Molon Labe

Ω ξειν’, αγγέλλειν Λακεδαιμονίοις ότι τηιδε
κείμεθα, τοίς κείνων ρήμασι πειθόμενοι.

Go tell the Spartans, stranger passing by,
that here, obedient to their laws, we lie.

— Simonides of Ceos

For some reason, Dear Readers, I have been spending a significant portion of my leisure time recently reading about King Leonidas, his 300 Spartans, and their suicidal stand against Xerxes' Persian hordes at Thermopylae in 480 BC.

I trace my current interest to the 2006 release of the sword-and-sandals epic, 300, which I personally found to be a more enjoyable piece of comic book art than the original Frank Miller creation itself (Gerard Butler's clotted Scottish accent notwithstanding). My interest has unquestionably deepened as I traversed the slippery slope of increasing realism, historical accuracy, and scholarship from Steven Pressfield's fictional Gates of Fire to Paul Cartledge's Thermopylae: The Battle That Changed the World.

Psychologically, the reasons for my current fascination with the topic are less clear to me. Perhaps it has something to do with the story of a small band of elite, hand-picked warriors battling hopelessly against overwhelming odds to preserve their freedom and way of life. One need not be too grandiose to draw parallels with the predicament of a shrinking band of highly trained investment bankers struggling desperately against a relentlessly rising tide of inactivity and an actively hostile society to preserve their right to three Lamborghinis in the driveway of a Hamptons potato mansion. Pathologically self-absorbed and massively egotistical, yes, but not grandiose.

Human psychology is such that we all like to imagine ourselves at the center of a dramatically coherent and meaningful story, whether we work in a Dilbert-style cubicle zoo or commute to weekly Executive Committee meetings on the company G550. And, pace the current wisdom concerning the evolutionary origins of investment bankers, the best scientific evidence available seems to indicate that most of them are indeed human. Investment bankers do have the same hopes and dreams as the rest of society. It just so happens that our dreams contain more champagne, caviar, and expensive Russian hookers than yours do.

Besides, the closer you look into this Thermopylae business, the more eerily exact and disturbing the parallels become. The battle itself is believed to have happened in the dog days of August, traditionally the nadir of capital markets and M&A activity and hence the scariest period on the investment banking calendar. This August in particular has been so dead that the typical jumpy, underemployed i-banker can be forgiven for seeing crouching Medean warriors—or HR associates armed with pink slips—lurking behind every Starbucks counter and Southampton hedgerow.

And notwithstanding the common man's perception of the Spartans as the Western World's first freedom fighters, marching bravely off to certain death for God, for Country, and for Yale, Spartan society was a deeply weird and rather repellent concoction, at least by current standards. The justifiably intimidating standing army of Sparta—which was composed of every adult Spartan male, for whom the role of full-time soldier was the only profession allowed—was in fact established and maintained primarily to control a vast underclass of enslaved Greeks known as Helots, upon whom the full-fledged Spartan citizens, male and female, relied to do all their labor.

Throw in officially sanctioned pederasty, fearsome women who expected their husbands to come home draped in glory or in a body bag, and the educational system of the agoge, which taught young boys to steal, lie, and do whatever it took to come out on top, and Spartan society begins to look disturbingly similar to investment banking culture. (I'll let you figure out where the pederasty comes in.) By many accounts, the Spartans were an arrogant, anti-intellectual, and unpleasant bunch, and their festival days must have looked a lot like the Hampton Classic horse show, minus the Ralph Lauren togs.

But the bugger(er)s were principled; you have to give them that. And, whether you believe it or not, most investment bankers are too. We just don't adhere to the principles most of the rest of society holds dear (or at least the principles the political correctness police loudly tells society it should hold dear). Cigar smoking, misogyny, excessively foul language, and a scornful disrespect for the meek and downtrodden are central to the Darwinian world view of your typical investment banker, and dearly held beliefs, too. On the plus side of the ledger, investment bankers do tend to hew to a punishing work ethic (at least the junior ones, before they learn the tricks of the trade from slacker MDs like me), and they clean up real nice. Some of them even—in a moment of weakness, I grant you—donate to charity. Who knew?

And, like the Spartans at the Hot Gates, the true threat to investment bankers' way of life does not really come from collapsing markets, vengeful regulators, or rioting shareholders: it comes via treachery from within. If any force has the capability to destroy all that is unique and special in investment banking culture, it is the bog-standard Human Resources department of your typical investment bank. Now—when banks are groaning under the pressure of plunging revenues and dousing smoking craters where their balance sheets used to be—is when the craven HR weenies crawl out from under their rocks and start swaggering around the halls waving sheaves of termination notices in their hands. They resort to each and every trick in their book to cull the bloated ranks of former Masters of the Universe, including enforcing the banks' internal PC behavior codes which normally remain dormant and unenforced when said MoUs are raking in the legal tender.

Therefore, we witness senseless little tragedies like the recent termination of fellow bloggist and investment banker 1-2 for the heinous crime of blogging while employed at some nameless über-bank. 1-2 seems to be taking it well, but his fate definitely casts a pall over the rest of us who undertake the occasional character assassination or fierce excoriation of some hapless boob in the industry from behind the comfy firewall of anonymity.

It is at times like these, with the PC Empire bearing down on the narrow defile where Yours Truly and a select few bloggers man the Phocian Gate in defense of truth, justice, and the Investment Banking Way, that my mind turns toward King Leonidas' laconic response to Xerxes' demand that the Spartans give up their weapons:

"Come and take them."

That—plus a few choice Anglo-Saxon epithets of rather more earthy persuasion—is what I mutter to myself whenever I sense the threatened approach of the nannies-that-be to confiscate the laptop, smoking jacket, and case of 20-year old Scotch which comprise the bulk of my blogging tools. They haven't caught me yet, but it may just be a matter of time.

Well, gotta go. Sounds like someone's banging on my office door with a battering ram, reciting the text of the Americans with Disabilities Act over a bullhorn. I guess they're coming for me.

I think I'll sit down, smoke a cigar, and comb my hair.

© 2007 The Epicurean Dealmaker. All rights reserved.

Immigration Forecast

From prefatory remarks to a speech¹ given by Larry Summers in January 2005:

It is after all not the case that the role of women in science is the only example of a group that is significantly underrepresented in an important activity and whose underrepresentation contributes to a shortage of role models for others who are considering being in that group. To take a set of diverse examples, the data will, I am confident, reveal that Catholics are substantially underrepresented in investment banking, which is an enormously high-paying profession in our society; that white men are very substantially underrepresented in the National Basketball Association; and that Jews are very substantially underrepresented in farming and in agriculture. These are all phenomena in which one observes underrepresentation, and I think it's important to try to think systematically and clinically about the reasons for underrepresentation.

Given the vastly diverging fortunes of Wall Street—which is collectively scrounging high and low for a second nickel to rub against the solitary exemplar remaining in its pocket—and the agricultural commodity markets, I posit that we may see a substantial shift in the employment data Mr. Summers identifies going forward.

Investment banking and many other sectors of the financial markets have always been characterized by harsh, inhuman working conditions: long hours, abusive supervisors, physically punishing labor,² and the general social opprobrium attached to being a financial parasite. Now that those conditions are no longer ameliorated by sackfuls of greasy simoleons, the industry seems likely to attract that segment of our population which usually gravitates toward low-paying, low-status, unattractive jobs: namely, illegal immigrants.

As we all know, a very large portion of the illegal immigrants in this country come from Central and South America, where Catholicism holds general sway over the religious beliefs and practices of the laity. Therefore, in a reversal of the trend identified by Professor Summers, I would expect a substantial increase over the intermediate term in the number of Catholics employed on Wall Street. (As an aside, one might wonder whether this will have any improving effect on the attitudes and practices of investment banking in general, or whether it will simply signify the beginning of a widespread corruption of the morals and integrity of a number of previously devout and upstanding citizens. But I digress.)

On the other hand, the recent dramatic rise in the prices of many agricultural foodstuffs has created an impressive economic boom in the formerly moribund and impecunious farm sector. Nowadays, it is difficult to determine whether your typical farmer is harvesting more bushels of corn or of greenbacks. One might even be tempted to update that old chestnut from the 1980s by adding the farmer to the pigeon as the only two creatures who can still make a deposit on a BMW.

I can only hope that farmers are taking full advantage of their current good fortune to reverse generations of socioeconomic warfare in the Grain Belt. They should do this, of course, by repossessing local bank branches in foreclosure, evicting bankers and their families from their homes, and waving merrily as the latter motor dejectedly off to the dust bowls of Orange County, South Florida, and Las Vegas.

Of course, conspiracy aficionados and anti-semitic wackos everywhere know that where there's money, there is or soon will be a large and growing kosher section in the local Piggly Wiggly supermarket and a material improvement in the taste and quality of bagels on offer at the local bakery. Given the impressive creation of remaindered employees on Wall Street and other financial hot spots—and the relatively high percentage of same who profess religious or cultural allegiance to the Tribe—I would therefore expect a rather wholesale migration westward of Jewish ex-financiers to the Elysian fields of Nebraska, Kansas, and Iowa. One can only imagine the culinary and cultural cross-fertilization which will result; led, perhaps, by the widespread adoption of gefilte fish as a cracker spread in preference to Cheez Whiz.

All that being said, however, the performance of the Redeem Team in Beijing gives me little expectation for a reversal in the second trend noted by Professor Summers above.

I suppose two outta three ain't bad.

¹ Yes, that speech. Surprisingly balanced, even-handed, and unstupid when read in the original, actually, rather than through the lens of an over-facile and unsympathetic media. Worth a gander over a long summer weekend, if you are so inclined.
² At least in terms of the excess alcohol intake, soaring cholesterol levels, and general inattention to physical health experienced as the usual side effects to such employment.

© 2008 The Epicurean Dealmaker. All rights reserved.

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.