Saturday, January 22, 2011

Bar Nothing

Every man I knew went to bed with Gilda... and woke up with me.

— Rita Hayworth

I laugh and laugh, O Dearly Beloved, whenever some yabbo alleges that investment banks have their clients wrapped around their impeccably manicured fingers. I laugh because it's almost never true. I laugh because investment bankers are hired guns, client service professionals who are employed on an ad hoc basis to help companies raise capital by issuing securities or do mergers and acquisitions. Clients hire us. We work for them. Not the other way around.1

Sometimes we will in fact suggest or bring a company a deal idea, but in almost every instance our idea has more to do with How and When to do a transaction, rather than What and Why. The clients themselves provide those answers, based upon their own self-determined need for capital or strategic objectives.

Now it's true that a wise client will never hire an investment banker to help execute a transaction unless the client really, really wants to do that transaction. For one thing, investment bankers are pretty good salespeople, and we will use our sales wiles on our own clients when we think it's necessary. Accordingly, we will try to overcome any objections (like price, terms, etc.) a client may come up with that may stand in the way of closing a deal. For another, investment bankers are highly motivated to close deals, because in almost every instance that's the only way we get paid. A client should never hire an investment banker for pure, unbiased advice as to whether it should do a deal, because often the right answer to that question is no, and that's just not what we're selling.2

* * *

But if you really want to understand the true nature of power relations between investment banks and their clients, it helps to examine the extreme example of a hot deal or client. Then you see the sordid truth: nervous, sweaty multimillionaires in expensive suits stacked five deep in a waiting room, desperate to get in and pitch for some juicy piece of business every Managing Director needs to win to make his revenue quota. Five, six, or more presentation books from different investment banks, each with exactly the same "ideas," exactly the same credentials, and exactly nothing to distinguish each from the other other than different bank logos at the foot of every page. Investment bank teams which vary directly in terms of number and seniority of members with the size and prominence of the client and piece of business at hand. (Of course, the prominence of those members varies inversely with their relationship to the client, understanding of the deal, and actual participation in its execution if the bank wins the mandate. Notwithstanding who is in the room, Ladies and Gentlemen, Jamie Dimon or Lloyd Blankfein will never actually do anything for your pissant little IPO or divestiture.)

These are the Gildas of the investment banking world: clients so sexy and compelling that every schlub and Casanova who can get into the casino will make his pitch to bed them. These are not clients whom you try to advise on the best course of action. They have probably already decided what they want to do, which usually involves making as much money as possible for themselves and, if there's any left over, some scraps for free-riders like shareholders and other riff-raff. If you want a piece of the deal, and the mouthwatering fees and bragging rights that come with it, you will suck up as shamelessly as possible to the beautiful lady and tell her anything she wants to hear. To hear tell in one of these Boardroom meetings, there is no supermodel or film star in the world more intelligent, attractive, and downright fuckable at this very moment in time than Acme Widgets and Social Networks, Inc.™

The client holds all the cards in these situations, and the most an investment banker can hope to do is hop a ride on the gravy train and ladle off as much as he can. It is not a scenario which encourages or supports professionalism, integrity, or carefully weighed judgment. It encourages blatant prostitution.

* * *

For an excellent example of just such a situation, let us turn to James Altucher, who has continued his recent spate of confessional blog posts from the past with this little gem:

So we closed on thirty million dollars and bought our first company. Then we bought a second company. A consulting company called Katahdin. They had nothing to do with wireless but they had profits. We’d bury them in the IPO story but make use of their profits. Then we bought a third company. I can’t even remember their name but they were a spinoff from MIT. Right away we were getting calls. Aether Systems wanted to buy us but we said no. They only wanted to pay fifty million for the company. A banker at CS First Boston told us he could get us seventy five million no problem. But we didn’t even listen to him. In the elevator we laughed at him. What an old fool! We were going for an IPO.

Every bank came in with a powerpoint and a team of young people to pitch us. Goldman, CSFB, Merrill, Lehman, etc. CSFB was the front runner because Frank Quattrone was an investor but Merrill made a strong pitch. The pitch was funny. The top Merrill banker was there. He said to the associate on the deal, “John, walk them through the numbers.” And John said, “uhh, my name is Roy”. Two other things I remember from the pitch. The first was, “Henry Blodget will be the analyst on this deal. He loves wireless.” Which made no sense to me since he was an Internet consumer analyst.

The other thing I remember was the back page of the presentation. The beautiful back page. The only page that mattered. It had what my networth would be if we IPOed and the market valued us similar to Aether Systems. I would be worth something like nine hundred million dollars.

Yes, you may laugh at the pathetic, drooling investment bankers in this story. I certainly do. But you must understand why they behave this way in front of hot clients. They do so because—notwithstanding everything you may have read and heard about my industry—there is immense competition among investment banks for this kind of business. I laugh even harder than I do above when I hear my industry described as an oligopoly or cartel, because that is undeniably untrue. Ever since I started in the business as a mere bag-carrier, my superiors and peers have complained about the excessive and relentless competition in investment banking. Part of it boils down to the fact that, on any given day, any investment bank with a broker-dealer license can probably execute your securities underwriting or M&A transaction just as well as the other thirty-two. Goldman Sachs and Morgan Stanley do not boast superior resources or better quality bankers than anyone else on the Street. In fact, I have experienced just the opposite my entire career and said so in these pages many times. If they want in, they've got to strap on knee pads and warm up the Vaseline just like the rest of us.

It is a strange feature of my business that, despite such intense competition, investment banks rarely compete on price. I have addressed this conundrum in the past, but I think it simply boils down to the fact that most of our clients simply aren't that price sensitive when it comes to fees for capital raising or M&A. Instead, banks mostly compete on how abjectly they can grovel in front of the boobs and knuckleheads populating the Boardrooms and executive suites of desirable clients. And this usually entails declaring the ridiculous, half-assed strategies devised by these lucky fools the smartest and cleverest ideas we have ever heard in our professional lives.

So, if you want to preserve some modicum of professional dignity and integrity as an investment banker, I would recommend you steer clear of hot clients, hot sectors, and hot deals. Leave those to the tech, consumer, and retail bankers, who would raise a billion dollar IPO for a company that makes Chia pets if they thought they could sell it. Join me in one of the many comfortable backwaters of the industry, where we try to add actual value to our humdrum clients with sensible, well-reasoned advice and well-executed transactions.

But if you want klieg lights and fame, get ready to sell your soul and your dignity. And get ready to recite, along with Gilda:

If I'd been a ranch, they would've named me "The Bar Nothing."

1 I do not speak here, O Attentive Ones, of the dark side of investment banking known as sales and trading, or capital markets, wherein banks act as middlemen in securities and derivatives trading markets. Nor do I speak of capital markets' evil half-brother, proprietary trading, nor its idiot second cousin, in-house private equity funds. I speak here of traditional investment banking: securities underwriting and M&A for third parties. You know, the good kind. Try to keep up. Thanks.
2 Which is not to say, mind you, that some of us don't recommend against doing ill-advised deals on occasion. Good investment bankers always try to put their client's interests before their own, because we're playing a long game, in which the client trust and reputation a banker builds from advising against bad deals should redound manyfold to our benefit in the future. But you should not be naive about bankers' economic motivations and incentives, which push us strongly toward doing this deal, right now. Bad investment bankers—which, sadly, are legion—have no such scruples.

© 2011 The Epicurean Dealmaker. All rights reserved.