We don’t have to look very hard to find evidence that the behavior of big-name investment banks is often controversial. In his now-famous article, The Great American Bubble Machine, Matt Taibbi of Rolling Stone likened large investment banks to “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Stop beating around the bush, Mr. Taibbi. What do you really think?
But while the profit-driven motives of large investment banks are often questioned, they are generally thought to be competent valuation technicians. From my experience, however, that is not always the case. A great recent example is the admission that Lazard, who advised SolarCity on its controversial deal with Tesla, made a computational error in its fairness opinion. Kudos to those involved for coming forward with the correction. Although it purportedly did not impact Lazard’s conclusion, it demonstrates that even big-name investment banks are not immune to making errors, even $400 million ones.
Lazard is generally well-regarded in the marketplace, and this isn’t an issue specific to Lazard or the error it reportedly made in the SolarCity deal. We are frequently asked to review the work performed by investment banks, and we find computational or conceptual errors more frequently that you would think. More times than not, the culprit is the fact that as many as four layers of professionals sit between the engagement leader and the people actually doing the work.
This issue also seeps its way into the “beauty contests” for middle market investment banking engagements. All too often, banks are selected based on their highly refined slide decks, with their innumerable tombstones and glossy headshots of seasoned industry veterans and credit market specialists. However, I sometimes feel that not enough attention is paid to the specific individuals who will ultimately work an engagement. I can’t tell you how many times I’ve heard business owners & executives complain that the Managing Director who performed so ably in the “pitch” meeting, was rarely (or never) seen until they sat at the closing table to collect the fee.
I understand the economics of our business. It’s hard to justify having a Managing Director spread financial statements, particularly if working on a contingent fee basis. But too much “leverage” in an organization creates distance between the engagement leader and the client. Not everyone will share my philosophy on that point, but it’s one I feel strongly about.
In the world of professional services, particularly in the middle market, our reputation is based on the work we do. Everyone is human. We all make mistakes from time to time. But the right balance of professionals and an earnest involvement by engagement leaders goes a long way to mitigating the risk of errors and the resulting turbulence it can cause in a transaction. If more firms adopted this client-centric approach (even if it means sacrificing a little profit margin in the process), maybe the investment banking profession could start rehabilitating its image a little and leave “squid” talk to the appetizer menu.