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At many, many points in your Wall Street career, you will encounter a basic quandary, which is, “should I behave like a douchebag here, or should I not behave like a douchebag at this one particular moment in time?” This question is hard because, on the one hand, behaving like a douchebag often brings immediate cash rewards, and can be fun; but on the other hand, there are longer-term reputational consequences to frequent douchebag behavior. Goldman Sachs has a name for its position on this trade-off, which is “long-term greedy,” and you can go think your thoughts about whether and in what circumstances “long-term douchebag” is a relevant substitution.
Speaking of long-term douchebags, William Cohan can NURSE A GRUDGE, man:
Yet, there is another version of the Bain way that I experienced personally during my 17 years as a deal-adviser on Wall Street: Seemingly alone among private-equity firms, Romney’s Bain Capital was a master at bait-and-switching Wall Street bankers to get its hands on the companies that provided the raw material for its financial alchemy. … I never negotiated directly with Romney; he was too high-level for any interaction with me. Rather, I dealt often with other Bain senior partners, who were very much in his mold. In my experience, Bain Capital did all that it could to game the system by consistently offering the highest prices during the early rounds of bidding — only to try to low-ball the price after it had weeded out competitors.
The complaint here is that Bain would put in high bids in early rounds of an auction for a company, and then when other bidders have been eliminated and Bain’s negotiating position was stronger, it would find ways to re-trade on price. And if you’ve ever worked in M&A, or, um, anywhere else, you are laughing hysterically right now at the notion that Bain partners are the only people who re-trade on price.*
The Epicurean Dealmaker wrote a withering response to Cohan this weekend, which boils down to:
(1) Getting companies cheap was, like, Mitt’s job, man;
(2) not letting him do that was, like, your job;
(3) stop whining.
And that is totally correct and you should read it and I presume that’s the last we’ll ever hear from William Cohan.
But I think there’s some vague kernel of truth here. It’s probably not that Mitt Romney was the worst private equity guy ever because he invented re-trading, and it’s probably not that his partners’ making William Cohan sad decades ago is evidence that he’d be a terrible president.** It’s that private equity firms probably are a bit more tactical and ruthless about these auction norms than are most other buyers. Sure, corporate buyers will lower their price because circumstances have changed, or because they’re free-ranging assholes, but in general they’re more likely to play by the rules – in part because they’re more likely to take the advice of bankers who’ve been brought up on the rules.
Hedge funds in theory exist to arbitrage market anomalies; they hope, anyway, to buy (sell) assets that trade too low (high) due to irrational or non-economic preferences of other market actors. Private equity firms, to a large extent, exist to arbitrage social anomalies – to make financial and operational decisions that others won’t make because it’s just so damn awkward. CEO doesn’t like laying off unnecessary workers? Mitt will help you with that, with a smile on his face. Public CEOs can’t imagine going to their lenders to ask to lever up to pay a big dividend? Guess who can! Feels kind of weird to claim that all of the compensation for your job that you go to every day is “capital gains”? Turns out, it feels kind of great to only pay a 15% tax rate. Private equity half-boasts, half-shamefacedly-admits, that it’s in the business of making hard decisions that others don’t want to, in the pursuit of more dollars for, like, teachers’ pensions and stuff.
On the other hand, while there’s lots of bluster about Wall Street’s ruthless efficiency and bottom-line focus, the traditional businesses of big investment banks are crusted over with lots of archaic customs that make life nicer, and more profitable, for bankers. Fees are pretty fixed. Securities offerings and accompanying derivatives are often negotiated rather than bid out. And, yes, serious re-trading in merger negotiations is generally frowned upon in part because it makes everyone’s life harder and more stressful on the way to their fees. These traditions always struck me as pretty fragile; I spent much of my time in banking wondering what would happen if the clients figured out that, if they came to us and said “look, suckers, we know you’ve put a lot of work into this deal, but we’ve decided to cut your fees from 300bps to 2bps, take it or leave it,” we’d probably do it.***
There are some sanctions enforcing those traditions – but they’re soft and inconsistent and often get steamrolled by the desire for money. As Epicurean Dealmaker writes:
The Street can be a very small place. Repeat offenders get put in the penalty box, don’t get shown deals (like Mr. Cohan did), get used as stalking horses to boost the offer prices of preferred bidders, and generally get fucked with by bankers who find them annoying. It is important not to overstate the restraint which reputation imposes on private equity firms, however, because they also tend to be the biggest fee payers in the M&A market, and investment banks … are careful not to shut them out or fuck them over completely.
That, I think, is an essential driving insight of the private equity business: that “the Street is a small place, but fuck it.” That you can get away with violating a lot of traditional rules largely because you are a repeat player who pays buckets of money in M&A and financing fees. And that violating those rules can put you in a position to make more money. Private equity firms are often delightfully top-line focused in deal negotiations; they’ll slosh around buckets of money for bankers and consultants to make sure that they’re getting the right deal at the right price. And if Mitt’s (decades-old) caddish behavior is any guide, the industry is similarly willing to accept the scorn and anger of bankers – even bankers who might one day, in the distant future, write op-eds about them – if it will bring a better price on a deal.
That’s really annoying if you’re the banker. I suspect the LPs like it.
All’s Fair … [Epicurean Dealmaker]
Related: One Way to Look at Private Equity [DealBook]
* In general, a thing I’ve enjoyed about this election cycle is that Mitt Romney/Bain Capital have been given credit/blame for inventing pretty much every aspect of modern financial capitalism, including shareholder-centric management, creative destruction, corporate personhood, LBOs, venture capital, Staples, staples, etc. Re-trading on price is a new one though.
** Really! Come on! You can think that Bain Capital’s record is good or bad or relevant or irrelevant. But once you’ve decided that Bain’s laying off thousands of workers is not relevant to Mitt’s presidential prospects, you’re going to say “oh, but he indirectly gave an investment banking MD heartburn on that one merger, guess I can’t vote for him”? Gaaah.
*** I mean, not really. But kind of. The fee negotiation, for something with sort-of-zero marginal cost, is always perilous, and relies much much more on tradition than on any logical basis.