You know that it is time to sack the consultants when they arrive in a car that is swankier than yours. That chief executive officer's maxim is now being turned against the most extravagant advisers of all, the investment bankers, who are beginning to lose competitive advantage in a hugely lucrative activity: advice on mergers and acquisitions.
Big companies are doing deals in-house without the helping hand of a banker. According to figures from Dealogic, quoted in The Wall Street Journal, 70 buyers in public company mergers valued at more than $1-billion last year opted for the do-it-yourself alternative. That represents 26 per cent of all major deals, up from 13 per cent in the previous year. According to the WSJ, ComCast and AbbVie shunned investment banking advice in their recent respective purchases of DreamWorks and Stemcentrx.
By spurning the helping hand, companies can avoid filling its palm with cash, fees that can run into the hundreds of millions for very large transactions. Some big companies that actively buy and sell corporate assets have built up teams of specialists, often made up of former investment bankers, to run the transaction internally. BP's in-house M&A unit comprises two dozen people who collectively have sold more than $40-billion in assets in a major fundraising exercise after the Macondo oil spill.
The advantage of the DIY solution is not just the savings in fees but also the greater expertise, the oil company reckons. There is little a banker can teach a major oil company about hydrocarbon assets and it isn't just the question of value. Beyond the finance and accounting specialists, the BP M&A team has access to human resources managers, geologists, engineers, health and safety professionals and so on. In the purchase or sale of a big petrochemical facility, the handling of the auction may be the least complicated part of the process, but it's probably the only bit in which a bank can claim any expertise.
If banks have such a meagre skill set, you might wonder why big corporates ever hired them.
When deals require equity or bond finance, the banks are still needed to sell the stocks and shares. But the underlying excuse for paying deal fees to Wall Street is the comfort that an independent opinion on value provides in the boardroom. And it is the independence of that value assessment that is increasingly in question. When the rewards for financing deals are added into the pot of M&A fees, what is left of the independence of an investment banking adviser? When we know, from the evidence of endless business school studies, that the majority of M&A deals fail to generate value for investors, the value of the advice that supported the transaction must be questioned.
If bankers rarely say "don't do it," the same cannot be said for in-house advisers. A full-time employee with accumulating pension rights has little or no incentive to wreck the company by promoting a mammoth merger. Moreover, the tools and data that bankers use to value corporate assets are now commoditized and available to anyone with access to the Internet. All that an investment banker offers is a highly subjective opinion to which an intelligent CEO will not attribute much value.
Merger advice is a feast and famine business that rises and falls with the stock market and investment bankers suffered a long hunger until a huge burst of activity erupted late last year to make it a record in dollar terms for M&A deals.
It's not clear, however, that the good old days of smash and grab takeovers are back again. Governments are blocking big mergers for political reasons, either because they suspect fiscal avoidance as in the U.S. administration's scuppering of the Pfizer-Allergan deal or the European Commission's block on Hutchison's takeover of O2, the British mobile network. It's difficult to see what value bankers can bring to such highly political obstacles; indeed, you might wonder if in such situations the heavy boots of Wall Street are more of a hindrance than an asset.
If merger advice is no longer an investment banking fiefdom and if regulation is squeezing the life out of the capital markets operations, what is left for Wall Street and the City of London? Last year, revenues shrank for the big investment banks and return on equity averaged 6.7 per cent, a performance that looks more suited to a utility than a buccaneering Wall Street player.
In the wake of a terrible year for Wall Street, Goldman Sachs has just launched an Internet retail bank, seeking to offer savings products and consumer loans for the average American, a far cry from the business of touting advice in boardrooms. It sounds odd that a bank with such highly rewarded staff would choose to invest in an electronic business platform with no human interface. Unless, of course, you have concluded that the humans are no longer required.
Carl Mortished is a Canadian financial journalist based in London.
Carl Mortished