at the apple. Hmm. If so, so much for Mr. Newmark's "hard" negotiating.)

For another, in my deal experience one of the most important services a buy-side M&A advisor renders his or her client is a carefully judged, thoughtfully rendered opinion as to the likely "clearing price," or ultimate sale value, of the target company (in the form of a range). It is this type of information, for example, which should be completely understood by the client before it ever undertakes an approach to a potential target. The client should have carefully weighed the likely transaction price, the potential value it could achieve by purchasing the target, and its own ability to pay before its CEO ever picks up the phone to call his counterpart at the target company. It should not be, as Mr. Newmark's narrative implies, an ad hoc add-on or "bonus" service provided to the client under pressure when the original negotiating plan goes off the rails.

Next, while I think I understand what Mr. Newmark was trying to convey by asserting that the final offered premium of "another 25%" (31% in aggregate?) was determined by "gut instinct," I fear he does his firm and his industry colleagues a disservice by saying as much in the pages of the Deal Journal.

There is no "right" number in merger negotiations, just as there is no one, right number in valuing any for-profit enterprise. Valuation, whether in the market or in a deal, is well and truly—and ineluctably, now and forever—an art, not a science. But such gut instincts—rather more accurately described as carefully considered judgments—on the part of M&A advisors are or should be based on a mountain of careful, well-judged analysis, comparison, and argument. You never go to your counterparty in an M&A deal and say your offer of $100 million for his pissant company is based on gut instinct; you give him reasons. You show him where his company's peers are trading in the marketplace, you show him the levels at which other companies in his industry have been bought and sold, and you share your assumptions of the future value of his business enterprise with exhaustively analyzed and justified discounted financial projections. He, if he is not an idiot, will counter with his own exhaustive analysis showing why his gem of a company is really worth $500 million. And you're off to the races.

I would expect no less from Mr. Newmark when he went back to the target company's shareholders with an improved offer, and I am sure they did, too.

Lastly, I find Mr. Newmark's implicit argument that Goldman Sachs earned its fee by saving his client "several hundred million dollars" disturbingly similar—and just as unconvincing—as Mrs. Dealmaker's occasional attempts to justify her splurge on a $10,000 cocktail dress by crowing that it was marked down 40%: "But Honey, look how much money I saved!" Sorry, Evan, no cigar.

Anyway, Mr. Newmark seems to have convinced himself he came out a hero in this transaction, smelling like a rose. (Interestingly enough, Goldman Sachs as a firm seems to have a preternatural ability to convince its clients they have received the best investment banking advice available, no matter how badly their bankers have fucked up. Perhaps Mr. Newmark is still drinking the 85 Broad Street kool aid.) To me, based upon what he has told us, he looks more like one of the Keystone Cops.

M&A bankers do earn their transaction fees, by and large, Dear Readers, but not by acting like this.

© 2008 The Epicurean Dealmaker. All rights reserved.

The Doctor is In

Well, I'm back.

My blogging—never high frequency, even in the best of times—has been particularly somnolent for the past few weeks because I have been reacquainting myself with the missus and the little Dealmakers on vacation. (Don't ask.) I won't bore you with the details, but suffice it to say that it was mostly a sporting vacation, involving lots of perspiration, the callous sacrifice of many small, defenseless animals, and several large helpings of gelato.

The highlights, to my mind, were teaching Junior how to shoot skeet in the Piazza della Signoria and morning iaido practice with a naked blade on the 12th green of Royal Birkdale before the second round of the British Open. (I still can't figure out what the course marshall was trying to say to me before I accidentally severed his brachial artery while executing a particularly difficult kata. Bloody scouse accent is incomprehensible.)

Of course, the exchange rate made the entire exercise a festival of pain, but at least we were able to forgo the cost of equipping our spacious Tuscan villa with toilet paper by using U.S. currency instead.

I note that in my absence you, my Faithful Readers, and your colleagues, friends, and fellow travelers have generated remarkably little news or scandal worthy of comment. The same tired story lines in place before I left still dominate the headlines, and I simply cannot get inspired to sharpen the quill and freshen the vitriol to take it all on again just yet. I am sure a couple of double lattes and a quick read of my most recent deal status report will get those creative juices flowing again forthwith.

The only item of note is the recent defenestration of my favorite poisonous little cherub from the executive floor of Citigroup, but even that was no real surprise. I guess the received story line is that Pandit's Morgan Stanley mafia finally overwhelmed the chubby little scrapper with superior numbers, but I prefer to think he was asked to leave because they simply no longer required his special talents. After all, with private equity flat on its back, legs in the air, and rigor mortis setting in, there really isn't much call for senior investment bankers whose primary talent is not appearing taller than their diminutive squillionaire clients. Oh, that and underhanded knife fighting in the leveraged finance Credit Committee.

Well, I'm off to wrestle my towering inbox into some form of submission, and to see whether I can arrange some long-distance defibrillation of my languishing deals and clients, which have been in decline for some time now. I'll let you know if I find any wooden nickels in the pile.

© 2008 The Epicurean Dealmaker. All rights reserved.