John Carney offers an interesting glimpse into the backroom negotiating techniques of investment bankers in a recent column for CNBC.
Carney was responding to an op-ed piece by former investment banker William Cohan who had attacked Mitt Romney and his Bain Capital cohorts as being a “bunch of jerks” in the negotiating process for buy-outs. Cohan says Bain Capital “gamed” the system by offering the highest price in the early rounds of bidding for a prospective company, just to get to the exclusive second round of the process. Then they would suddenly find all sorts of warts and wrinkles during the more extensive due diligence process, and start lowering their big, but only after all their competitors had been booted out of the process. Cohan accuses Bain of being particularly rapacious capitalists.
But Carney argues this beating down of the bid was not limited to Bain Capital, nor was it driven solely by greed. It was also a function of the normal and valuable risk management processes of creditor investment banks.
“Investment banks were typically not just found on the side of the deal where Cohan worked, arranging for owners of companies to cash out to private equity firms. They were almost always on the other side of the deal as well, providing the cash the private equity firms would use to buy the companies,” writes Carney.
These creditor banks would go through their own bidding process to win the privilege of financing a private equity firm’s buyout deal. But once they won that right, they, too, had the right to dig more deeply into the guts of the deal looking for potential problems.
Very often it was the creditor banks that forced the private equity guys to adjust their bids. “We cared a lot about managing the risk we were taking on with these loans. From the lending bank’s perspective, it often seemed like the private equity guys had been so eager to win the role of buyer that they had overlooked serious problems at the company,” writes Carney.
Of course, things went “off the rails” between 2005 and 2007, when M&A activity reached such a fever pitch that banks were rushing credit out the door at a frantic pace to keep up with their competitors. The result was astronomical acquisition prices and far less attention paid to risk and due diligence.
The process wasn’t always simple and it wasn’t always polite, says Carney, but it helped keep valuations in line with reality says Carney.
Have you ever been involved in one of these negotiating sessions in one of your investment banking jobs, either on the buy-side or sell-side, at an investment bank? Add your comments below.
At least one major investment bank is weighing the option of freezing bonuses for their junior investment banking jobs, a move that could catch on if other major banks follow their lead.
Credit Suisse is reportedly considering suspending the automatic bonuses doled out each year to analysts, associates and some vice presidents, according to a story in Businessweek. These staff will still get their regular annual salaries, but bonuses may be lowered to keep total pay flat from the year before.
Industry insiders are watching to see if other big banks such as Goldman Sachs or JPMorgan Chase follow suit. If they do, it could mark a turning point on the Street. But if not, it could open up Credit Suisse to large-scale defections by junior bankers who are able to get higher pay packages elsewhere.
Junior-level bankers typically comprise about three quarters of a firm’s workforce. They often start with base salaries in the $200,000 range, and can expect increases of 15 to 20 percent each year. An investment banker often spends three to four years as an analyst or associate, then three more years as a vice president before being named as a director. Top-producing vice presidents in their third year can earn in the neighborhood of $600,000 to $700,000 in total compensation, according to the article.
A plunge in trading revenue and European debt worries have put a crimp in profits for the big banks, thus leading to more strategies for cutting costs. However, limiting pay among junior bankers could be a risky move since juniors tend to talk more with peers and former classmates and compare notes. The news of lower entry-level pay at one firm can put it at a disadvantage recruiting new employees.
Many of the big U.S. banks will inform their employees about salaries and total compensation by the end of January. New compensation schemes would go into effect at the beginning of February. With earnings estimates slashed by a downturn in trading revenues, the banks are eyeing each other’s compensation plans carefully this month before determining their next step.
What’s your opinion? Do you think the inevitable downward pressure on total compensation, especially for more junior employees, is going to put a damper on young people pursuing investment banking jobs? Add your comments below.
Bloomberg reports that compensation for investment bankers in Brazil is heating up in a big way, with pay hikes in the neighborhood of 25% for bankers ready to defect to rival firms.
And while the financial services industry continues to shink in such centers as London and New York, the opposite is true in Brazil. There’s actually a shortage of experienced investment banking talent in Latin America’s largest economy.
Brazil is showing a net increase in investment banking jobs in 2011. Salaries for managing director-level bankers ranged from around $350k to $500k, not including bonuses. This compares well with the average $300k to $400k at top U.S. banks. In fact, according to the Bloomberg article, average pay for bankers fell by roughly 27% last year, while it declined by only 1% in Latin America.
“The local debt and credit markets will be the next big thing,” (in Brazil), said Vinicius Bolotnicki, a partner at Options Group in Brazil. Foreign companies such as Deutsche Bank AG (DBK), JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Goldman Sachs Group Inc. (GS) have been adding employees at their offices.
The biggest challenge for Brazilian banks will be to retain senior executives, says Bolotnicki, especially as fees decline from underwriting stocks and bonds and from advising on M&A.
Total revenue from investment banking fees in Brazil reached $891 million last year, according to data from Dealogic. That level is below 2010 levels of $1.16 billion and far off the peak of 2007, $1.6 billion. This means that senior executives may take the lion’s share of banks’ bonus pools, leaving mid-level professionals’ compensation essentially flat. Nevertheless, Brazilian banks still pay their bonuses in cash, something that’s especially attractive at a time when U.S. and European banks are being forced to defer larger chunks of executive compensation in shares of stock, and trim bonuses overall.
Bright spots on the Brazil scene include increasing demand for equity analysts and equity-derivative teams.
What’s your take? Are you investigating Brazil as either a place of doing business or for an investment bank job? Add your comments below.
