John M Green discusses the ins and, mostly, the outs of bankers’ league table rankings.
It’s springtime, which traditionally brings smiles to the grumpiest faces. This year, that will include people who’ve been disgruntled for years: investment bankers. For some time business confidence was very cautious, with many boards focusing more on stabilising earnings than growth, so deal pipelines were empty. But earlier this year, more companies started leaning towards growth, so the recent spate of IPOs, M&As and other deal-related acronyms have got bankers’ champagne bottles popping again.
The sober reality is that good investment bankers can add value to a board’s deliberations, whether it’s through outside-the-box insights, deep market, industry or local intelligence, trusted relationships or taking a risk themselves and using their own balance sheet.
So how do boards choose between all the banks lining up to help us? If your board is a frequent consumer of these services — either the company itself or collectively via the directors’ portfolio — you’re probably inclined to use bankers you’ve successfully been in the trenches with before. That’s unless they’ve become conflicted, or this time they have weak specialist expertise or, on foreign deals, less local knowledge, or perhaps another bank brought you the deal.
Most companies, though, rarely employ investment bankers and are ripe targets for banker sleight of hand, of which there’s no more exquisite example than the league table.
When a bank sniffs a deal in the air, one of the first items it’ll shoot over to you — together with hard-to-get tickets to the Hong Kong Sevens, the Opera or the Rolling Stones — is its gold-plated “independent” ranking that will be indisputable proof of the yawning gulf between it and every other firm trying to kick down your boardroom door.
Some are so creative they should be nominated for a Miles Franklin Award for fiction. That doesn’t mean we should dismiss them, but rather asks that we wise up to some of the bankers’ tricks, to give us a better clue to their real expertise.
Say three banks are pitching to you. It’s almost certain you’ll see three league tables, with each bank baldly claiming it is Number 1 in the relevant niche. How is that possible? Are two of them lying?
Heavens, no! Think about it as if they’re a tourist who is simply cropping a holiday photo to cut out an unsightly stomach bulge or as Sherlock Holmes’ creator Arthur Conan Doyle aptly said: “Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.”
With so many data variables to turn off or on, the most artful of bankers can cut and mould the identical official source material into whatever narrow set of criteria will rank them, absolutely truthfully, as the clear winner.
At best, this is cheeky, but if they can do that with such gravitas and sincerity, you might more readily imagine them on your team, tinkering with an intricate merger model to massage a target company into bumping up your shareholders’ cut of the pie from a measly half to a more attractive 65 per cent.
So, what are some of the “tells” we directors should watch out for in these league tables? First, check the time period they cover. Even firms whose shelves are groaning with deal tombstones can play games with dates. For example, if you wade through the footnotes, you might find that the league table data ends on a rather strange date, say 19 June. Generously, you might think that the bank chose 19 June because it was the cut-off for the best available data set. Which it was — if you meant best for it and not best for you. The reason might be that an arch-rival snaffled two hugely relevant deals away from it on 20 and 28 June.
Next, is its ranking calculated by the number of deals it worked on or their value? If they use the number of deals, check the fine print. You might find they’re all $25-$75 million transactions, which is not so relevant if yours is a $1 billion deal.
It’s also important to check for what role the bank actually had. A bank might brazenly claim full deal credit as if it was the board’s key or sole adviser, yet when you explore this you might discover that it merely wrote a valuation report or assisted on the due diligence, both of which are important but involve different skills and usually different people.
If your deal is on another continent, say in Latin America, the footnotes might reveal the bank’s Latin American league table excludes deals done in Brazil. Why? Perhaps because a competitor won some big deals there, whereas all its own were in, say, Argentina.
When a bank shows deal experience by industry sector, it can carve that up just as creatively as a region to show themselves in the best light.
Yet all the bankers are doing is following one of Albert Einstein’s prescriptions: “If the facts don’t fit the theory, change the facts.” Perhaps directors should encourage them to follow another Einsteinism: “Anyone who doesn’t take truth seriously in small matters can’t be trusted in large ones either.”
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