
I'll buy that for a dollar.
There was much astonishment over at the New York Times as it explained that the big Silicon Valley tech firms, the Googles, Apples, Facebooks, aren't using the traditional services of the Wall Street bankers as they make their acquisitions. There are a number of reasons for this. As to whether this is all a good idea or not, …
If you're a serial acquirer, there's no real reason why you can't bring a lot of the banking expertise that you actually need on a deal in house.
In fact, I would imagine that this is a really good idea for two reasons:
1) Advisory fees charged by banks are usually a lot higher than the fees charged by the other professional advisors on the deal and, to be blunt, a lot of the work billed is essentially pointless (e.g. an analyst recolouring a slide showing the completion schedule as a pretty chart several times a day to take account of very minor changes).
2) There's an insane conflict of interest present in these deals being run by the same people that advise other clients on buying and selling the assets in question and also conduct their own trading in the assets. Such a conflict would cause accountants and lawyers to run for the hills, but banks manage the risks with Chinese walls. All well and good while your clients trust your ability/willingness to follow through with this: but that trust has massively ebbed away in recent years.
Also, as for the article's suggestion that the "adults" might step in and call time on a crazy acquisition: I would *love* to hear an example of an investment bank pouring cold water on a board of directors' latest self-aggrandising scheme on the grounds that it was a bad deal. I've never heard of it happen and I suspect I never will.
Point 2 also applies to in-house evaluation. Charismatic CEO wants to by a lame duck company. All the analysis says it's bubble-valued, won't open new markets, and lacks any useful feature.
So, are you brave enough to tell the board that the CEO is deluded? Hope you've got another job lined up...
I suspect you don't hear of the cases when the advising banks veto an acquisition because companies don't like to disclose this info. a) it makes them look stupid, and b) it advertises known weaknesses in the company's product-line, but also c) it can tip off their competitors: just because an acquisition is bad for your company, it doesn't follow that it would be bad for your competitor too.
Indeed - the conflict of interest is even more basic. It's a fundamental conflict in perspectives and attitudes. The bank's interest is not just in overcharging, but in, ideally, getting you into hoc to them - so they're actually interested in you getting a bad deal. The more you pay for the company, the worse for you, but the better for the bank.
That's not really a 'conflict of interest' it is completely opposite interests.
Paying anybody a percentage for advice is simply daft. If Google wanted advice from a bank, they should buy the bank, get the advice free, then flog the bank at a profit.
It's like Estate Agents. Once upon a time, people thought it reasonable to be charged a percentage by them for buying or selling a house - the point was it was difficult to find out about houses for sale. Not it is easy, the only reason to throw your money at an Estate Agent is because you're his mum.
If companies had a little more backbone when acquiring they would bind the banks the to the value of the deal. Offer to pay cash based on cost of the bankers work and then shares in the new company that only vest after 5 years.
That would tie the bankers income to giving good advice all round.
After the @#$%@#$% that wallstreet pulled in lesseee:
1974, 1986, 1995/6/7/8,2000, 2004, 2006->2008
People wonder why they are loosing business? Its about time the whole damn fleet were rolled up, packed on a barge, sailed out to the Marianas Trench, handed concrete life perservers and told to swim for Australia.
While I get the concept about raising funds to enable growth in the economy, I'm a firm believer in *real* value rather than market value. And the market value crap is what keeps causing these "little hiccups" that cost 25% to 45% of "market value" to vanish abruptly. And we've all seen the results of that.
Pensions? what pensions? These are not the pensions you'd been paying into for the last 30 years... these are NEW pensions.
Oh never mind.
> While I get the concept about raising funds to enable growth in the economy, I'm a firm believer in *real* value rather than market value.
You say this and in some unclear sense I agree with you. Mr. Worstall said this in a previous article of his <http://www.theregister.co.uk/2014/06/25/youre_all_inventing_the_wrong_sort_of_technology/>
> The first point to make is that no one can decide what represents value for other people. Other people get to decide what is value for them. I might well have decided, for example, that Facebitch is of no value whatsoever and I might even be right about that. The fact that 1 billion people disagree with me, however, means that it does have value for them.
This feels wrong but I can't justify why. Yours feels right but I can't justify why. In neither case can I put my finger on the core flaw or killer justification of either. So for the sake of my edification try to explain your claim, please? It might make the merits of Tim's clearer too.
Ta everso
Given that Wall Street* investment banks come across as terminally conservative, risk-averse, and ready to panic at the drop of a share-price, I don't regard then as "adult" in any sense. Chicken-Little would have made an excellent investment banker (or stockbroker) ...
* and all the others
The fact that these Bubble 2.0 companies are on such an acquisition tear that they can't be bothered to go to an investment bank is pretty clear evidence that everything is going to come crashing down very soon.
That said, it sounds like the investment banking industry is experiencing the same contraction that other service/agent/middleman sectors have been. Now that online real estate listings exist, it's harder for the agents to justify charging 6% (both on the buying and selling end). It was easier when they were the only ones who knew houses were for sale and had the huge binder of Polaroids. The only places that still have high-priced liaisons involved are car dealers (legally protected market in the US,) and the medical industry (private insurance in the US ensures a huge staff of office managers/billing and coding people, etc.) I know no one is going to shed too many tears for the banking industry, but it's just the continuation of a trend.
The one thing I do worry about is the loss of these liaison positions in the economy...millions of people in the middle class are in the middle class because they have a nice stable job being the agent/liaison/whatever. This has the potential to kick them out the same way de-unionization and offshoring kicked factory workers out.
Disintermediation is the term from economics and that's happening everywhere the information economy is touching. As you point out it could get quite ugly especially when a decline in middle-class wealth is already occurring, long known as a trigger for revolutionary movements throughout the histories of civilization.
I do like the fact that much like the internet, technology firms are routing around the damage that is Wall St.
It couldn't possibly be because Wall Street Investment Banking has been graphically shown to be incapable of managing it's own house to the extent it actually crashed several world economies by means of its witless, self-destructive behavior and demonstrated in 2008 that the American Capitalistic Model was fundamentally flawed to the world?
Because, well, that's what I'd stick at the top of the answer list.
That is, the most important reason that the tech companies aren't using Wall Street is that they don't seem to be very good at using Wall Street.
Actually, I think they understand how to use Wall Street very well. They just don't play by Wall Street rules. The guys in charge give themselves large stock options, they float an IPO. They buy what they want for whatever reasons and make themselves even more money without ever having to shill out to the traditional Wall Street firms.
Am I wrong?
...and those would be Fiduciary Responsibility. The clowns running these large tech corporations are bound by this rule.
If someday, some large shareholder(s) realized that one of these buying sprees by the CEOs of one of these companies had devalued their multi-million/billion investment, the CEO just might find themself in deep doo-doo.
It is legally possible. Whether it ever happens or not is another thing.
[...] the CEO just might find themself in deep doo-doo.
Deep doo-doo == Golden parachute of back pay and stock options, an NDA, and a canned "I'm going to spend more time with my family" departure speech (vetted by the PR dept. to make sure nothing violates that NDA). Oh, and a new job at a similar company (likely with same board members) within a year.
No penalties, no recompense to the investors (well, because they don't really deserve one -- nobody should expect their gambling debts be made whole), and no perp-walks. In other words, Business As Usual.
On the IB side, IBs operate EXACTLY like real estate agents... expertise, access to markets (buyers and sellers) and pulling together financing. If you are selling your house and don't know anything about selling your house, then it might be worthwhile to pay someone a fat fee to do it for you. If you are someone who buys and sells houses all the time, it is way less costly to just get your real estate license.
Good article. The advantage to not using Wall Street is the visibility and accountability. There's no sinister mega-corp manipulating their clients like puppets in ways that won't be discovered for years. (BTW, thanks for that housing market bubble) Instead, you get a CEO telling the whole world that he/she is blowing billions of dollars on a shiny new toy for possibly no good reason at all. It makes it a lot easier to predict what's coming in the next few years.
if they're not very good at using Wall Street, then what unholy deals are they cobbling together without that adult supervision?
Wall Street? Adult? Are you kidding? These are the bastards whose selfishness (which puts the selfishness of my toddler to shame) tanked the entire world economy and who went so far as to actively TAUNT the demonstrators when the Occupy movement hit (not to support the Occupy movement....it was always doomed to failure in my opinion, but watching the tycoons go 'neener neener' did nothing good for my opinion of Wall Street).
Personally I say if they don't need Wall Street then good for them for not using Wall Street. As is usually the case the banks need them a whole lot worse than they need the banks.
"That is, the most important reason that the tech companies aren't using Wall Street is that they don't seem to be very good at using Wall Street."
Not quite it. It's that "they seem to be very good at NOT using Wall Street".
There have been many deal in the last few years where Wall Street didn't bring much to the table but certainly took a lot off it.