In an issue about the movers and shakers in the industry, we must pay some attention to the financial intermediaries supporting the industry. The bankers that advise companies on acquisitions and sales, finance those transactions and take the companies public are a key cog in the development of the payments machine. Although, the common question I hear is, "what do these guys really do?"
Since school starts again in a few weeks, I find it easiest to compare large investment banks to your typical high school — complete with all of the politics, cliques and stereotypes. Each investment banker can be compared to one of the core high school characterizations.
Coverage Banker
The coverage bankers are the cool kids in school. They're the guys who are burning up your telephone line on a daily basis, or showing up regularly at your office to tell you how great they are. Their sole purpose in life is to make sure you and everyone else knows who they are so that you call them when you consider pursuing a transaction. They attempt to instill the belief that somebody would have to be out of their mind to do business with any other bank because all banks other than theirs are inferior in every way. They even have the league tables (bank rankings) to prove it. To that point, there is a common joke that every bank is the #1 bank in the industry/product they are marketing. If a banker can't manipulate the numbers to place their bank at the top of the list, you shouldn't hire them anyway. This leads to very interesting selection criteria (for fun, look at the footnotes of any pitchbook league table to see the manipulation that goes on).
Coverage bankers are necessary because the banks need someone to manage their "relationship" with you. To build this relationship, they will pitch you any product the bank offers as the silver bullet solution to the issues you are facing. They also will roll out extremely large books of numbers to prove to you that buying Competitor A (who isn't for sale by the way) is the best thing you could do over the next three to six months of your life and of course they will be right there with you.
Equity Capital Markets (ECM)
The ECM bankers are the jocks. Everyone within the investment bank secretly wants to work in ECM. These are the guys who will manage your IPO and subsequent stock offerings. After all, who doesn't want to ring the bell at the New York Stock Exchange? These bankers have their fingers on the pulse of the stock market. They've trained hard, studied the playbooks and know exactly which roadshow routes to run to get your offering priced at the highest level.
ECM bankers are also the most competitive bunch in an overly competitive industry. ECM bankers not only care about being involved in your IPO, but are extremely concerned with where their names are located on the cover of the offering document. In the past ten years, the ECM bankers across Wall Street have taken a single role (the top bank in your offering that represents and directs all of the other banks in the deal) into three tiers of importance: the Global Coordinators, the Bookrunners and the Lead Managers. You may think this seems foolish, but in many firms it is more important than how much they are being paid. For example, in one highly competitive IPO in the past couple of years, a major Wall Street firm offered to work for free just to have their name included as a Bookrunner rather than at a lower level of importance.
ECM bankers are invaluable as you look at an IPO and may be second only to the quality of the distribution platform of the bank when selecting your IPO advisor.
Debt Capital Markets (DCM)
The DCM bankers are the Brainiacs. These are the smartest guys in the building. They are responsible for determining if your business is credit-worthy, how much debt your business can handle and what the debt will cost. From the bank's point of view, they are also responsible for the most important task— finding other banks to sell all the debt to so that their bank doesn't actually have any exposure to the risk of your business defaulting on the loan.
In addition, there is a competitive streak among these bankers as well. In the run up to 2007, every DCM group on Wall Street was trying to prove that they could extend more debt to a business than their competitor banks. The discussions at many bank credit committees were less about the merits of the company and more about the fact that Bank B was offering one more turn of leverage so Bank A had to raise its proposal to win the business. Today, those discussions are focused on risk, the bank's exposure to the company or the industry and how much of the debt the bank will have to hold onto.
DCM bankers are probably the key players in every deal being considered in the industry today given the lack of capital availability. To quote James Carville: "I want to [be reincarnated] as the bond market. You can intimidate everybody!"
Hopefully you now understand your bankers a little better and see how they move and shake the acquiring industry. Knowing what motivates them will help you get the most out of your interactions. It isn't that hard; just think about how you survived high school.  |
