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.