Monday, October 27, 2014

Courtly Love

Nobody likes lawyers
Contrary to the cynicism that can pervade discussions of [mergers and acquisitions], many top level M & A advisors have a genuine concern about the integrity of large scale transactions and a desire for the fiduciaries involved to serve the interests they represent in a good faith and effective way. This is not to say that they do not seek to advance the interests of their clients in obtaining legitimate economic advantage, but they do want the game to be a fair one.

— Leo E. Strine, Jr., Chief Justice, Delaware Supreme Court 1,2,3

1 While I appreciate Chief Justice Strine’s sentiment and respect for the basic integrity and desire for fair play which does indeed hold sway among the large majority of professional advisor participants in M&A processes, I find his proposal that we make our lives—and those of our clients—before his and other benches easier by documenting in much greater detail the twists and turns of our recommendations and analyses in medias res of transactions to be both impractical and naive. Surely Chief Justice Strine, among all jurists, must appreciate the role accident, error, and chance play in almost every complex process such as a merger or acquisition and how, even when said twists and turns are faithfully and comprehensively memorialized the twin imps of imperfect memory and hostile interpretation can confuse and bedevil the faithful interpretation of the facts of the matter. I suspect Mr. Strine, being both professionally empowered and constitutionally predilected for the role of fact finder and detective, simply prefers a clearer trail of evidence to allow him to judge the facts of the case properly and render more equitable judgments. However, I also suspect virtually no internal or external investment bank counsel or deal lawyer of any kind will be remotely interested in providing more potential fuel for the fires of devious and aggressive plaintiffs’ counsel for the sole purpose of making Justice Strine’s and his colleagues on the bench’s jobs easier. After all, that is why they pay him the big bucks and solicit him to speak at ABA conferences: because his job is difficult. Plus, we never know when some bozo will relocate litigation jurisdiction away from the Halls of Justice and Light in Delaware to some one-horse hick town in Texas where the judges don’t even know how to read PowerPoint. I’ll go out on a limb and reckon his suggestion is not gonna happen anytime soon. It was a nice try, though.
2 This quote also reminds me of an excellent article by philosopher David Papineau, who wrote about the distinction which can be drawn between the rules of the game and the notion of fair play in both sport and politics. I think a similar analysis could be performed for the highly ritualized, rule bound competition which is mergers and acquisitions. Maybe if you’re nice to me and send me a fruit basket I’ll undertake such an explanation one day.
3 Does it count as a blog post if the chief substance of your remarks lies sequestered in footnotes? Does it count as a speech? Did Chief Justice Strine read each and every footnote as well when he delivered his speech? These are some of the mysteries which consume my restless nights.

© 2014 The Epicurean Dealmaker. All rights reserved.

Sunday, October 19, 2014

Sunday Reading from the Archives

Mmm… coffee
Edward Hopper, Early Sunday Morning, 1930
“Then I need say no more,” said Celeborn. “But do not despise the lore that has come down from distant years; for oft it may chance that old wives keep in memory word of things that once were needful for the wise to know.”

— J.R.R. Tolkein, The Fellowship of the Ring

Periodically, O Dearly Beloved, I take a leisurely stroll through the carefully stacked and organized pixels of my back catalogue, clicking from link to link in a solipsistic journey of rediscovery. Occasionally such wanderings illuminate a consistent intellectual preoccupation of mine, which the bored and underemployed among you might find provocative or merely amusing to waste your time with on a leisurely Fall Sunday morning.

Today’s theme, I suppose, could be described as the necessity for us, as both individuals and as members of society, to accept our fate, to acknowledge the limits of our agency and the extent of our ignorance, and to accept our mutual entanglement with the fortunes of our fellow human beings. In other words, perhaps: Humility.

I like these pieces of mine, even though (or perhaps perversely because) they have not been among my most popular. I hope you find something to enjoy or even make you think. Cheers.

All Together Now – Steve Randy Waldman has said opacity is integral to modern finance. I argue that opacity—and the information asymmetry which it reveals and which creates it—is an emergent feature of all sorts of social functions in complex societies, including finance. Information asymmetry and its associated rents are a convenience tax which members of a society implicitly accept when they agree to the division of labor necessary in complex social communities. Accordingly, I do not believe they can be made to disappear anytime soon.

Punished by Fate – C.J.F. Dillow despairs of the common man’s understanding of chance, declaring it irrational. In contrast, I believe folk notions of justice and fairness incorporate a very sophisticated understanding of our exposure to fate—good, bad, and indifferent luck—and rest upon a communitarian ethics of sharing such undeserved gifts and punishments. Rather than being evidence of ignorance, irrationality, or undeserved entitlement, the average person’s sense of fairness is a very sensible collectivist approach to the problem of just deserts in an uncaring universe.

Occupy Galt’s Gulch – Continuing with the theme of communitarian ethics, Jim Manzi points out that “winners [in society] require shared resources produced by the losers.” I explore some of the implications of this notion in the context of just deserts for self-styled übermenschen who rely on the resources of society, the labors of their fellow citizens, and the uncontrollable vicissitudes of chance to create the conditions for their success, as filtered through the particular lens of American culture and society.

To Whom It May Concern – Drilling deeper into the notion of individual success, I explain the exposure an aspirant in my industry has to luck, both good and bad, and some of the ways of coping with it. I suppose one could call this approach fatalism.

It’s All How You Look at It – Wisdom is good, but it is no comfort. And there is no shortcut to it; no box of Wisdom waiting for you at the local WalMart. You must earn it yourself, with no guarantees that it will make any difference. Sorry.

Prolegomena to Any Future Life – So what are you waiting for? Why are you reading this? You must change your life. Get to it.

Happy Sunday.


© 2014 The Epicurean Dealmaker. All rights reserved.

Saturday, October 11, 2014

The Privy Counselor

I would advise against it, My Lord
Diego Velasquez, Portrait of Pedro de Barberana, 1631
No! I am not Prince Hamlet, nor was meant to be;
Am an attendant lord, one that will do
To swell a progress, start a scene or two,
Advise the prince; no doubt, an easy tool,
Deferential, glad to be of use,
Politic, cautious, and meticulous;
Full of high sentence, but a bit obtuse;
At times, indeed, almost ridiculous—
Almost, at times, the Fool.


— T.S. Eliot, “The Love Song of J. Alfred Prufrock”

So The Blackstone Group decided yesterday to spin off its advisory business and merge it with Paul Taubman’s advisory “kiosk.” This is just the sort of relatively trivial exercise—the advisory group in question accounted for only 6.4% of Blackstone’s revenue and 2.1% of its economic income—that sets financial journalists’ and Wall Street pundits’ heads to nodding and chins to wagging, based almost entirely on the undeniable fact that Blackstone is big and important in the financial ecosystem.1 But I must pop my head up from my hidey hole, if only briefly, to take issue with some of the hasty conclusions being drawn here. I promise to withdraw swiftly and silently at the conclusion.

First, I must disagree with William Alden that Blackstone’s actions somehow contradict prevailing wisdom on Wall Street:
For decades, it has been a deeply held belief among many of Wall Street’s giants that a multiplicity of business lines is superior to a more streamlined model.
No, the conventional wisdom on Wall Street is and always has been quite simple: do whatever makes the most money. This is actually quite a sensible, beautiful, adaptable, and flexible business strategy. Sometimes, in fact, it does encourage executives to add business lines to their firms when they believe those businesses will add revenue and profit synergies to their existing business while being profitable in their own right (i.e., earning a return on top of paying for the people, assets, and financing costs they require). But more often than not it entails creating new products or services within existing business lines (like derivatives within capital markets operations), or just hiring a bunch of clowns who can cover an industry or execute a kind of business you do not already perform. (A “business line” in my industry is frequently little more than a handful of guys with business cards and a budget.) Often, as in the current environment, it encourages senior executives to discard unprofitable business lines, assets, or personnel by shutting them down, selling them, or just firing the unprofitable clowns because they can’t make money anymore or regulators are forcing you to get rid of unapproved activities.

Certainly there is a sensitivity among senior executives in finance to the benefits of maintaining a portfolio of complementary business lines, wherein secular and cyclical variations in the fortunes of certain lines can offset the different variations of others, and often there is a corollary fondness for the diversification accomplished through sheer size alone (usually by executives of big firms, natch). But both these considerations take a back seat to the short-, intermediate-, and long-run profit contributions, both direct and indirect, by the business lines in question to the mother ship. You can suckle at the corporate teat for a little while in my business while you wait for conditions to turn, but patience in the Executive Suite runs out pretty quickly if you can’t pull your own weight over the intermediate and long term. And notice I wrote the business lines must be complementary: if they don’t have the ability to contribute revenue and profit synergies to other business lines or the firm overall, their chance of staying within the fold long term—whether at GigantoBank or Two Guys and a Phone, LLC—are pretty darn slim.2

Enforcing this strategy from the other direction, by the way, are the self-interested considerations of the personnel who run the business lines in question. If they calculate belonging to the mother ship does not enhance their own intermediate- and long-term earnings and personal wealth generation prospects (via subsidy in bad times and better pay in good times than they could achieve elsewhere), they have absolutely no hesitation to jump ship for sunnier shores. From the top of the firm to the bottom, very few successful people on Wall Street value their job title and business card more than the contents of their paycheck, and most of us act accordingly. Besides, managing a multiplicity of business lines is hard. Even Wall Streeters know we are crap at management.

* * *

So I think it’s fair to take Blackstone at their word when they say they are divesting their advisory business due to structural conflicts with their core asset management businesses. In other words, not only was the advisory business not contributing any meaningful profit or revenue to the main group (q.v. supra), but also belonging to Blackstone was throttling the advisory group’s growth and profit opportunities. One can see this clearly in their results, where the Restructuring group has advised on the lion’s share of the unit’s business this year, $32.4 billion worth of deals, versus the regular advisory group’s relatively paltry $4 billion. This makes sense, since restructuring advisory (think bankruptcy, turnarounds, and workouts) is its own special business, with a different set of clients (failing companies, creditor groups, distressed investors), revenue model (hefty monthly retainers versus deal success fees), advisors (lots of ex-lawyers with sharp elbows and fierce manners), and business cycles (naturally, they tend to do well when everyone else is flat on their backs). They should normally have few conflicts with Blackstone’s core asset management businesses, most of which tend to invest in healthy companies or assets. The major exception cited in the articles—their inability to advise Lehman on its bankruptcy because Blackstone’s real estate division wanted to bid on its assets—is the killer exception that proves both the rule and the magnitude of the potential conflict.

Given that conditions are booming in regular M&A markets, the lackluster performance of Blackstone’s corporate advisory business is telling. Because Blackstone is so big and so active in principal investing across private equity, real estate, securities, and other asset classes, they must constantly show up on one side or another of potential transactions which its advisory group would like to get hired for. Such direct conflicts will usually put the kibosh on Blackstone’s advisors getting hired, or at least severely limit their alternatives. And even if no direct conflicts obtain, many corporate clients and virtually all competing private equity firms and principal investors are no doubt reluctant to hire Steve Schwarzman’s trained killers to give them highly sensitive financial and strategic advice. I can’t help but think this goes double for the third leg of Blackstone’s advisory stool, which helps raise money for—wait for it—other asset managers.

The point, in other words, is that Blackstone divesting its advisory business has nothing to do with bucking a nonexistent trend on Wall Street to add business lines like barnacles on a freighter. Instead, it has everything to do with dumping business lines that add no value, subtract value, or fail to realize their own value due to inherent negative synergies resulting from persistent structural conflicts of interest with the parent company. In other words, it is business as usual.

* * *

However, and for the very same reasons, Schwarzman pulling the ripcord on his M&A bankers does not signal the start of an industry-wide trend of divesting advisory groups by integrated investment banks. For one thing, big integrated investment banks with sales and trading, securities underwriting, and corporate advisory practices like the C-suite access top M&A and industry coverage bankers give them. Because they talk to the CEO, the CFO, and occasionally the Board of Directors, they have access to a level of decision making at corporate clients that the debt capital markets bankers and derivatives structurers do not. (They tend to talk to Treasurers or their finance staff.) This means they can get access to bigger, more profitable debt and derivatives deals and valuable, profitable product to pump into the insatiable maw of their huge trading machines. Profitable equity underwritings are also CEO- and Board-level prizes to give, and M&A deals are just icing on a cake that does not require meaningful capital to be put at risk.

M&A and corporate finance bankers like belonging to big integrated investment banks, too, when things work as they should. For one thing, it gives them more deals and ideas to talk about with their clients than just the usual who-should-buy-whom rigmarole. For another, it allows them to deepen and institutionalize their firm’s relationship with important clients by establishing multiple touch points and ongoing dialogues between subject matter experts within the bank and counterparts at the client. For a third, having equity research analysts who cover their clients and target industries gives them an entrée and a credibility with clients they do not know, and a capability to underwrite profitable equity business for those they do.

But most importantly, having M&A and industry bankers gives integrated investment banks an excuse to deliver ideas, industry and client insight, and all-important deal flow to the biggest-paying class of clients on Wall Street: private equity firms. While it is well known that private equity firms do not like paying M&A advisors for advice—usually because, rightly or wrongly, they think they know at least as much or more as bankers do about companies, deal-doing, and opportunities—they absolutely love paying investment banks to supply and arrange leveraged loans and high yield debt to finance buyouts of target companies. And banks love this too, because it is both huge and hugely profitable business. PE firms are usually happy to hire investment banks to sell their portfolio companies or take them public upon exit, too, although they tend to favor the banks which brought them the investment in the first place, financed it, and or smothered them with loving attention and juicy new buyout opportunities in the meantime.

So no wonder Blackstone ejected their M&A advisors. Not only can’t they offer the biggest and best paying clients on Wall Street (or anyone else) access to highly profitable leveraged lending, IPOs and equity underwriting, or sales and trading for securities and derivatives (because Blackstone Mère does not offer them), but also the biggest and best paying clients on Wall Street have no interest in hiring them because 1) they don’t value the advice they do have to offer and 2), duh, they work for one of their biggest competitors. I mean, if you could somehow engineer a similar set of constraints for Goldman Sachs’ M&A department, you can bet dollars to donuts the entire group would be camped out on West Street selling pencils before lunchtime.

* * *

Lastly, I have to I disagree with Jeffrey Goldfarb, too. I don’t think this action will start any powerful trends toward consolidating independent M&A advisors like the new PJT-Blackstone Advisory spinoff or even any significant acquisitions of same by larger financial institutions. For one thing, there are only so many synergies and complementarities one can generate in a homogeneous business line like M&A advisory or restructuring before negative returns to scale begin to kick in. At the end of the day, firms like PJT-BA, Moelis, Greenhill, and Evercore are really just a loose collection of fiercely independent, egotistical rainmakers who focus almost entirely on mergers & acquisitions for corporate clients. There isn’t a lot of infrastructure or shared assets to leverage, and there are no complementary business lines like securities underwriting, derivatives structuring, or sales and trading to juice the vig. Managing an advisory boutique is almost exactly like herding a passel of recalcitrant cats, and in my experience, the more the cats, the harder the shepherd’s job becomes.

Similarly, the likelihood a large commercial or foreign bank would snatch up any of these independent advisory shops should be limited by sheer common sense. For one thing, if the acquirer does not already have most of the key complementary underwriting and securities businesses listed above, adding a costly team of pinstriped M&A advisors is going to be an expensive exercise in cultural frustration and no synergy. Adding such capabilities after the fact would be even more expensive and less reversible, since those businesses require real assets, infrastructure, and permanent fixed costs that dwarf those required by the usual M&A department. For another, the history of such acquisitions argues more eloquently than I can against it.

* * *

For Steve Schwarzman, who has not paid noticeable attention to his old advisory business for years and who probably needed to be reminded by Tony James that Blackstone stilled owned it, the motivation for getting rid of the division is clear. He no longer wants or needs to be privy counselor to captains of industry or titans of finance.

It is many years since Steve Schwarzman has considered himself to be—and rightly so—a king in his own right.

Related reading:
Kiel Porter, David Carey, and Devin Banerjee, Blackstone to Spin Off Its Advisory Business With Taubman (Bloomberg, October 10, 2014)
William Alden, Shunning Wall Street Norms, Blackstone to Spin Off Its Advisory Group (DealBook, October 10, 2014)
Jeffrey Goldfarb, Blackstone’s Move Could Set Off a Trend (DealBook, October 10, 2014)
L’État, c’est moi (February 12, 2007) — Steve Schwarzman, Rex
Go West, Young Sheik (September 12, 2007) — Foreign bank acquisitions
Oxymoron (October 13, 2007) – Investment banking “management”
It’s Not the Meat, It’s the Motion (July 15, 2009) — Advisory boutiques

1 There is perhaps an ancillary motivation derived from investment bankers’ unwarranted glamour and notoriety due to their current popular role as B movie villains in our global financial crisis soap opera. But you already knew that.
2 This is not to deny that there are easy returns to scale (to a point) within business lines. Two Guys and a Phone, LLC would likely become much more profitable if it were One Hundred Guys and Several Phones, Inc., if only because they could share resources, support personnel, purchasing synergies, and enhanced marketing and sales generation prospects by looking bigger and hence more reputable to their potential clients, who are often big and diversified themselves. But these cost and revenue synergies often do not obtain between business lines that each have their own separate and different operating structures, client bases, and external market reputations. And past a certain point, scale and diversification can hurt you. The only thing belonging to GigantoBank ever did for me was open the door to an occasional new client who took a meeting because they were afraid GigantoBank would squash them (or more likely revoke their credit line) if they didn’t. A few others refused to meet with me because that is exactly what GigantoBank had already done.

© 2014 The Epicurean Dealmaker. All rights reserved.

Friday, October 3, 2014

Farewell, Ghafla Distraction

What is the airspeed velocity of an unladen swallow?
“Aha! Now we see the violence inherent in the system!”

— Monty Python and the Holy Grail

Yes, it’s true: I’ve left Twitter.

No special reason. All of a part with my reasons for terminating this blog,1 which boil down to being tired of it. I no longer get enough out of the service to merit the near constant immersion and distraction which it seems to elicit from me. I have better uses for my time. And the more substantive readings and links of interest which used to attract me I have sourced otherwise through RSS feeds, so I no longer need to wade through reams of banal tweets on unemployment data, fluctuating bond yields, and the latest outrage du jour of anarcho-social-media-ites to find them.

Of course I am sorry to leave those few friends I have made on Twitter behind. But let’s be frank: there aren’t that many of you, and all of you will get along just fine without me. Besides, if you’re a true friend who’s not a complete mental incompetent, you already know or can find my email address, which remains the same. Those of you who can’t, well, there’s always Kim Kardashian and Justin Bieber. Like your parents, they will always love you and never leave you.

No, really.

1 And no, this does not count as a blog post, except in those pathetic excuses for autofellation some of you frequent elsewhere. My posts have substance. This is a notice, for pete’s sake.

© 2014 The Epicurean Dealmaker. All rights reserved.

Monday, September 29, 2014

TED’s All Time Greatest Hits

They’re all money, honey
The person who experiences greatness must have a feeling for the myth he is in. He must reflect what is projected upon him. And he must have a strong sense of the sardonic. This is what uncouples him from belief in his own pretensions. The sardonic is all that permits him to move within himself. Without this quality, even occasional greatness will destroy a man.

— Frank Herbert, Dune

I have used the preceding epigraph before, as some of you Delightful Readers may recall. It is a versatile and thought-provoking sentiment. Like many quotes and excerpts from Dune, which I contend is one of the greatest science fiction novels ever written, it pleases and intrigues me. It also reminds me—when I am smitten with the unwarranted attention the criminally indiscriminate among you have bestowed upon the thin leavings I whimsically scatter here at unreliable intervals like some verbose will-o-the-wisp—that I am anything but great, or even worthy of attention. I use it sardonically, you see.

I am not without self awareness.

But now I have decided, for the nonce, to abandon you, as I have made clear before. Bummer that, but it cannot be helped. “To everything there is a season,” or some such bullshit. So it strikes me as only fair to post a list of the ten most popular posts I have ever released upon an unsuspecting and undeserving world,1 if only so some people can focus their anger at global injustice and bank overdraft fees on a similarly appalling yet perhaps more accessible target. It is better than reading Slate or Gawker or Jezebel or Guardian pieces, anyway. And they don’t need the page views, I do. I still owe Blogger.com a helluva lot of money for excess pixel consumption, you see.

So enjoy, and please remember to deposit your candy wrappers, empty soda bottles, and previously unexamined prejudices in the handy trash receptacles at the end of the show.

THE CANONICAL CANON, All-Time Canonical Edition:

1) Curriculum Vitae (March 2013) — The canonical career path for young tadpoles to hoary old bullfrogs in my business, corporate finance and M&A. This is what your life will look like if you choose to follow me, children. Warts and all.

2) The Mouth of Sauron (February 2010) — A hit piece, richly deserved, on the fabled former mouthpiece of Goldman Sachs, Lucas van Praag, who is no doubt happily torturing small animals with forks on a leafy Victorian estate in his dotage.

3) The Rules (November 2012) — Read them. Live by them. Pay particular attention to Rule #5.

4) Jane, You Ignorant Slut (May 2011) — The opening salvo in a series of posts about rampant ignorance in the financial press and blogosphere about the nature and mechanics of initial public offerings. This rabbit hole is deep, Alice. Beware.

5) The Invention of Leisure (November 2013) — Junior investment bankers work hard. No matter what people may say or think or do about it, this will not change, and there are very good reasons for that. Not bad reasons, good reasons. See Rule #5.

6) Overheard at 85 Broad Street (June 2008) — An old post in which I eviscerate those gutless weasels at Goldman Sachs who fucked over junior bankers during the Financial Crisis in a particularly cowardly and reprehensible way. I can neither confirm nor deny rumors that Goldman moved its global headquarters to 200 West Street solely to escape the historical opprobrium of this post.

7) Go Ask Alice (September 2013) — The bookend to the series on IPOs, begun with 4) above. Read these two, and the intervening posts, and you will know more about IPOs than most investment bankers and all financial pundits.

8) A Fine Disregard for the Rules (January 2014) — More reasons why junior investment bankers work like dogs and always will, no matter how many foosball tables and papaya soy lattes Google and Facebook try to tempt them with.

9) To Catch a Thief (February 2009) — Do investment bank executives strike you as, well, a little odd? I suspect you are right.

10) Where Did He Learn to Negotiate Like That? (August 2014) — Investment bankers, by training and inclination, tend to be much better negotiators than many of their clients. Occasionally this works to the client’s disadvantage.

* * *

Since these posts are ranked here, as is my custom, simply by aggregate historical page views as collected by Google Analytics, some of you may notice a recency bias, as the number of readers coming to these pages has accreted over time like barnacles on the hull of a poorly maintained ocean freighter. You will also notice a narrower range of topics and treatments than your local bartender may have informed you I offer, which is related to said recency. Those masochists among you who would like to explore both deeper in time and more broadly across my variegated oeuvre I would encourage to start in the archives and use my idiosyncratic keywords and Blogger’s search function liberally. There is nothing for it but to dive in, headfirst, and try to stay afloat on my sea of words, just as a tyro investment banker plunges into her apprenticeship of fire.

The metaphors are deep, O Dearly Beloved, and mixed. Welcome to my world.

Related reading:
Table of Contents — the archives
Topics Addressed in These Pages — idiosyncratic keywords

1 I exclude, as is my custom, generic results like this blog’s home page, recommended reading, outdated personal information, introductory blather, and my curated archives. I suspect you can have no objection.

© 2014 The Epicurean Dealmaker. All rights reserved.