Investment Banking – Why is It the Way It Is? Part 3 Marketing a High Priced Intangible Product

 

You'd Probably Find an IB Pitch
from this Duo Unconvincing

IB’s sell high priced professional services.

If you’re in the market for a car, you can nip down to the Maybach dealer and kick the tires. And then continue over to check out the latest offering from Geely. Take a test ride.

IB’s products aren’t hard physical items. 

Usually they act as intermediary between two parties in a transaction.

They help you to find buyers for that unwanted division of yours. 

Or help you find just the new division you’re looking for. 

And negotiate the “best” price.

Or investors for your debt or equity issue at the “fair” or “market” price.

By expanding the geographic or sector range of investors they may be able to lower the price. Or though nifty new instruments. 

That applies even if they underwrite because they don’t underwrite until they have a good sense of their ability to place the deal and a price range.

Success in these endeavours depends on their "smarts", experience, range of contacts as well as their ability to persuade other parties to participate in a transaction. 

So you’re looking for professional, competent, self-assured, experienced, persuasive bankers.

If they can prepare “flash” presentation materials (a “pitch book”), deliver a convincing (verbal) sales pitch to you, all the time maintaining a professional appearance, you're more likely to have confidence that they will be able to perform these same tasks with the transaction counterparties you need to have convinced.

Pin-striped suited bankers will make a better impression than the same presentation team in Hawaiian shifts. Thought the latter may make a better impression when pitching a movie idea to an entertainment conglomerate.

In other words: horses for courses.

McDonald’s pitches its offerings with a clown. IB’s don’t.

While past performance is no guarantee of the future, a track record of success (league table positions), a brand name, a team with documented experience are also selling points.

Often IB’s cut prices on megadeals – to garner market share stats. That’s why sometimes you see a plethora of banks on a deal even though they are not all really needed.

Not only is the cut of their jib important, but also the appearance of materials associated with the sale.

When you buy a Rolex, it doesn’t come in a cardboard box lined with plastic foam.

Nor is that pearl necklace you just bought at Mikimoto handed to you tucked into a handy Ziploc plastic bag.

Investment Banking – Why is It the Way It Is? Part 2 Compensation Structure: Bonus Drives Behaviour

(Investment Banker Charles Wellington III)
He's Got His Mind on His Money
and His Money on His Mind

Like other businesses IB’s are in the business of making money.  As much as possible. No surprise here.

So what’s the difference from other firms?

Investment banks largely but not exclusively compensate an employee for his or her personal revenue generation.

While investment bankers have relatively high salaries, their yearly bonuses are often multiples of the base. And thus can easily dwarf the base salaries.

Few other industries are as generous.

The more revenue one generates or is seen to have generated the higher one’s bonus.

Promotion depends on revenue generation. Those in the higher realms receive bonuses based on their team’s revenue generation along with any “rainmaking” of their own.

Generating transaction volume and favorable publicity also generates bonus “credit”.

Bosses are therefore motivated to ensure that they “pitch” as many clients as possible. So are those with their eyes on the higher rungs of the corporate ladder.

All of them are also motivated to ensure that no opportunity to pitch is lost because of “bandwidth” problems. Not enough people. Just work the ones you’ve got longer hours. And yourself - ideally.

Woe betide the boss whose team misses a marquee deal.

There is another motive: self-preservation.

In most firms, each banker has a minimum target of annual revenue he or she must generate. An amount that depends on his or her “level”. 

Miss that target and you may find a target of another sort on your back. 

And the target meter resets to zero revenue with uncomfortable regularity. 

It's not what revenue you brought the firm in the past, but what revenue you will bring today.

Investment Banking – Why is It the Way It Is? Part 1 - Introduction

 

Like Bob Cody AA Says What He Means
and Means What He Says

Recently there’s been a lot written about the plight of investment bank analysts. 

Long distance psychological diagnoses have been performed on both analysts and those who manage them. Paging Senator/Dr. Bill Frist!

Various economic theories have been trotted out and fingered as the culprits.

Deep societal analysis has shown. The weakness of youth. The enlightenment of youth. The end of the American Dream.

What I haven’t seen is a look at what are the fundamental drivers that affect how investment banking operates.

Not all industries are the same. There is no one organizational or management style that fits all. And even within industries there are differences.

Corporate organization and management style have a direct impact on how an organization behaves or doesn’t.

One more introductory comment. 

When there’s talk about “investment banking”, the names Goldman Sachs or Morgan Stanley usually come to mind.

Just to be clear: these and similar firms do more than investment banking.

What are some of the other activities?

Global client and proprietary trading. Asset management. Investment vehicles/funds. Securities research. And (shudder) now even retail banking. These all have different characteristics than investment banking and operate differently.

Broadly speaking what then is investment banking?

Capital (debt and equity and hybrids thereof) raising and placement. Mergers and Acquisitions. Structured Finance. Derivatives. And more.

In the posts to follow, I’ll look at two key characteristics of investment banking and the role/purpose of analysts with a firm. And use some of the observations to explain IB behaviour or misbehaviour.

All this meant to be descriptive not normative. 

Or, if you’d like, explanatory not exculpatory.

The three topics that I think are relevant to how IB’s operate are:

1. Compensation Structure
2. Product Characteristics
3. The Role and Purpose of Analysts