A Terrible Beauty Is Born

I have met them at close of day
Coming with vivid faces
From counter or desk among grey
Eighteenth-century houses.
I have passed with a nod of the head
Or polite meaningless words,
Or have lingered awhile and said
Polite meaningless words,
And thought before I had done
Of a mocking tale or a gibe
To please a companion
Around the fire at the club,
Being certain that they and I
But lived where motley is worn:
All changed, changed utterly:
A terrible beauty is born.

— From W.B. Yeats, "Easter, 1916"

The current situation in Egypt is, as they say, fluid. There is the remote possibility that the Egyptian people will achieve their apparent ends relatively peacefully, without further loss of life. But while the power of authority arrayed against them—the police, internal security apparatus, and perhaps the army—relies for its ultimate effectiveness upon the credible threat of violence, the power of protest and resistance relies in the last instance upon a people's willingness to die for their cause.

This is what it means to be courageous: to place yourself in the path of irresistible force, certain of your own destruction, for a cause higher than yourself and your petty concerns. Flesh arrayed against bullets, bodies against tanks. Lives willingly offered for beliefs and aspirations. Without sacrifice or the threat of sacrifice, there is no courage.

And bullets and tanks are so much more powerful than flesh and bodies, are they not? But here's the trick: once the credible threat of violence by a government against its own people tips over into the actual use of force, the balance shifts. The government forfeits all legitimacy, and the people assume the mantle of moral and political authority over their own destinies. By sacrificing their blood and their lives, the people themselves can seize power from the men with bullets and machines. For there are always more people than there are bullets or machines.

Ammunition runs out. Machines break down. But ideas, and ideals, are inexhaustible.

Let us hope the Egyptian people feel the power in their own hands, and use it.

Creedy: "Die! Die! Why won't you die?... Why won't you die?"
V: "Beneath this mask there is more than flesh. Beneath this mask there is an idea, Mr. Creedy, and ideas are bulletproof."

— V for Vendetta

© 2011 The Epicurean Dealmaker. All rights reserved.

Standup Physics

Everybody needs a hobby, Dear Readers. Everybody. Even I have to take respite from high-level global financial parasitism on occasion, in order to maintain my keenly honed intellect and razor-sharp sarcasm.

One of my hobbies is collecting books on the history and philosophy of science, especially physics. I have developed quite an impressive library, which glowers ominously from my bookshelves like a mathematical reproach to my ignorance and wooly-headedness. For make no mistake, My Skeptical Friends, I have read very few of these weighty tomes and understood even fewer. Nevertheless, I like the way they look, the graceful, incomprehensible equations which crowd their dense pages, and the mistaken impression they create among visitors to my home, who naturally believe I have read and understood them all. They also tend to set conversational expectations somewhat higher than the latest shenanigans on The Jersey Shore, which obviates the necessity of me punching my houseguests in the nose should they sink so low.

Anyway, I have absorbed enough of the issues and concepts of physics that when @__phlox tweeted a clever joke earlier today on Twitter, I felt both compelled and inspired to reply in kind. Herewith, for your entertainment and edification, is what followed.

The action:

@__phlox: a neutron walks into a bar, orders a drink, and asks how much. the bartender says, "for you? no charge."

My unequal and apposite¹ reaction, with explanatory links:

A Higgs Boson walks into a bar. The bartender says, "Hey! Where've you been? Everybody's been looking for you."

A neutrino walks into a bar and just keeps going.

A proton says to another proton, "You repel me!" "Are you sure?," asks the other. "I'm positive."

An electron says to a neutrino, "I really like you, but I just can't get a reaction out of you." She replies, "Aww, don't be so negative."

A photon asks another photon, "So, which slit are you going through?" The other replies, "Dunno. The experimenter hasn't decided."

An electron on vacation asks a photon for a date, but she replies, "I'd love to, but I'm already entangled with someone back home."

A mother neutrino calls upstairs to her son, "Junior, where exactly are you?" He replies, "Sorry, Mom, I'm not completely certain."

And the capper:

"Thaaaaat's all, folks!," exclaimed the particle, as he waved goodbye.

* * *

So, never let me hear you say that TED cannot sink to the lowest level of cheap, nerdy humor when he wants to.

And let that be a lesson to you, too. Mess with me, and I just might trot out my Émile Durkheim jokes. Then you'd be sorry.


¹ Sic. You didn't really think that was a mistake, did you? Really? I'm disappointed in you.

© 2011 The Epicurean Dealmaker. All rights reserved.

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.

A Good Start

Q: What do you call 10,000 lawyers and 10,000 investment bankers chained together at the bottom of the sea?
A: A good start.

— (Apologies to) Anonymous

Not content with instigating a racial and cultural bar brawl over the only proper way to raise children in the United States, Rupert Murdoch's Wall Street Journal now appears determined to create news any way it can. In the most recent instance, the Journal's editors seem to have taken a look around and asked themselves, "Which are the two most-hated groups in America, and how can we pick a fight between them?" Given that Republicans and Democrats seem to being doing a fine job bashing in each other's heads without the media's help (and an even better job with it), the WSJ appears to have settled on everyone's favorite serial kitten killers: lawyers and investment bankers.

Accordingly, they have lined up Mean Street's Evan Newmark, former Goldman Sachs banker [hiss] and current gadfly about town, and former M&A deal lawyer Ron Barusch to do the honors. Sadly, it is a bit of an unequal contest, since Mr. Newmark, whom this blog has gently mocked in the past, delivers an effort which is a distinct weight class or two lighter than that of Mr. Barusch. Evan's piece seems to boil down to asking why anyone would want to work on Wall Street without making as much money and as much fame as possible. Suffice it to say only a banker—and a not particularly reflective one at that—would find that a compelling argument or even a very interesting question.

On the other hand, Mr. Barusch turns in a clever and funny piece which mostly takes investment bankers to task for character and behavior quirks that he and his fellow deal lawyers find irritating. His roast is recognizable to anyone who has worked with or across the table from an investment banker on a deal. Even I, paragon of well-behaved reasonableness that I am, recognize myself in the counselor's portrait.

Were I a less disputatious man, I might let Mr. Barusch's good-natured ribbing lie. But then I would not be true to myself. And, if you are honest with yourselves, Dear Readers, you would be disappointed if I did. Am I right?

Well then.

* * *

Mr. Barusch titles his piece "6 Ways Bankers Drive Lawyers Nuts." He enumerates these irritations and offers explanatory commentary on each. I thought it would be amusing to address his criticisms directly, while responding to his points with countercriticisms which investment bankers commonly level against lawyers.

1. Bankers are wimps. Mr. Barusch complains that investment bankers never say anything substantive about the deals they work on on the record. This is absolutely true, whether the remarks appear in public filings or on the witness stand. Read simply from their public statements, investment bankers are mealy-mouthed purveyors of empty, meaningless, convoluted verbiage, which conveys nothing of the true drama of real dealmaking or the actual force and substance of any recommendations they make to their clients in the course of a transaction.

Counterpoint: Lawyers are castrating Bowdlerizers. Mr. Barusch alludes to the source of this curious irritant himself: lawyers themselves prevent bankers from saying anything. Bankers' public disclosure documents and courtroom testimony read like Vogon VCR manuals for the simple reason that all substance, spirit, and fact has been thoroughly and religiously bleached out of them prior to their release by an army of lawyers: bankers' in-house lawyers, client counsel, and even attorneys on the other side of the deal. No-one involved in an M&A deal has any incentive to recount its ups and downs and dirty details, nor what was said, whispered, or screamed in Boardroom deliberations. It's just too messy and confusing. Give me a partial transcript of one negotiation or an internal discussion of a merger or acquisition and even I, a lowly legal virgin, could construct the plaintiff's suit to end all plaintiff's suits.

Furthermore, it is not investment bankers' primary task to be opining on anything in public. Our job is to help a client find and execute a transaction. If a deal is done, it is the client's deal, not the bankers'. (Remember, bankers don't live with a deal: the client does.) The only reason bankers do opine is because Boards of Directors demand such legal bubblewrap to cover their asses in the case of subsequent shareholder or third party lawsuits. We do this reluctantly, with extensive provisos, carve-outs, and weasel words for the very reason that we want to attract as little as possible of the litigious ire and consequences directed at a deal and its principals—the companies and investors involved—to ourselves. Banks do offer standalone fairness opinions when they can't get a piece of more lucrative advisory assignments, because they usually get paid some fee to do so and also league table credit, but it is not a preferred business line for us.

Conclusion: Fight fire with fire, Mr. Barusch, and lawyers with lawyers. If the world were not populated with flesh-eating securities litigators chomping at the bit to prove malfeasance because a banker was caught on record alleging the sun is hot, we bankers wouldn't have to wrap our every public utterance in 50 pounds of cotton wool. Physician, heal thyself.

2. Never get between a banker and his fee. Are you serious? This is a gripe? You might as well complain that sharks like to eat things.

Counterpoint: Never come between a lawyer and a billable hour. I mean, if we're gonna take cheap shots, let's take cheap shots. Oh, and Mr. Oh-So-Valued Corporate Client, don't even dream of not paying your devoted counsel's bill timely and in full, unless you would like to see your former consigliere unleash the slavering hounds he keeps in the back room for just such an eventuality.

3. Bankers are quick to volunteer unreasonable schedules—for others. And? Where do you think the time pressure comes from, buster? It comes from deal dynamics, competitors and regulators breathing down our collective necks, and from the client CEO's looming, uncancelable plans to take the mistress skiing in Gstaad. Dealmaking is client service, buddy, and bankers are more often the messenger than the instigator.

Counterpoint: Unreasonable schedules make for more billable hours. See #2 above. We're just trying to help you send Junior to Harvard Medical School, pal. Cut us some slack.

4. "We are working on the model." I'm not quite sure what Mr. Barusch finds irritating about this, actually. Helping frame the valuation of the company is, at the end of the day, one of the primary ways an investment banker helps his or her client come to a reasoned conclusion about whether or not to accept or pursue a particular deal. "Working on the model" is also an integral part of the way bankers do due diligence: we come to understand our client's business and financial prospects by detailed investigation, testing, and discussion of each financial line item with company management. This bears directly on the determination of value.

We transfer the company's figures into our own models because ours are typically more powerful and flexible in analyzing different business and capital structure scenarios. And, yes, investment bankers often encourage company management to revise and clarify their own projections because we challenge them in ways potential buyers do. Many is the company which has modified its financial projections during the course of a deal based upon a more realistic and market-tested view of their assumptions. But at the end of the day, the projections belong to the company. If the client does not sign off on the projections, we do not use them. We can't, and we won't. Financial projections are the responsibility of company management, and no-one else. Whose model or format they happen to be in is beside the point. Finally, unlike the activities of certain other advisers in a deal process [ahem] (see below), the model is almost never the bottleneck in terms of timing.

Counterpoint: You want delays? I'll give you delays. Meanwhile, 25,000 pages of constantly wordsmithed, constantly changing, constantly argued-over supporting legal documents later, the clients and the bankers are still sleeping on couches in the law office waiting room while counsel for each side kickbox over semicolons. And the press release announcing the deal is due to hit the tape in 20 minutes. Delays? Hah!

5. Where did they all come from? I have seen this phenomenon with bankers, too. Usually it comes from large firms, where the only person on the banking team who actually knows what's going on is the second year Financial Analyst. The senior client Managing Director, the senior M&A Managing Director, and their respective Vice Presidents and Associates are just there to schmooze the client and get credit. All I can say is, work with better firms and smarter MDs who actually know what they're doing. Like me.

Counterpoint: Where are all the lawyers who showed up on the billable hours summary? Cause you sure won't see them in the room. Or anywhere else during the deal. Hmmm...

6. Bankers are eternal optimists. Uh, duh. That is the most critical component of our job. If we weren't, no deals would ever get done. As Mr. Barusch points out, bankers are only paid if the deal closes, so we have complete incentive to make it happen. That's why clients hire us. Besides, someone has to counteract the lawyers (see below).

Counterpoint: Lawyers are eternal pessimists. Which is their job. Lawyers are there to protect their clients, to say no, to anticipate and plan for the worst. They are paid by the hour, which means they have no disincentive to cratering a deal and, interestingly, every incentive to drag out negotiations as long as possible. Unfortunately, if they got their way all the time, no deals would ever get done. Mergers and acquisitions are risky business: financially, strategically, and legally. All business is. Lawyers are professionally and genetically disposed to hate risk. So eventually, if a client really wants to take a risk and do a deal, he or she has to overrule their attorney. I've seen this time and time again, when company counsel goes along with something against his or her better judgment because the client insists. It's how deals get done.

Conclusion: Every deal needs a Yin and a Yang, a good cop and a bad cop, a saint and a fool. Lawyers and bankers are both necessary to a successful process, but our working methods, incentives, and personal predilections all conspire to put us in tension, if not opposition, all the time. This is a good thing.

For without this Hegelian dialectic, who would feed the fishes?


© 2011 The Epicurean Dealmaker. All rights reserved.

When You Are Old

When you are old and grey and full of sleep,
And nodding by the fire, take down this book,
And slowly read, and dream of the soft look
Your eyes had once, and of their shadows deep;

How many loved your moments of glad grace,
And loved your beauty with love false or true,
But one man loved the pilgrim soul in you,
And loved the sorrows of your changing face;

And bending down beside the glowing bars,
Murmur, a little sadly, how Love fled
And paced upon the mountains overhead
And hid his face among a crowd of stars.

— W.B. Yeats, "When You are Old"

Happy Martin Luther King, Jr.'s Birthday.

© 2011 The Epicurean Dealmaker. All rights reserved.