CHAPTER 4 HOW TO USE AN INVESTMENT BANKER
| Jurisdiction | United States |
(Nov 1994)
HOW TO USE AN INVESTMENT BANKER
Lazard Frères & Co.
New York, New York
ROCKY MOUNTAIN MINERAL LAW FOUNDATION
Institute On Mergers And Acquisitions Of Resource Companies: November 10 & 11, 1994
Introduction.
My career in investment banking started 20 years ago, which, by today's standards, makes me an old timer at the young age of 44. Sixteen of these years have been at Lazard which makes my career both a long one and a stable one.
Over the last two decades we have all witnessed a transformation of the investment banking profession. Vast numbers of people have entered the field. Firms have grown expodentially; Morgan Stanley had approximately 500 employees in the early 1970's and today has 8,500 employees. The business has also become intensely competitive. And, traditional client/banker relationships have weakened — in part due to the competition between firms as bankers launch new business campaigns directed at competitors' client lists and in part due to increasing sophistication among clients which feel they have the ability and need to pick different bankers for different projects.
Over the same period of the reputation of the investment banking profession has diminished. We hear complaints from corporate executives about the lack of loyalty of their bankers. Often, corporate executives question whether they have received value for the fees paid. Too often, corporate executives question the motives of their banker. Frequently, executives bemoan that dealing with Wall Street is a necessary evil in the merger and acquisition game. This complaint is many times driven by a mixture of envy and disgust for the life in the "fast lane" of M&A on Wall Street.
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I am reminded in this context of a drawing by William Hamilton which was published in the New Yorker about five years ago. It shows an older man at a bar with two younger men. All are dressed in dark suits and the younger men display all of the accouterments of up and coming investment bankers: braces, slicked-backed hair, English-cut suits and intense, serious gazes. The older man is speaking and he says, "I know you will find this hard to believe, but 20 years ago if you told a young lady you were an investment banker you could expect a yawn."
What then is the cause of the frequent criticism of my profession? To a degree we deserve it. Some bad apples have overstepped the boundaries, particularly in the 1980's. Drexel Burnham comes to mind and earlier this fall I noticed a $20 million settlement was paid by a leading firm to a former client for misuse of confidential information. I also believe actions and attitudes of many clients promote today's behavior on Wall Street. CEO's who shop the field for information, advice and contacts on Wall Street should hardly complain about loyalty. While some actions by bankers demonstrate flaws in character, in many cases they are commercial reactions to how they are treated.
To answer the question, however, one reverts back to the title of this session which the Institute asked that I address: "How To Use An Investment Banker". In speaking to this topic I think a great deal can be learned to reduce the tension between a client and banker and reduce the incidents of dissatisfaction. The results can be a productive, value-added relationship with your investment banker as good or better than with any other supplier of services to your company. Let me now address the topic.
Know your needs.
Investment banking is a service business. Investment bankers are there to serve your needs. It is necessary, however, for you to know your needs before retaining an investment banker if the relationship is to be a success. This point is often overlooked. Indeed, for all the complaints about investment bankers that I have heard in recent years, the heart of the problem is usually a mutual misunderstanding of client's needs and the investment banker's role. More often than not, it's as much the client's fault as it is the investment banker.
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So, before hiring an investment banker ask yourself why do you need one. The reasons to hire an investment banker vary. Among them are:
To act as a strategic consultant
To execute on a divestiture or an acquisition
To be a source of information
To provide financing for an acquisition
To render a technical service i.e. a fairness opinion
To provide a "good housekeeping" seal of approval for the benefit of the board, investors or the public
Of course there are a number of other reasons to hire an investment banker among which could be to repay past service or to hire a "name" for the reputational pleasure of being able to refer to the association. Some companies have even hired investment bankers solely for the purpose of conflicting them from working for anyone else in a competitive situation. It is said many times Drexel Burnham received such assignments in the 1980's when they had a preeminate position in the junk bond market.
Being clear on your requirements is all important because not all bankers are equally good at the same thing. If you are looking for dispassionate, patient strategic advice and you hire someone who is best at execution, you will be disappointed. Conversely, if you are looking for worldwide execution on a divestiture and you hire someone who specializes in strategic advice you will be disappointed. Likewise if you need financing for an acquisition you will need a banker who has access to the markets you expect to access — institutional or retail; high-yield or investment grade. And, if your chairman or board is looking for third party comfort on a transaction some people will be able to provide comfort given their reputations and others not.
In this regard, it is vital to understand the role of your senior contact at the banking firm. If the managing director or partner is principally a relationship officer, new business officer or manager of a team of professionals who undertake the day to day work, do not expect careful, insightful strategic advice. It is unlikely in these circumstances that the person with the
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experience and judgment will be close enough to your affairs to provide such a service. Nonetheless, such a person might be perfectly situated to handle a large divestiture assignment or complicated acquisition, particularly if he is backed with a large, strong team. A quick acid test of the role of your senior contact is to measure the ratio of associates to partners. The higher the number the more likely the senior people are isolated from the fundamental day to day work.
Of course, there is always a mix of reasons for hiring an investment banker. Many times, one firm can't do the job alone. This suggests two or even more bankers for an assignment. The advantage of more than one banker is, of course, the different skills that can be brought to bear on the issues you face. It also has the advantage, which bankers rarely like to admit, of generating internal competition during the term of the assignment, creative tension if you will. The competition can, however, quickly break down into divisive bickering, positioning and, even worse, less than forthright advice to the client. This is the greatest downside to joint assignments and, in my experience, a frequent problem. Unless you choose your team carefully, lay down the ground rules for the joint work clearly and monitor behavior vigorously there is a substantial risk that the quality of the service you receive will deteriorate as a result of the internal competition. As a general matter I would exercise great caution in retaining more than one banker for an advisory assignment. That said, a properly structured joint representation can be the best of all worlds. A good example is Corning Glass Works who for many years used my firm and Goldman Sachs jointly on all of their advisory and financing matters. It was a great arrangement for the two firms complemented each other, were respectful of each other's strengths and Corning imposed a tight discipline which kept the internal competition at a healthy level.
Getting Started.
Let's assume you have identified the deal of a lifetime, thought through the role you wish your banker to play and are ready to make a call. In today's competitive environment it is likely that any company with a market capitalization greater than $100 million will have received new business calls from a half-a-dozen bankers. What, however, if you haven't received the calls or don't know which firm to choose? I urge you to consult with an experienced outsider rather than
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rely on general reputation or league tables. Probably the best source of a referral is your law firm. Most likely they have dealt with many firms in many circumstances and can guide you from experience. They also know your company and its personality. Further, it is likely they will work closely with your banker and they will presumably recommend someone with whom they can get along. Another source of referrals are directors who have undertaken similar transactions. They have many of the same attributes as your lawyer along with broad business experience.
Another increasingly common way to chose a banker is to ask for proposals from more than one firm. This is a so called "beauty contest" or "bake-off". Provided confidentiality is not key, there are real advantages for the company in a competitive selection process. One such advantage is that in preparing the request for proposals it forces you to think through the role of the banker and it forces the banker to think through how he will fulfill this role in advance of getting started. It also provides for a fee submission in a competitive environment. The downside is the lack of confidentiality and the time you and your colleagues must dedicate to running an effective selection process. And, of course...
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