UK
Earlier this year, Guy Kawasaki, the US venture capitalist, made the following comment to the New York Times: “With investment banking, you make a lot of money, and you get a distorted feeling of how wonderful you are. You’ll be flying around in corporate jets and you’ll be attending board meetings, but you don’t really add value.”
Guy’s not the only one levelling those accusations. It’s a common criticism of M&A bankers: you work a lot, but do you actually do anything useful?
Junior M&A bankers are largely pointless
Having been a junior M&A banker myself, I can confirm that Guy is not entirely wrong.
As a junior M&A banker, you might revise that presentation 73 times, but chances are no one will even look at it.
Occasionally you might get to bring in revenue or save your bank money – which you need to capitalize on – but most of your day is spent on administrative tasks rather than changing the world.
Senior M&A bankers are (probably) worth it
The more interesting question is whether senior investment bankers are actually adding value either. Let’s look at the source of investment bankers’ pay: the fees that companies pay them for advising on transactions.
You’ve just sold your company for $1 billion, and you pay the bankers advising you a nice $10 million fee, 1% of the transaction value.
Ridiculous, right? Why should the bank earn $10 million merely for “advising” you, talking to the buyer on your behalf, and making a few presentations?
But that’s the wrong way of looking at it.
Had you not paid them the $10 million, would you have sold for more than $990 million or less than $990 million?
If it’s less than $990 million, then their services were worth it. More than $990 million, and their services actually cost you money.
Measuring value
But there’s no way to determine “what would have happened” had you not hired the bankers.
So you need to look at what they actually did – what new buyers (or sellers) they brought to the table, and whether their involvement resulted in higher or lower prices.
Investment bankers add the most value when:
- The deal is extremely specialized – a hostile takeover defense for a cross-border transaction – and requires skills that only a few bankers have.
- The deal requires longstanding relationships and access to key decision-makers.
- The company is not spectacular but bankers dress it up really well to generate lots of interest and competitive bids, driving the price up.
Investment bankers add the least value when:
- They run a generic sell-side M&A auction process where they contact dozens or hundreds of companies but don’t rely on specialized skills or relationships.
- They’re working on an IPO or debt/equity offering where you need to use bankers, but where they don’t actually do anything specific to raise the value of your company.
This is why small companies with attractive offers on the table sometimes skip bankers: unless there’s a great potential buyer that only the bank has access to, they don’t add value.
On the other hand, distressed companies and PE firms looking to sell less-than-desirable companies often hire bankers because they’re great at making “ugly” assets look more attractive.
Yes, investment bankers are valuable after all
So yes, investment bankers add value – when they help a company earn or save more than the company pays for the bank’s services.
And outside of banking, traders and others in market-related positions add value by making markets and enhancing liquidity.
No, these are not quite the same as changing the lives of billions of people, but if banks truly added no value then they wouldn’t exist.
Bankers get accused of “adding no value” because what they bring to the table – relationships, access to the key decision-makers, and specialized skills – is hard to quantify compared to a company making products. That doesn’t mean, however, that they’re worthless.
This is a guest post on eFinancialCareers, written by the author of Mergers & Inquisitions, a website dedicated to helping people break into investment banking, and to maintaining their sanity while doing so.
I am relieved that investments bankers add value. that has just made my day,
there’s a difference between creating value and capturing value.
there is also a difference between value and price.
M&A bankers are in the business of capturing (not creating) value for their clients. if they are good at it, it is hardly a surprise that they capture value for themselves in fees…
So, a former M&A banker says bankers add value… how surprising!
Why don’t we discuss, instead, of the many many mergers and acquisitions which simply do not work? Not a small percentage!
as far as i see tjey only make company go bust , and spend money
then ask cleaner to pay tax for their salary
when people will……..
The author did not even understand Kawasaki’s statement. It’s about the fact that mergers on average have shown to be value destroying for the newly combined firm (measured in shareholder value). On top, the M&A advisors capture a part of the shareholders’ money in form of fees.
if you want to see how much value they create just take a lok at the Pru deal …
of course the author didn’t understand the statement – he’s an M&A banker!
M&A can add value, but frankly, until someone realises that defining success as completing the deal is an inherently foolish idea, the onus will never be on giving the right advise, it will always be on getting the deal done.
M&A advisory add value? No (easy answer)
If you work as a principal investor and you deal with bankers, you will understand what i mean.
In years of work, never heard a good idea from them, they just randomly try to sell the same companies to everybody.
M&A decisions (right or wrong) are taken by the investors. that’s it
would be interesting to see who adds/destroys the most value on average through their M&A advice – bulge bracket advisers or 2nd tier?
Reckon it’d be the bulge brackets, but maybe I’m just hating?
From company perspective you are paying for two things
1) access to investors/prospective purchasers of your company
2) someone to organize and run a process for you
while 1) clearly adds the most value as most companies have no idea who to send information to 2) is important because these types of transactions are 1) time consuming and difficult to put together and 2) huge time sinks for internal people so the “worthless” junior bankers are valuable in that they take pressure off of existing staff and let them focus on current job.
Senior guys give a company access and junior guys allow the company management to keep their eye on the ball while the process is ongoing. Both add value. Is 1% the right value, I don’t know but they add value.
But do M&A bankers add shareholder value to the firms they work for (assuming they themselves are not the controlling holders i.e. in boutiques). There are often many mouths to feed on an M&A fee; 60-75% is paid out directly in compensation. The rest of the 40-25% has to cover the rent, infrastructure and business development costs. In the good years there is often little left in the pot for shareholders, in the mediocre years they are subsidized by other parts of the bank. Adding value??
Wow! That’s a really neat asenwr!
If you work as a principal investor and you deal with bankers, you will understand what i mean. COOL