Wednesday, 20 February 2008

Sirens and investment bankers – two of a kind?

Some time ago, I was interviewing a CEO of a FTSE100 company, which had acquired several dozens of companies over the past years, when we came to speak about investment bankers. He then asked me “do you know who the Sirens were, in Greek mythology?” I said “yes” (because I did and, of course, also because I did not want to appear ignorant).

Sirens were beautiful maidens located on a small island surrounded by cliffs and rocks. They would lure seamen who sailed near the island with their enchanting singing, to shipwreck to death onto the rocks.

“Well” this CEO continued, “investment bankers are just like Sirens”. That caught my attention…

“How’s that?” I asked. “They constantly try to seduce you into doing another deal, and they don’t care at all whether that deal actually make sense for the company”. Ok…

Of course, firms and their shareholders are not the only parties potentially benefiting from a transaction. A vast industry exists that initiates, values, negotiates, and closes deals. However, the interests of such parties, for instance investment bankers, may not always be aligned with those of the firm. Especially when M&A times are relatively slow, investment bankers may attempt to initiate deals from which it is not clear that they are to the benefit of the potential acquirer.

As an ex-investment banker told me some time ago, “when times were slow, we’d all go through our address books and discuss ‘who hasn’t done a deal for a long time’, because we would usually be able to talk such a person into doing one”.

Yet, one could make a good argument that investment bankers are not necessarily to blame for this; they are supposed to follow their interests and it is up to the manager to say “no” to a proposed transaction.

Yet, deals – and investment bankers – can be seductive. Sometimes, CEOs who are inclined to at least listen to their investment bank would do well to do like Odysseus; Odysseus wanted to hear the mythical Sirens sing but was less keen on shipwrecking. So he asked his sailors to plug their ears with beeswax and to tie him firmly to the ship’s mast. They then sailed past the Sirens; Odysseus was overwhelmed by their music but, being restrained, could not free himself to follow his urges and run his ship onto the rocks.

All we need now are boards with beeswax and offices with a mast. I will bring the rope.

8 comments:

Xian said...

Interesting blog, Prof Vermulen. Just found the link from a FT article.

In my naive opinion the rope, not only to stop CEO acting on urge but also bring them back down to earth (ref: earlier blog on CEO hubris) is to take away their golden parachutes and make them put down money so that they are personally affected for the negative consequences. It is a fact of life that when people have something to lose, without comfort of insurance or guarantee in retreat, they will try much harder. Obviously it's much harder to do, since being the CEO, he/she has much power to redesign the course for his comfort and with the current weak governance in reward/remuneration, it's all too easy. This is why we see shareholders and workers gets to bear the brute, via CEO gets a free meal ticket to lure for a few years before getting head-hunted to lead another company.

Freek said...

Hi Xian, Thanks (for the kind words about my blog, and the slightly less kind words about CEOs...). Some nice analogies too - I might have to plagiarise some of them :-)

I agree with 70% of what you say, and I disagree with 70% of what you say (you have to be an academic to pull that off). I am inclined to immediately write 5 blogs in response (e.g. about corporate governance, performance-related pay, etc.) and promise to definitely do so in the very near future, but not all at once... Watch this space!

vlade said...

Found this blog via FT too, and as someone who is almost a professional cynic, I liked the first post a lot...
What a lot of people (including CEOs) don't seem to appreciate, is that most "investment bankers" that companies (clients) see are really sales people. They might be even smart sales people, and might be even good salespeople (defined not by volume, but by utility to both client and their employer), but ultimately they are salespeople.

Think used car salesman/real estate agent in spiffy suit and possibly better english. You can find some that you can trust in good and bad times, but with most of them, you shouldn't (and with none you should right off the bat).

I tend to remember a story about a real estate investor and his policy when choosing RE agents/managers. To start, he gave them one, not that lucrative, building in his portfolio. If they performed well, he gave them another, more lucrative. If they performed badly, he doubled down (took away two).
Of course, he could afford it has his were the most lucrative properties on that specific market, but the moral stays.

Freek said...

I would not call myself a cynic (although I realise I might sometimes give that impression!) but would prefer "realist" - also about top managers. CEOs often become the personifications of their companies; we glorify them if the company does well (e.g. Jack Welch) and vilify them when they collapse (Jeff Skilling). Both are likely to be exaggerations, as they are usually not the only people to blame/praise.

Yes, I think it is partly due to the (peculiar) personalities of the people who become CEOs (see my blog on the 7th of January) but, at least as important, also due to the people they become under the influence of their environments (e.g. business press, sycophants and business schools... - see my blog on the 3d of February).

CEOs most of the time are human and therefore suffer from the same cognitive and emotional limitations as the rest of us.

vlade said...

I call myself a realist too, but the outside keeps marking me as a cynic...

Yes, I read now the two entries you mention, and I think you're right.
In effect, it's rather sad and silly, but unfortunately human psychology has been like that and I guess will continue.

I find it even more fascinating, that when someone is successful we try to emulate them (be it by making them role models, letting them teach etc..), without even realising that we cannot quantify what role luck played in their success. Not just spotting the opportunity, as you rightly mention in another blog entry, but also taking it - there's a whole lot of banks out there which are not as badly affected by the credit crunch only because they were too inept/slow to get into these markets in the first place, not because they would know how stupid it was in the first place.
For those who really are excellent, we underestimate the fact that if everyone was Warren Buffet, the original wouldn't be nearly as successful.

But then, most people lack basic static and probability knowledge, otherwise they wouldn't be willing to accept "we shall make sure at least 60% of our pupils have above average grades" nonsense.

Dean said...

greetings to all.
I would first like to thank the writers of this blog by sharing information, a few years ago I read a book called costa rica investment in this book deal with questions like this one.

Sildenafil Citrate said...

sirens and investment bankers as two of a kind, interesting way to look at it. well in my opinion sirens and investment bankers are associated in one way or another

Investment Bankers said...

I agree with you.I liked the first post a lot. What a lot of people (including CEOs) don't seem to appreciate..Thanks!!