If you work in investment banking, and particularly in M&A, you likely know the magic word: pipeline. It’s an opaque and nebulous term used to describe potential deal activity – revenue-generating business that is in-the-works, so to speak. Senior investment bankers use the word constantly. They describe their pipeline to their bosses, and then their bosses pass the estimated size and strength of that pipeline up the ladder. The final step of the dance is when the bank’s CFO delivers news of the pipeline’s status to analysts on quarterly earnings calls. The word “pipeline” is almost always used positively – meant to inspire hope. It’s just not all that accurate.
"There are two lies in this world: (1) I love you for your personality and (2) my revenue is not at budget but my pipeline is great,” one senior M&A banker told us.
At J.P. Morgan, Chief Financial Officer Marianne Lake has used the word “pipeline” at least once during each of the bank’s previous six earnings calls. At Citigroup, CFO John Gerspach and CEO Mike Corbat have mentioned or responded to questions about the bank’s pipeline during four of the last six quarterly calls.
And yet the pipeline is not all that it seems. Earlier this year, when discussing J.P. Morgan’s 2017 fourth quarter results, Lake pointed to the bank’s strong performance in debt underwriting, and then went on to note that the “overall pipeline remains healthy and at levels similar to last year.” She added that the investment banking division (IBD) in general was also well positioned. “The pipeline and momentum into the first quarter feels good,” she said about IBD.
On Friday, when talking through Q1 results, Lake acknowledged that debt underwriting fees were in fact not similar to last year – they were down 18% year-over-year and down 15% compared to the previous three months. Investment banking revenues were down 7% year-over-year.
You can guess where Lake went next. “Despite these headwinds…the overall pipeline remains strong,” Lake said about the firm’s debt underwriting business.
Something similar occurred with Citi and its pipeline in 2017. Gerspach was asked on the Q2 call how the M&A pipeline was looking compared to a year earlier. “I would say that we are in a stronger position as far as our engagement with clients,” he answered. “You don't have to look much further than the fact that in announced M&A, I believe now that we’re number 2 in the league tables.”
Needless to say, Citi’s advisory revenue fell 1% year-over-year during the third quarter and 25% compared to the previous three months. The bank finished the quarter 4th in global M&A revenue, more than $120 million behind second place J.P. Morgan, according to Dealogic. Citi also finished fourth in the league tables over the first nine months of 2017, over $100 million behind second place Morgan Stanley.
On Friday, Corbat was asked about the health of Citi’s investment banking business. “I would say the pipeline, as we go forward, we think, looks good. And we expect activity to pick back up,” he said. Wash, rinse, repeat.
Now this isn’t to pick on J.P Morgan and Citigroup. We looked at the two banks in question as they were the first two U.S. firms to report first quarter results. If you search back far enough, the same examples can likely be found with every bank. The “pipeline” is oftentimes a mirage. And while the bank’s mouthpieces likely play a role in the pipeline propaganda, it's bankers themselves who are talking up their pipelines in the hope of keeping their jobs and getting paid.
“The thing is, if someone hires someone who promises big revenues, the hiring boss is then on the hook too, so the big pipeline becomes a substitute for the revenues actually materializing,” one M&A managing director told us. “Banks are psychologically odd places, mostly feudal and run by insecure people. The ‘strong pipeline' crowd are taking advantage of that, and the fact that most MIS (management information systems) aren’t good enough to track and trace the pipeline conversion rate for individual bankers.”
Of course, some pipelines are better than others. The same MD said a bond pipeline which is, "short-tenor, high-delta," is much more of a sure-thing than an M&A pipeline, which can, "take multiple years and end up with nothing."
All pipelines are liable to abuse, he added, particularly as talking them up is a crucial tactic in keeping your job. Eventually, though, the pipeline's failure to produce will be noticed. "It catches up with you in the end," he sighed.
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