"Bankers are sitting in coach"
Best of Times Is Worse
For Investment Bankers
Even as Money Gushes In From Mergers Boom,
Designer-Suited Legions Feel a Bit Unwanted
Having just scored billions in year-end bonus, Wall Street's deal-making minions ought not feel a sense of malaise these days. Over a bourbon, though, a hint of self-doubt emerges among them. Have another, and a deeper malaise comes through.
It's never been easier to make a dollar on Wall Street. But behind the scenes, many investment bankers say it's hard to make a difference.
Investment bankers are paid to put companies together and pull them apart. Now the value of what they do is changing as new money sweeps through Wall Street.
Bankers describe jockeying between squads of advisers, each trying to make an impression during interminable conference calls. The "private-equity guys" -- they say with a clench of derision -- prefer bankers stay out of the way. Vast amounts of capital have also reduced the art of the deal, they say, into a postmodern abstraction. In short, many clients want the bank's money, but not their advice.
"Deeply dissatisfying," says one banker about the state of most assignments. A deal lawyer lobs in his own stinging assessment: "Bankers are sitting in coach."
Fat Cats Join Dinosaurs? Well-paid advisers are feeling left out these days.
These folks are too highly paid to earn much sympathy for their woes. But it is worth understanding how, in their greatest hour, the double-Windsor set is wallowing in insecurity.
Around the Street there is the widely held belief that 2007 will be the last year of a historic four-year run. A slew of retirements are already planned for early 2008. And in the mergers-and-acquisitions world, there is a feeling that the psychic rewards of the job have moved inversely to the monetary ones.
"Smart people in this industry are trapped," between those diverging lines, says one young banker. Much of the time, he says, his clients have their own staffs of in-house advisers, who don't need much outside guidance. "Do we add a lot of value? I struggle with that personally."
It's easy to stereotype bankers as craven salesmen, who conveniently position themselves near vast flows of money to siphon off their tidy take. Of course that's part of the game. But you also find some exceptionally bright people, who for reasons of vanity and otherwise, find purpose in providing strategic counsel, conveying experience and delivering that small but crucial observation to a CEO in need.
QUESTION OF THE DAY
• Where are we in the private-equity M&A boom?
This is the part that's not about the money. "It's such a pleasure to be wanted," the young banker confides.
The adviser's role, though, is being overwhelmed by what were once his two greatest weapons: information and capital. And that is creating a reordering of the advisory business.
During the great deal boom of the 1980s, the "technology" of M&A was husbanded by a few dozen wonks inside New York investment banks and law firms. Over time, this knowledge spread far and wide. The ambitious wanted in on the action, and are now part of the legions trundling down from Connecticut each morning to work on the Street, in private-equity or in-house at a corporation. A company like Johnson & Johnson, for instance, might have some 200 people doing such work internally.
This has yielded its own, heaving mass of information and insight. Most bankers quietly admit it's difficult to come up with an original idea. So many people have already picked over the same territory.
Flowing around this are the same Google-powered forces changing the realms of news and politics. Older bankers recall how clients once relied on them for real-time stock quotes from Quotron machines. Information about realms once inscrutable -- be it private Indian companies, or Russian aluminum -- are more instantly obtainable. And even if some tidbit is hard to locate, it won't take long for a deal-obsessed army of blogs, message boards and news media to find out.
Companies have eagerly exploited these changes. They mercilessly spread their business around. Rather than seeking out wise counsel from the few, they now award work to a wide cast of banks hoping to tap into deep pools of cash from the many. It all makes bankers more eager to please, and more on edge.
Just look at International Business Machines, which in the last nine years has used 11 different banks in its acquisitions, according to data provider CapitalIQ. On the Street, this has become derisively known as the "lazy Susan" trade.
Banks differentiate themselves by promising gobs of capital to buyers. The important advice comes from the whiz kids structuring the loans and not the deals themselves.
"Capital is everything," says one banker at a top-five firm. It's a change that most galls old-fashioned advisers.
"A lot of bankers pull the levers inside their own banking machine to make transactions happen. And that's a different function from being an adviser on a much more personal level, where the only thing you can sell is your brain," says 46-year-old Marshall Sonenshine, who started his own advisory boutique after leaving Deutsche Bank in 1999. "We find it satisfying, but it's a harder way to go.
Grousing is strong of late at Goldman Sachs Group, where a number of bankers have complained about being knocked out of deals because Goldman's private-equity arm was involved. "Our clients expect us to be an adviser, financier, and co-investor," a Goldman spokesman counters, "but the advisory business is at the center of our franchise."
Private-equity deals now make up about a quarter of the overall M&A market. Buyout shops paid the Street some $10 billion in fees through the first nine months of 2006 alone, according to Dealogic. Yet the buyout shops aren't too picky about who they use. In most cases, advisory fees are just a toll paid to get access to lending.
Perhaps that's why private-equity firms are so roundly hated by the proud types who become investment bankers.
Those bankers may just have to bear life as highly compensated and highly browbeaten. As an old Street saying goes, if you're sick of M&A, you're sick of life.
I actually read this in the journal this morning. For a long time I've questioned the "value" that products guys bring to the table RELATIVE to coverage guys. Don't get me wrong, I recognize the importance of the execution role...but always assumed that the coverage guys where more highly regarded for their relationships. I assumed there would be more prestige and $$$$ earning power on the coverage side...long-term.
However, after reading this article it makes me question the value add of coverage teams. In the future, perhaps product expertise and execution will be a more significant value add to CFOs and sponsors given their growing strategic knowledge base and expertise.
Id like to know how serious bankers think this PE trend is on the whole. PE deals have grown at an incredible rate, I dont need to post numbers. How long, if ever, before banking becomes a "second tier" finance career?
As someone who is seriously considering making a career out of banking, this is definitely the most depressing thing I have read in a while.
private equity, in general, is becoming a very efficient market and one that is saturated with many highly-seasoned industry pros. They simply don't need to rely on M&A and corporate finance advisory as they did in decades past. They know their industries very well...know the strategic opportunities, and, as we all know, any monkey with a little bit of training can derive an "optimal capital structure" solution for a deal.
From my perspective, the "value-add" of investment banking over the long term will be deal execution and secondary market liquidity. Period. PE Firms will always need a middle-man to execute broadly syndicated debt/equity deals in order to achieve the best economics. Advisory services will be geared more toward lower-middle market companies and financial sponsors that lack sophistication.
It's an important consideration...that's exactly why you see GS trying to figure out a way to efficiently expand into the middle-market. It's the future for M&A and corporate finance advisory.
People have been predicting the end of banking for the last 30 years.
The fact is that the M&A business has never been stronger. Its hard to square the main premise of the article with the fact that firms like Evercore, Greenhill, Lazard, Blackstone are getting an ever bigger share of the M&A pie. Corporate, for the first time since the 1980s, want real senior level M&A advice, and are turning to "adults" in the M&A business for that. Having a 200 person in-house M&A team is all very well, but AT&T turned to two boutique houses when they bought Bell South. It is true that at many of the larger firms, capital is everything (though that's less true at Morgan Stanley, for example, than CS), but vey few people at the boutiques are feeling the sentiments expressed in the article.
And, as regads the PE boom, it is true that private euqity houses are awful M&A clients, but that business is cyclical, it looks like the cycle is coming to an end, and its still a lot less of total M&A volume than in the 80s.
And its been a long time since I've travelled coach when there's a first class seat available.
It just sucks to read articles like this when someone has been working like hell to get into banking, and then read that the industry's importance is diminishing daily..
Out of curiosity, would you recommend starting in a product group or an industry group if one's goal is to be a banker long-term?
I think if you talk to pretty much anybody who is in a successful group VP+ and has a good upwards trajectory, no ones wants to leave. Certainly, if its not Blackstone, KKR, TPG or starting your own fund, the best bankers don't want to leave to private equity or pretty much anywhere else. Most of us have those options and have chosen not to exercise them.
Depends on the product. I would always recommend M&A until the mid-VP level, and lev fin till the mid-Associate level. Then its up to you. Both will stay relevant. Good industry bankers know products cold and good product bankers know a couple industries cold.
When capital is cheap and easy to come by, bankers are less valuable. Bankers are like real estate agents in a way. When the market is a seller's market anyone can jump in and make money. When the tide turns and cheap money dries up, it becomes more difficult to finance and arrange deals, in which case a banker's expertise and position at the nexus of information becomes valuable.
That being said, information is more readily available nowadays and bankers need to make sure they are really providing a value added service.
so you recommend being in a coverage group long-term (ie: when you reach VP level). Can you elaborate? Why?
because thats the level when relationship building/client management comes into play, no?
Interesting --- I'd actually read the WSJ article this morning as well.
Seeing how I both have some exposure to the Canadian and Asian markets, I'd thought I could add some value to this discussion.
In the Canadian front, the large corporate clients are as sophisticated to the ones down South. They have literally an entire army of guys working in corporate development to analyze targets, work out the pricing and strategy. In effect, I totally agree, for sophisticated clients, investment banks just play a real estate agent role. Hence, your senior investment bankers are at times more or less like a sounding board to the client (albeit a very expense one).
In the long-term, I personally think the value-add from the traditional corporate finance / IBD side of things is just going to keep on diminishing. As mentioned, private equity guys know what they're doing and surely the corporates know what they're doing. Recall how in the narrow definition, a bank (commercial or investment) is a financial intermediary and they match providers and users of capital. Advisory services are more of an auxiliary thing --- think about why M&A is critical to a bank overall; of course the primary reason is to generate the % of EV fee, but also it channels businesses for other functions of the investment bank (i.e. trading, underwriting, etc). The key drivers of revenue in the future from the investment banks would come from the S&T side of things. This is no surprise as you see many of the senior people in the bank are coming from S&T and no longer from the traditional corpfin side. It is in that division where banks can play a high value-add role through innovation and competitive advantages.
In the Asian context, it is still the Wild West (East?) out there. Corporate clients, large or small, are usually not sophisticated in corporate finance. Hence, there's a lot more "hand holding" between the investment bank and the client, and obviously this translates to greater responsibilities and value-add to the entire chain of command in IBD. In fact, for the HK individuals who have worked in both HK and NYC / Europe, they all agree that they feel a greater sense of responsibility and value to the client (i.e. entrepreneurial, for the lack of a better word).
Interesting discussion so far.
somecdndude, everything you said sounds fair, but how does the fact that boutique banks (such as Evercore, Greenhill, etc.) are performing well, and are on most of the major deals these days fit in to your framework of thinking? They do not provide any financing, yet clients are still paying them for their advice.
Hi streetluck,
Good point and I'll try to put some thought into this response.
Flipping open our ECON101 textbooks, you'll undoubtedly encounter "specialization" and "comparative advantages" go hand-in-hand. For the sake of argument, let's just say that investment banks have a comparative advantage in financing over boutiques (which is obvious as most boutiques can't do financing) and that boutiques have a comparative advantage over investment banks in advisory (let's just assume this).
When clients approach investment banks, as indicated by the WSJ article and by my reasoning, they're more or less looking for financing first and advice second. However, when they're looking for boutiques, they are clearly looking for advice as they know they wouldn't find any financing options there; hence, they're willing to pay a fee for such advice. Then what can be said when a client receives financing and advisory services from an investment bank? Well, if we can assume that the client's primary motive is for tapping into the financing resources, then we can say that the fees paid for advisory can be thought of as an "entry fee / admission ticket" for the bank's financing. (now whether the advice is that of quality or whether it is actually implemented by the client is a different question).
I realize that the above assumptions and reasoning that I've made are overtly simplistic; at worst, there are flaws in my rationale. The reality is much more complicated than this when we factor in: investment bank and boutiques relative positioning in the specific advisory services, strengths in specific industry, relationships, etc etc.
If you think about it for a moment, almost all boutiques in their mission statement state they want to eliminate possible conflicts of interest between advisory and financing. Hence, they strive to provide the highest quality of advisory and perhaps this explains why clients are willing to not only use their own corporate development guys' analysis but also pay for a second / confirming opinion.
And remember, every case that goes to court regarding chinese walls being breached at a BB is more of a driver for clients to move to independent advice.
http://epicureandealmaker.blogspot.com/2007/03/woe-is-me.html
Epicurian Dealmaker's take on the article..
http://epicureandealmaker.blogspot.com/2007/03/clothes-make-man.html
The Epicurean Dealmaker
Corrupti et incidunt perspiciatis exercitationem. Minima et occaecati est alias quia laboriosam accusantium. Ut nobis et suscipit eos suscipit perferendis.
Repudiandae amet dolores facilis ut est alias dolores. Et ipsum asperiores nulla aut corrupti blanditiis. Similique dolorum ut maiores. Qui impedit et maxime maiores non quis.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...