In case you haven't heard -- or seen trumpeted on our home page or in the magazine -- 2009 marks The Deal LLC's 10th year. We've been celebrating since January with our ongoing
Decade of The Deal project. And the current issue of
The Deal magazine offers analysis on the dramatic events that have defined the M&A market since 1999.
Of particular interest to corporate dealmakers is the story
Nice work if you can get it. In it, Vipal Monga and I explore how the relationship between investment bankers and their corporate clients has evolved. The bankers and corporate executives interviewed for the story agreed that corporations have gotten better at doing deals. They've built in-house M&A teams that are as capable as any investment banking team at identifying targets, gathering market intelligence and conducting due diligence.
"The assumption that you need a banker on every deal is going away," says Michael Frankel, senior vice president of business development and M&A for LexisNexis, a provider of work flow and risk management services. "It's no longer enough for a banker to say 'Here's how to do the deal.' Bankers are being asked to demonstrate value more often."
These days that comes in the form of specialized industry knowledge, debt restructuring, tax structuring, sophisticated analytics and insight into a target's management or board. "Clients want more color around the name, not the name itself," says Chris Hite, co-head of global health care at Citigroup Inc. (NYSE:C). And certainly there's a premium on the capital markets expertise a banker can provide.
Says Rob Kindler, head of global M&A at Morgan Stanley (NYSE:MS):
"The investment bank can bring a perspective on what the rating agencies are going to do on the debt side, how the debt is going to trade, what the capital markets reaction is going to be. [That] is very difficult to get in-house expertise on because you're just focused on your own company, rather than the whole market." (See video).
In house M&A dealmakers have had a great run. What usually happens is companies discover they have created very little value and long term sustainable growth from M&A. What metric do they really rely on? 100x P/Ee multiple and 60% growth rate target? What did they do wrong? This is why I am opening an Investment Banking firm. Why do they need Investment Bankers the most? To help them uncover and unlock value. It takes a strange animal to do this kind of work.
Intel, Google, whomever was in a world where stock prices were going straight up. It was a nice run, but let's not be one of the suckers born every minute "The days of playing Investment Bankers against each other for information are over." Small companies with the help of Venture Capitalist will be in need as well--that is going to be the most fun because they are really arrogant. An arrogant person in need is a wonderful thing.
In house M&A acquisitions are about to be valued, as we can look back to 1995 in industries like Technology, Information Technology, Commercial Real Estate etc.... In-house M&A dealmakers will see the lack of value from their efforts. These dealmakers were paper-pushers riding a wave with plenty of cash to burn--now their acquisitions are going to be measured against a historical dBase. It takes many years to understand the Capital Markets, and how to really win! The firms that do this for Investment Returns have done the best job trying to create models that reveal true value.
This is a case where the "fees" are worth the "advice" and can be measured "fee dollar" to "advice dollar." In-house dealmakers understand their industry, and they can pull off a paper transaction without Investment Bankers. But, how would you like to be the guy or gal that paid to 100x for a company in a 6x world? Well, who cares if you don't really create value from paying millions and billions for companies. More importantly, "ex-the merger models which you better have," this is not the value proposition for hiring an Investment Banker.
As the only two positive performing "liquid" asset classes are gold and biotech in the last 3 years (and Apple,) M&A in-house dealmakers will come calling, I guarantee it! The markets will separate the short term performance seeking from sustainable organic growth oriented investors--and who will sell your declining paper to the short term performance seeking investor or fund if you don't have a relationship?