Recipe for Success

For your reading pleasure this weekend, O Faithful Acolytes, I have decided to pen a little riff inspired by the scandalette du jour now working its way through the twinned pythons of New York Society and the Oprah Winfrey Show audience. I do not speak of the minor éclat caused by news that un-French French President Nicolas Sarkozy and his wife of 11 years have finally divorced—"How quaint! How ... American!" No, I refer to that titillating mini-saga emerging from the seething cesspool known as childrens' cookbook publishing, what many are coming to call "L'affaire Seinfeld."

I will not bore you with the tawdry details of this dust-up, which you can read for yourselves in the Times article by Motoko Rich. (Now there's a name for you!) Suffice it to say that Jessica Seinfeld (pictured above), wife of the eponymously named comedian Jerry Seinfeld (how do they tell their bathroom towels apart?), and her publisher Harper Collins have been not-quite accused of not-quite stealing the ideas and several recipes in her book from a disturbingly similar ankle-biter cooking compendium composed by one Missy Chase Lapine. (Seriously: I'm not clever enough to make this stuff up.) It seems the basic idea of both books is to sneak healthy foods into the cotton candy dreck most children prefer, like spinach into brownies. Apparently, dastardly matriarchs have been betraying their progeny in like manner from time immemorial.

Anyway, I draw this little drama to your overextended attention not to discuss the wiles and deceptions of faithless Womankind (as I might), but rather to illustrate how similar the story of these books' publication is to the creation of an M&A deal. The parallels are striking, and the substitution of a few pinstripe suits and a few investment banking institutions for the frilly aprons and publishing houses of the original yields a story which matches several dealmaking experiences of my own and others almost exactly.

For those of you with a conference call to join or a client meeting to attend, the basic story is this: As for the dueling cookbooks described above, it is not the quality or content of the ideas that matter in a potential M&A deal, it is their timing and packaging. An essential corollary to this is that the attractiveness, broadly defined, of the promoter of the idea is important, too. Let me explain.

I do not know about cooking strategies to cope with picky eaters, but I can guarantee you from over twenty years experience that there is virtually no such thing as a completely new, original idea in M&A. Sure, investment bankers constantly wheedle their clients to allow them to pitch some "really interesting ideas," but the clients never take the meetings in the hope they will be shown something they have not already considered, and they are almost never disappointed in their expectations. Indeed, if I were a corporate executive who lives and breathes my business, and has worked in my industry for decades, I would be mighty worried if some wet-behind-the-ears Harvard Business School tyro from Goldman Sachs or Morgan Stanley showed me a good acquisition, merger, or divestiture idea that I had not already thought about exhaustively. So should my Board of Directors. Take it from me: if your idea is not completely stupid, the client has already seen it. Likewise, it is clear that neither author in our ink-stained story above came up with a tot feeding strategy not already discovered by generations of crafty mothers.

In contrast, timing is critical in M&A. The best acquisition idea in the world doesn't do you a bit of good if you can't get the attention of the object of your desire. The target has to be ready, hair washed, teeth brushed, and packing protection before she'll agree to meet you out behind the football field bleachers late at night. And she won't want to go to dinner with you if you are between paychecks and can only afford Arby's takeout. Timing is so important, in fact, it even trumps the quality of a deal idea. When the stars are aligned, even a lousy deal can—and will—get done. Think AOL-Time Warner. From the Age of Dinosaurs forward, good M&A bankers have always closed the sale not based on the Who or the Why of a deal, but on the When and the How.

Packaging is also critical, at least to the M&A banker who wants the assignment. Presentation matters to a CEO, if only to make sure the banker he or she chooses does not embarrass him or her in front of the Board of Directors. As we have discussed before, it is practically impossible for a client to evaluate the quality of a particular M&A banker's advice before a deal closes, and often quite difficult thereafter. Therefore, in order to pick an M&A banker from among the legions of identical-looking graduates from the same business schools pestering him for the assignment, a CEO must rely on reputation plus the appearance of plausible reliability. Reputation is what it is, so personal appearance, plausibility, and chemistry with the client—packaging—usually decides which banker gets the nod.

Try this little experiment at your next Manhattan cocktail party. When you meet someone who tells you they work in finance, try to determine whether he or she is in corporate finance or M&A before they tell you. If they are well- and expensively dressed, vaguely handsome (but not too attractive), are a smooth and persuasive conversationalist, and exude so much quiet confidence that you can't decide whether they are arrogant or not, six times out of ten that person will be a corp fin or M&A banker. (If they are disshevelled, unkempt, unattractive, slightly hostile or dismissive, and totally arrogant, on the other hand, you can bet good money that they are in a hedge fund. They are also probably worth a lot more money than the M&A banker.)

Now I do not know how Missy Chase Lapine stacks up against Jessica Seinfeld in the appearance and personality department, but I can tell from the article that she is not lacking in publishing experience, and her book idea is no worse than—in fact, is indistinguishable from—the one Ms Seinfeld pitched Harper Collins two weeks later. Nevertheless, Harper Collins chose Ms Seinfeld to do the deal, based, we can imagine, largely on the same criteria her agent used when she described her as “smart, stunning, and infinitely promotable.” Like I said, packaging matters.

There is one final wrinkle to our sorry little tale that seals its instructiveness for the student of investment banking and M&A. For, at the end of the day, a client trying to decide between two bankers for an M&A assignment is often stumped. As far as the client can tell, the finalists are completely indistinguishable, equally talented, and equally plausible—both perfectly acceptable candidates for the final nod. At that point, the client often makes the decision based on the name on each banker's card. No, not that name, silly. The name of his or her investment bank.

Not that infrequently, which firm the banker belongs to becomes the primary deciding factor, winning out over even superior talent and better personal chemistry. "Goldman Sachs" almost always trumps "NoName Capital Markets LLC," regardless of how superior the NoName banker may be. For there is an old saying circulating in the boardrooms of Corporate America and among D&O insurers everywhere:

No Director ever got sued for picking Goldman Sachs to execute his shitty, half-baked M&A deal.

I imagine the firm of Missy, Chase & Lapine lost to Seinfeld LLC for the very same reason.

© 2007 The Epicurean Dealmaker. All rights reserved.

Oxymoron

I have been much too busy, Dear Readers, raping and pillaging making hay while the sun shines these past weeks to entertain you with any pearls of wisdom, and for that I do apologize. There seems to be a mad sort of Morris Dance taking place in the capital and M&A markets right now, with the storms and alarums of August faded to but a distant memory in the minds of many market participants. Accordingly, my services as mercenary consigliere have been in high demand. I fear it will all end in tears, but as I am not paid ridiculous amounts of money to salt away Kleenex for the bleary morning after, I must soldier on and do my duty by helping various consenting adults do the nasty.

One recent bit of news has tempted me to stick my head up from my spider hole, however, if only briefly. I write, of course, of the recent management reshuffles at Citigroup. I will not rehash the endless commentary, both professional and amateur, that has been lavished on this little soap opera, but I will offer a couple of remarks, since I do have some passing acquaintance with a few of the players.

I do not know Vikram Pandit, who seems to have been anointed Chuck Prince's chief lieutenant and bodyguard, so I cannot comment on his New York Times personality profile:

A calm, dispassionate man with a professorial bent and a Ph.D. in finance from Columbia, Mr. Pandit’s selfless disposition has caused him to stand out from his banking peers.

His administrative and technical skills, plus an ability to make himself indispensable to bosses like John J. Mack and Phillip J. Purcell, fueled his career at Morgan Stanley, where he became president.

But he is also a retiring man, not prone to ruthless acts, with a natural hesitancy about taking risks, both professional and personal.

However, I will note that The Wall Street Journal's stock dot portrait of Mr. Pandit, which seems to portray him as somewhat of a genial old elf, sets my PLF¹ radar buzzing. I do not know of too many selfless, retiring, and non-ruthless individuals who have risen much beyond the level of First Year Analyst at any major investment bank, much less to President of the poisonous nest of vipers that was Morgan Stanley under Phillip Purcell. I suspect he has many hidden qualities as yet undiscovered by our redoubtable financial press.

He will certainly need them, given that his direct reports include the formidable Michael Klein, whom the Times describes as "a smooth investment banker ... who has shown a keen instinct for survival." Uh, yeah, that's one way to describe him. Others might point to the fact that Mr. Klein pins the Scary Investment Banker-o-Meter at "Run. Run away now," or that he is the perfect person to have with you at a knife fight on the Manila waterfront, as long as you keep him in front of you. His co-head, Equities' Jim Forese, should prove a genial Stepin Fetchit to Klein's Simon Legree, but he may yet have a trick or two of his own up his sleeve which could come around to haunt either Pandit, Klein, or both.

Meanwhile, exeunt stage right, on a cloud of fragrant encomia, the Three Musketeers of Fixed Income, Tom Maheras, Randy Barker, and Geoff Coley. Barker has taken the bullet for spearheading Citi's promiscuous lending spree, Maheras has swanned off the trading floor after refusing to report to Pandit, and Coley has been "reassigned," no doubt whither all disgraced ex-Salomon Brothers bond traders go to nurse their pride and plot revenge, equities in Dallas.

Little Tommy M. is now free to fritter away his time handicapping his chances of elevation to the pantheon of saints of Our Mother Church of Mammon while he considers the flood of employment and hedge fund offers no doubt winging their way to his inbox. Apparently, he received the same sort of standing ovation on the Citi trading floor when he left that Jamie Dimon did after Sandy Weill pulled the rug out from under him. Traders. Always the cheap and obvious gesture, then back to work until the next firm gives them a better offer. Sure, Maheras was a personable guy, and he inspired a lot of loyalty in his troops, but that and three ninety-five will buy you a latte at Starbucks. Heinrich Himmler himself could have pulled the loaves and fishes trick if he had been in charge of a universal bank's fixed income division these past few years, so making money for Citi is not proof that Maheras is God, or even "a very good banker."

* * *

Notwithstanding its justified reputation as an oxymoron worthy of inclusion with classics such as jumbo shrimp and military intelligence, there is in fact such a thing as investment banking management. (For one thing, it is a never-ending source of revenues for management consulting firms like McKinsey, in part because the problems are never fixed and arguably unfixable.) The higher up the management hierarchy a banker travels, the further removed he or she becomes from the actual making of money, and the more important it becomes for him or her to stake claims to money. This is known colloquially as politics.

Normally, or when times are good and the money is flowing, the political situation among top management of an investment bank resembles a logjam, or the Western Front: lots of strains and pressures under the surface, but very little movement on the surface. When crisis hits, however, the logjam breaks, and the long knives and artillery come out in earnest. Those are the times senior IB managers live for, since it is open season on your friends and enemies, time to settle scores and pay back prior injuries, and often your one big chance to leap to the top of the heap over the dead and falling bodies of your foes and allies. At times like these, the backbiting, backstabbing, and betrayals in the executive suite would make Machiavelli blush.

What I find interesting in the Citigroup process is that Chuck Prince apparently tried to formalize this fingerpointing exercise into a formal report on sources of the bank's problems. Usually, top management power struggles take place in the shadows, supported by whisper campaigns and off-the-record remarks, which can preserve the illusion of professionalism and statesmanship amidst the carnage. Here, causes and blame must have been assigned—and attributed—on paper, which as we all know is a very dangerous thing nowadays. Is it too much of a stretch to believe that Prince did this in part to cover his own ass, and to have a documented record of the nasty little maneuverings of his subordinates that he could use against them in the future? I think not.

So, Dear Readers, fret not. The winners and losers in this little brouhaha all look pretty much the same, notwithstanding what their publicists tell us, and the losers will no doubt land on their well-shod feet quite nicely. Besides, no-one I know gets really upset when the sharks start attacking each other in a feeding frenzy.

What I will say is that I feel for the poor junior slobs who took on the task of interviewing senior management and compiling this report. Let's hope for their sake that it was a well-written report, since their future chances of getting a job on Wall Street are probably limited to reporting for the New York Times.

¹ Poisonous Little Fuck. As opposed to, say, other hallowed senior IB management types like the GSB (Genial Son of a Bitch) or the HTB (Heartless Technocratic Bastard). Some particularly skillful inside players are adept at donning and doffing many such disguises at will, depending on the dictates of circumstance.
© 2007 The Epicurean Dealmaker. All rights reserved.

Aw, Shucks

Apparently TED has been anointed a charter member of the "Econoblogosphere." Thanks, Felix.

It is certainly flattering to be included in such eminent company, and I suppose I should not look a gift horse in the mouth, but I worry a little for some of Felix's readers who come to this site with no preparation other than his brief characterization. After all, he lumps your Tetchy Correspondent in with "The Finance Geeks," whom he describes as "translating Wall Street gobbledegook into English." Faithful Readers of this site know rather that my aim and design is to translate Wall Street gobbledegook into English gobbledegook. Besides, I think it would be much more fun to be sitting in the back row throwing spitballs with "The Snickerers." If only they could learn how to spell.

Oh, well. Do not despair, Dear Readers: the newbies will soon leave, bedazzled and befuddled, and we will have our limited-distribution blogo-nicheo-microsphere back to ourselves. Just remember our watchwords: turbid and orotund. Pass them on.

© 2007 The Epicurean Dealmaker. All rights reserved.

Confidence Game

Is it just me, or is the sound of whistling getting louder in here?

Helen Thomas from FT Alphaville told us earlier this week that the market mavens at UBS have declared the imminent health of the mergers and acquisitions market. Apparently, these Pollyannas took a gander at previous disruptions to the global financial markets—like the US savings and loan crisis and the implosion of Long-Term Capital Management—and have concluded there is no reason to speculate that this time things will be other than just peachy.

Sure, the sudden freeze in the credit markets has put the kibosh on free money masquerading as "covenant lite" debt, and the maximum feasible deal size for prospective LBOs has plunged over 80% to seven billion smacke(u)roos, but all else is for the best in this best of all possible worlds, according to our lederhosen-wearing pals. To what is their optimism due? Well, to the faithful corporate M&A buyer, of course, who they are sure is even now sprinting up to take the baton on the next leg of the global M&A steeplechase.

Now of course it is true that corporate buyers continue to account for the substantial majority of the M&A deal volume, as they have done from time immemorial. There was a time, not too long ago, when private equity accounted for less than 10% of the annual deal volume in the market, and it has only been over the past several years that it has peeked noticeably into double digits. A casual reader of the financial press might be forgiven for believing—based upon the column inches devoted to chronicling in nauseating detail the deal making, compensation, and social peccadillos of various and sundry PE plutocrats—that corporations have been taking a very long nap in the M&A coma ward over the past few years, but it is not true.

That being said, long experience and personal knowledge of many corporate dealmakers has left me with little reason to suppose that hordes of the same are chomping at the bit to preserve the frenzied dealmaking pace witnessed earlier this year. A little sober reflection on your part, Dear Reader, will surely lead you to the same conclusion. For what CEO, CFO, or even corporate development officer would feel compelled to leap into action and start spewing above-market bids left and right simply because a few drunken sailors (PE firms, natch) have left the field?

While it transpired, the credit market love fest which turned every second year Associate at Carlyle and KKR into Genghis Khan Jr. had little effect on the dealmaking proclivities of Corporate America or Europe, other than making them shake their wooly heads in wonder at the insane multiples said Associates and their betters committed to pay the delighted sellers. Now that the ersatz financial wunderkinder have toddled off to the nursery to play with smaller companies—or with none at all—your average workaday CEO is trying to calculate a decent interval of mourning before he or she launches a substantially lower offer for the juicy little acquisition target he or she has been eyeing these many moons.

But here we come to the crux of the matter. In order for M&A nooky to take place, there must be an agreement between consenting adults, and most of the potential sellers I am aware of are claiming to suffer from nasty headaches. Pourquoi? Well, wouldn't you have second thoughts, Dear Reader, about giving up the good thing if your paramour suddenly changed the dinner venue for your date from Le Cirque to Applebee's? Sure you would. The dramatic recent compression of valuation multiples offered has had a distinct chilling effect on the ardor of most potential sellers, for the simple fact that most potential sellers do not have to sell. For the average CEO, it is much better to remain in the C-suite, collecting juicy option reloads and undemanding performance bonuses than to settle for a golden parachute calculated on a less than stratospheric takeout multiple.

There is a similar and well documented "seller strike" syndrome in the residential housing market, where sellers refuse to acknowledge a market-wide reduction in the price level and insist on listing their property at the value implied by what their neighbor Bob realized three months ago. The effect in the housing and the M&A market is the same: the property languishes on the market indefinitely, until the seller pulls the listing in disgust or capitulates to offer it at the new, lower market price.

I would that it were not so, but we investment bankers as a class do little to dissuade potential sellers from behaving in this fashion. In order to win the assignment to sell a business, an investment banker must usually be exceedingly optimistic about both the potential value achievable in a sale and the speed with which the potential buyers can line the seller's pockets with moolah. (While most sellers give the pitching i-bankers some rigamarole about the importance of certain "soft" factors, like preserving jobs and such, there are only three things a potential seller is really concerned about in awarding a sale mandate: value, value, and value.)

After he has won the assignment, the investment banker's job largely consists of (1) persuading potential buyers against all contrary evidence that this property above all others is truly worth a king's ransom and (2) reassuring the seller that an unhinged buyer is mere days away from lobbing in an offer priced at the highest multiple ever recorded in M&A history. Once the final bids are in—usually falling pathetically short of the target value the i-banker told his client was in the bag—said intermediary must switch rapidly to spin and close mode, in which he simultaneously staves off both buyer's and seller's remorse until the final check changes hands in the closing ceremony. In short, a successful sell-side investment banker must have the patience of Job, the constitution of an ox, the self-delusion of a real estate broker, and the cast-iron cheer of a Frank Capra movie.

It is hard to fake such a persona, and unwise to turn it off in public, which is why we are now getting treated with articles like the one published today in the FT. After describing the ineluctable evidence of a dramatic slowdown in deal activity, the reporters regale us with a veritable parade of M&A honchos who tell anyone who will listen that the good times are coming back, in spades. As an industry insider, I tell you in confidence that they do this in part to preserve as much of the M&A department's bonus pool as possible against the inevitable cuts coming down from the executive suites of Wall Street. But they also do it because they realize that—unlike private equity, which depends on the ready availability of attractive debt finance to make their buyouts work—for corporate buyers confidence is the lifeblood and driver of strategic M&A activity. No confidence, no deals. No deals, no Testarossa.

So now you understand. The M&A market is subject to the same relentless march of progress as the rest of society.

In Ancient Egypt, there was only one Cleopatra. Nowadays, Wall Street is full of Queens o' de Nile.

© 2007 The Epicurean Dealmaker. All rights reserved.

Moral Fiber

I saw a really promising article about hedge fund managers and real estate in The New York Times yesterday, and I thought, "Goody! Now we can see how the hedgies are adjusting to the new market realities."

I settled in with my coffee and roll for a nice helping of Sturm und Drang, a great wailing and gnashing of teeth, and a clash of Titans as the Irresistible Force of Hedge Fund Ego smashed against the Immovable Object of New York Real Estate. Instead, I got Woody Allen and Alan Alda bickering over the script of The Four Seasons.

So the pressure begins to build, and eventually, said Andy Kessler, a former hedge fund manager, “you stop spending.” Why? Fear, mostly.

“You worry about redemptions,” Mr. Kessler said, “you worry about margin calls, and you worry about working for free. Down 7 percent may be no big deal, but when your investors say, ‘Get me out,’ you have to sell everything.”

After years of eye-popping returns, sudden losses can be wrenching. Aware of the psychological impact that high-pressure trading can have, several funds have retained psychologists to counsel stressed managers.

“It has been a very challenging period for these people,” said Jonathan F. Katz, a psychologist who works with large hedge funds. “I have seen people shaken, their confidence eroded. They are upset and depressed.”

"Upset and depressed?" You're effin' kidding me, right?

Unfortunately not. The article continues:

Such distress can result in what some call a social contagion, as hedge fund executives let their woes at work affect their personal lives. Investors have said that their golf scores soar, that they lose their appetites and wake up in the middle of the night in a cold sweat.

To be sure, many investors are cool headed enough to not let inevitable setbacks derail them. But others find it hard to keep their sense of self insulated from losses.

“Some people are debilitated by it,” said Ari Kiev, a psychiatrist who works principally for SAC Capital, the hedge fund founded by Steven A. Cohen. “You can’t sleep; you can’t eat; you have catastrophic thoughts about losing your house.”

A prominent hedge fund investor, who like the other executives who discussed their anxieties asked not to be identified, spoke of a crisis of confidence. “It’s an intellectual destabilization,” he said. “All of a sudden, your funds are down 5 percent and the S.& P. is down 1 percent. Once you were master of the universe, but the market makes you humble.”

What?! These assholes suffer a 4% relative underperformance over one month and all of a sudden they're feeling humbled? The next thing you know we'll be reading about how they're suffering from hives and erectile dysfunction. Sheesh.

* * *

I don't know about you, Dear Readers, but I like to have my heroes and villains a little larger than life, with hair on their chest and balls a size or two too large for their britches. (You too, girls.) I don't want to read about some pussy who can't even maintain the conviction of his own Napoleon complex when he suffers a couple of slings and arrows. Where's the ranting and raving, the breaking of crockery? Instead, we get a gelded Tony Soprano with his thumb up his ass.

It occurred to me as I read on that this is what has bothered me most about all the column inches offered up by hedge fund apologists in the media these past years. Instead of J.P. Morgan thrashing a photographer with the temerity to photograph his ugly great schnozz, we get a pudgy, fleece-wearing Steve Cohen whinging about how all the money-making opportunities have disappeared and giving photo ops at his local Greenwich sandwich stand. Instead of Andrew Carnegie and Henry Frick crushing a steelworker's strike with hired thugs, we get Daniel Loeb picking lopsided fights with deer-in-the-headlights corporate managers who can't get out of their own way, much less his. Butterballs instead of titans; playground bullies in place of forces of nature. For cripes sake, I'd take even Dennis Kozlowski over James Simons any day. Simons may be smarter than Stephen Hawking and Albert Einstein combined, but the man's personality makes soggy melba toast look downright scintillating.

Where's the brio? Where's the chutzpah? Where's the moxie?

Who knows? There may be some interesting personalities out there in hedge fund land, but I can't for the life of me remember reading about them. Ken and Anne Griffin slobbering over each other's "passion" in Portfolio magazine? Puh-leeze. These people need a serious personality makeover.

Get some grace. Get some style. Get some class. It's not like you can't afford it.

If you need an example of how not to behave, just reread the NYT article. Word to the wise: don't send your bejewelled crack whore girlfriend to check out a $48 million Southampton estate so she can ask whether JetSkis are allowed on Lake Agawam. Putz. And if you're really suffering from severe depression and performance anxiety, don't take a full page confessional ad out in the Times. Go buy yourself a really nice English shotgun and go out in style, à la Ernest Hemingway.

This one should do nicely. It's efficient, and your heirs will appreciate that you left them a really fine piece of hardware.

You do want to leave a legacy, don't you?

© 2007 The Epicurean Dealmaker. All rights reserved.