Svengalis, Bankers and the Role of Intermediaries

Earlier this week Andrew Ross Sorkin in the New York Times wrote a column clucking over investment bankers who advised on a series of Hewlett-Packard M&A deals. Sorkin adhered to a now well-worn meme: that the bankers for HP were somehow in the wrong for advising on M&A deals that now look dicey -- and which helped usher out Léo Apotheker from the CEO's job -- and for getting, as usual, handsomely rewarded for doing so. Sorkin's column bristles with caveats. After all, it's true, HP executives and its board technically made the decisions and Apotheker paid the price with his job. And it's true that Frank Quattrone's Qatalyst cleaned up on a number of these deals by advising the targets, not HP -- a reality that remains unchanged just because HP picked up the tab. But the clear implication remains: Those Svengali bankers of Wall Street had struck again.

Sorkin's column raises a larger point that floats through much of the current discourse about Wall Street and its "investment bankers": the embattled, distrusted, even despised role of the intermediary both on Wall Street and beyond. Let's clear a little ground here. In the popular mind, the term "investment banker" includes just about everyone in that amorphous and secretive beehive, Wall Street, including traders, lawyers, money managers and adjective-less bankers (meaning lenders). In reality, the number of true investment bankers, meaning advisers to corporations, is not that large. There is a small, if potent, irony buried here. As a dominant power bloc at the largest firms -- the advisory boutiques are different -- traders began to nudge aside investment bankers as long as three decades ago, with the battle at the old Lehman Brothers between investment banker Pete Peterson and trader Lew Glucksman -- won significantly by Glucksman (who then lost, another story). Traders drove the transition from partnerships to public companies and for the steady accumulation of capital. Over time, just as trading replaced banking as a core Wall Street source of revenue, so too did principal trading and investing -- trading for the firm -- take predominance over customer trading. All this shifting around never sank in publicly. The criminal protagonist in Oliver Stone's Wall Stree was a trader who was conflated with an investment banker. Much of the blame for the financial crisis was laid at the door of investment bankers, who are still confused with traders and principal investors who command most of the capital and assume most of the risk on Wall Street -- the reason for the Volcker Rule.

Investment bankers are intermediaries, middlemen, go-betweens. They advise companies most typically on mergers, "renting" their knowledge of the markets, of investors, of the game itself. They are not alone. Corporate lawyers are also brought in, and accountants, public relations experts and consultants gather around the various parties to a deal. Few large companies hire just one investment banker or just one firm; as Sorkin suggests, they hire a number of firms, not just for specific reasons (financing, particular expertise, to keep the other side from hiring someone) but to get a range of views. The days when corporations retained tiny, stable sets of advisers has long been over; while personal relationships still exist, particularly among a tiny handful of star advisers, they have been undermined by other considerations, from governance concerns to the increasing power of the big banks that can finance major deals. (Lawyer relationships and retainers have held up better, but even they have eroded.) Not least, companies have steadily beefed up their own internal teams -- at The Deal we call them corporate dealmakers -- that can both monitor outside advisers and replicate much of the expertise that once made Wall Street so powerful.

What all this points out is what should be obvious: Companies control the game. They can hire and fire. It's difficult to imagine how the CEO, not to say a board, of an enormous public company like HP would feel the need to accede to the whispered lunacy of some investment banker, no matter his or her status. That's not to say that a) the advice might not be lousy (though advice givers in a company, like that of a royal court, are legion) or b) that entire M&A enterprise might be misbegotten, which it too often is. It is to say that in a competitive arena, the responsibility for corporate decisions lies squarely within the corporation itself. In fact, a better theory than the belief in Svengali bankers is the power of groupthink. CEOs and boards are so powerful, and so important a source of revenue for critical advisers (not to say consultants), that they spend all their time anticipating their desires, rather than offering truly independent advice. Corporations define the mission: Help us close the deal. They're not asking these folks to worry about culture or integration or structure. Just get the deal done.

Do investment bankers get paid a lot for this? Sure, but that's a complicated question too. These deals are large and complex, requiring a lot more than just a "consigliere" -- a term always used with "The Godfather" playing in the background -- sitting in a dark room plotting with a CEO. The fees on these deals are reflective as well of the outsized pay packages on Wall Street, which is a different issue. And despite the usual murmurs about getting bad advice or the handwringing over M&A deals that fail miserably or even the presence of in-house dealmaking teams, those fees have not demonstrably tightened over the years. Unless you believe that this too is a sign of excessive Wall Street power -- M&A fees are high because companies do what bankers tell them to do -- then you have to conclude that companies generally feel they are getting something for their money, or at least their shareholders' money. After all, shareholders are the ultimate owners and monitors.

In short, power and leverage almost always resides with the company, not the adviser. The equation is starkly unbalanced. It is a remarkable, and to me telling, fact that this meme of the Svengali intermediary persists in the face of the enormous power, reach and resources of corporations. But this is larger and more ubiquitous than just the role of a bunch of bespoke bankers. Decades ago, Peter Drucker promoted the notion of "post-capitalism" and the "knowledge society" and presented a vision of a far more complex, attenuated, networked world in which information or knowledge meant far more than capital or material resources. Many others followed Drucker; Robert Reich coined the phrase "symbolic analysts" (much the same as Drucker's "knowledge workers") for those trained to use information in a way that allowed them to thrive in a shifting, information-rich networked world. Roles in this world were murky; today a principal, tomorrow an intermediary; today a collaborator, tomorrow a competitor. Accountability and education, as Drucker stressed in "Post-Capitalist Society" in 1993 was a big issue. Much of this has come true, notably on Wall Street, but also in the tendrils of social media and the Internet, with its multitasking and shifting roles. Indeed, much of what people distrust so deeply about Wall Street is the sense -- often valid -- that such a system spawns conflict, manipulation, lack of accountability, not to say hidden pools of risk. Because these intermediaries move between one situation and the next (and because they produce, well, nothing tangible: they offer a service) they are inherently untrustworthy, suspect, and self-interested. The fact that they are also vulnerable, exposed and involved in a series of asymmetric relationships tends to be forgotten.

The fact is we are all, in one way or the other, intermediaries. We are all involved in asymmetric relationships, and we all balance off conflicts every day. Error is common. What advice should a banker offer to a CEO intent on a course of action? Should advice that doesn't work out not be paid for? And how do you judge in complex situations whether that advice hasn't worked out? (M&A deals are particularly tricky to judge, especially given the sheer number of folks around them and the complexity of the situation.) These are, each and every one of them, difficult, even moral and ethical, questions. But the rule at the end of the day should be: He who has the power also has the accountability, whether there's a Svengali lurking around or not.

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