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.

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.

Overheard at 85 Broad Street

This is just sad. Fucking sad.

MD: You're being placed into the accelerated one-year analyst program.

Analyst: You mean I'm being fired?

MD: No, you're being placed into the new accelerated one-year analyst program and will be paid through August.

Analyst: I'm being fired.

MD: There will be nothing on your record indicating you were fired. It'll say you were in the one-year analyst program.

Analyst: I'm being fired.

Unless you are a sick bastard, firing people is no fun, even when they deserve it. It is double no-fun when you have to fire a colleague and friend simply because business has fallen into the shitter and your group/division/investment bank has to cut payroll in the face of reduced revenue prospects, like we face today. It is triple no-fun when that colleague is some bright-eyed youngster fresh out of college or business school who still has stars in his or her eyes about the industry and their formerly bright future within it.

That doesn't mean it doesn't happen in investment banking. I have seen it up close and personal. Sometimes there is even a good reason to fire perfectly competent, inexpensive junior bankers instead of expensive deadweight Managing Directors. (Less often than you might hope, in my experience, but that's politics for you.)

But if you're gonna do it, if you're gonna dash the hopes and prospects of some eager young lad or lass your firm (and maybe even you personally) just hired less than 12 months ago, have the cojones to do it right. Don't lie and dissemble. Don't dodge and weave with the truth, telling your young charge he or she has just been "promoted" to a one-year program when they were hired for two.

Be a man. Not a weak-kneed, lily-livered, unprincipled, ball-less, gutless, prevaricating, backstabbing, motherfucking pussy.

Tell them straight: I'm sorry, you're being fired because we have to reduce our costs in the face of declining business. It is no reflection on you, your talents, or your future prospects. It is simply a business decision we have decided to take. I am sure you will do well in your future career, and I wish you the best of luck.

Look them in the eye. Be honest (or as honest as the inevitable Human Resources weasel in the room will let you be). Shake their hand, if they offer it. And try to remember through your discomfort and embarrassment that it is them who is getting fired, not you. Like I said, be a man. Do the right thing.

That is the right way to do it. That is why I find this report leaking out of Goldman Sachs to be so despicable. Who the fuck do they think they're kidding? Not the analysts getting canned, surely. Not those analysts' potential future employers. And certainly not anyone on Wall Street or among their investors who has not suffered a frontal lobotomy recently.

There is no form of public humiliation excruciating enough, no corporal punishment which causes lasting enough damage to serve as adequate remedy for such low, cowardly, pusillanimous behavior as this. Whoever thought up this stupid, cowardly, insulting plan should be taken to the steps of the New York Stock Exchange, disemboweled, and hung on a stick to dry, along with the senior executives who approved it and the Managing Directors who executed it. Recently laid-off investment bankers below the rank of Vice President should be issued a blanket invitation to come throw rocks and piss on their desiccated remains. Wives and mistresses of the miscreants should have their Henri Bendel store charge cards confiscated and their heads shaved, like captured collaborators in WWII. Their children should be forced to attend state schools and work for the Peace Corps.

Readers are invited to mail other suggestions to the senior management at Goldman Sachs at their leisure.

I feel nauseated. It's almost enough to make me turn in my keys to the executive washroom.

P.S. — Helen, just in case you were wondering, this is a rant.

© 2008 The Epicurean Dealmaker. All rights reserved.

None Shall Pass

Arthur: "Now stand aside, worthy adversary."
Black Knight: "'Tis but a scratch."
Arthur: "A scratch? Your arm's off!"
Black Knight: "No it isn't!"
Arthur: "Well what's that then?" [pointing to the arm lying on the ground]
Black Knight: "I've had worse."
Arthur: "You liar!"
Black Knight: "Come on, you pansy!"

— Monty Python and the Holy Grail

I try to stay positive, Dear Readers, I really do.

While I have never detected in myself that raging strain of congenital optimism prevalent among so many of my confrères in the investment banking world, I do make determined efforts to remain chipper and upbeat with my various clients in the face of the current M&A market slowdown. Like a good little M&A banker, I tenderly hold their hands and reassure them that their faltering little pissant transaction is only a heartbeat away from a spectacular and satisfying conclusion worthy of the record books. Were I not already aware that maintaining such an attitude is simply good business practice for a hired gun strategic advisor, I would no doubt be swayed by the heavy penalties Ye Ancient and Hoary Guild of M&A Workers is wont to impose on its members who are not seen in public with relentlessly cheerful grins plastered on their well-groomed kissers at all times.

But here, nestled comfortably in the bosom of my Trusting and Nonjudgmental Readership, I feel safe in sharing some of my skepticism concerning what I consider to be the excessively optimistic outlooks for the M&A market which are periodically published in the mainstream media. (The reassuring cloak of anonymity helps.)

The latest salvo of happy talk from the land of Honah Lee with which I feel compelled to take issue comes to us courtesy of WSJ's Deal Journal, wherein Stephen Grocer and some pals from Ernst & Young's transaction advisory services group attempt to reassure anyone who will listen that things, really, are not so bad after all.

Yes, global deal volume is down 26% from last year. Yes, the credit markets continue to sputter and talk of recession abounds. Yet amid the doom and gloom, it should be pointed out that 2008 has actually been a pretty good year for deal making.

True a 26% drop is steep. But is it fair to compare 2008 to 2007? ...

Consider another comparison: Global deal volume this year is up 3% from the same period in 2006. And remember, 2006 was the biggest year in M&A history prior to 2007, with $3.93 trillion in M&A volume, according to Dealogic.

Okay, true: so far 2008 has not turned into the Slough of Despond like 2002–2003—yet—but the 2008 over 2006 year-to-date comparison becomes less compelling when one recalls that a great deal of 2006's then-record deal volume came in the fourth quarter, as the Great Deal Engine of 2007 began revving its motors in earnest:


Oops.

Furthermore, an unsuspecting reader who has forgotten his rose-colored glasses at home might read the nifty little quarterly deal volume chart above—and Mr. Grocer's own relation of successive 47% and 33% falls in deal volume in 2001 and 2002 from prior highs—with a great deal less equanimity than he does. One might even draw the conclusion that, based on recent historical patterns in the M&A market, we have a great deal further to fall from current levels than we have seen to date.

Nevertheless, I concede that past is not necessarily prologue in the M&A market. Perhaps declining volumes and declining confidence will not work hand in hand to foster drastically lower deal activity, as they have in the past. This time, maybe it really is different.

Mr. Grocer—or his E&Y sources, it is not really clear which—certainly seems to think so. He gives four reasons why volume declines from 2007 should ameliorate:

1) Deal making fell off the cliff in the second half of 2007. So at the very least 2008 will face easier month-over-month comparisons going forward.

Translation: I have excellent news, Mr. Rutherford. The gangrene advancing up your leg slowed dramatically once it reached your groin area.

2) Corporates and private equity buyers have gobs and gobs of lovely cash, which is simply burning holes in their respective pockets. Plus, strategics simply have to buy stuff. The Polynesian god of globalization says so.

Do you hear that, Steve Ballmer? Get off your ass and buy Yahoo!, you moron. It's globalization, and consolidation, and strategic imperatives, and stuff. Sheesh. You might also want to put in a bid for one of those shitty legacy airlines the Wall Street Journal has been flogging to everyone and sundry for the past 12 months. I'm sure there's a "globalization" angle there somewhere. I dunno: world travel?

2) (continued) Oh, and just you wait. Private equity has boatloads of simoleons they have to put to work, too. Boy oh boy, as soon as those pesky banks start lending money again and stop renegotiating higher interest rates and tighter covenants on existing bank facilities every time a healthy PE portfolio company wants to do an add-on acquisition, you're gonna see private equity bounce back, big time.

Uh-huh. Just you wait. Any day now.

3) It's true those damn sellers just haven't adjusted their expectations down the way they should have already. Stubborn bastards. Well, they'll collapse in despair soon, and everything will be rosy again.

There might be that little, tiny, baby problem that the only sellers who sell at low multiples are the ones who have to. These, by definition, comprise a much smaller number (read:lower deal volume) than those who sell willingly when the Seventh Fleet of drunken buyers pulls into port (viz., e.g., 2007). There is also that disturbing documented tendency of sellers to cling to higher value expectations in the face of a declining market much longer than efficient market theorists (and cheapskate buyers) would predict. Existing home sales, anyone?

Lastly, my favorite:

4) [The] M&A marketplace is increasingly global. Sovereign-wealth funds are ... prowling on the M&A front. Meanwhile, corporations from Brazil, Russia, India and China are looking to do deals. In the first 19 weeks of 2008, M&A volume reached $91 billion in Brazil, Russia, India and China, up from $78 billion a year earlier. Companies in those countries, like Vale, are looking beyond their borders. The Brazilian miner is raising $15 billion that it may deploy to do deals.

Woohoo! $15 billion. Look out baby!

Of course, at $91 billion year to date, annualized M&A volume from the BRIC countries would make up only 6.3% of 2006's global total. A pipsqueak is still a pipsqueak, no matter how fast he is growing.

Anyway, I guess I can't blame Mr. Grocer or Deal Journal for talking their book. After all, it must be pretty tiring to rehash the same old story every day about Jerry Yang, Carl Icahn, or Seth Tobias. I'm even more sympathetic toward the E&Y TAS guys. Christ, with the percentage of their business which depended on the private equity feeding frenzy—and which has vanished overnight—those guys must be scrambling to place positive M&A stories in every high school paper and church group newsletter they can, much less the WSJ. The Carlyle Group sure as shit isn't returning their calls.

Of course, optimism, determination, and a positive attitude are all admirable things. As I have stated in the past, the typical investment banker simply cannot survive without them. However, one must still guard against losing complete touch with reality, or reality might happen by with a really sharp sword and chop your limbs off one by one. There's no upside in being a looney.

© 2008 The Epicurean Dealmaker. All rights reserved.