It hardly sounds like a groundbreaking realization from legendary investor and “Oracle of Omaha” Warren Buffett. Of course, there is the rustic way in which he phrases it. As New York Times’ chief mergers and acquisitions reporter Andrew Ross Sorkin quotes, “Don’t ask the barber whether you need a haircut.”
Just as a woman with sharp scissors may urge you to go for an earlier than needed cut, Wall Street dealmakers eager for fees are going to push to get deals done.
From The New York Times:
“Of course, acquirers often hire more than one banker to advise a board, to act as a check on the other. But all too often, both banks are given the incentive to recommend the deal.
“Since 2008 in the United States, in 131 of the 230 deals that were worth over $1 billion, the acquirer hired more than one bank, and in some cases more than five. Those banks were paid an estimated $3.3 billion for advisory services, according to Thomson Reuters and Freeman Consulting.
“The problem, as Mr. Buffett explained when I called him on Monday, is that the system is skewed. Companies are willing to pay advisers a supersize fee when they do a deal because then it is merely a rounding error, a tip on a lavish, celebratory meal.”
Sorkin refers to Buffett’s statement on bankers as “a bold suggestion that isn’t sitting well with the establishment.” Yet, that sounds like an overdramatization. It’s unlikely to impact Wall Street’s firmly entrenched techniques for squeezing “value” out of corporate America.
You can make up your own mind on the matter by reading Andrew Ross Sorkin’s commentary on Buffett’s annual letter to Berkshire Hathaway shareholders.
The Daily Reckoning
Rocky Vega is publisher of Agora Financial International, where he advances the growth of Agora Financial publishing enterprises outside of the US. Previously, he was publisher of The Daily Reckoning, and founding publisher of both UrbanTurf and RFID Update -- which he ran from Brazil, Chile, and Puerto Rico -- as well as associate publisher of FierceFinance. Rocky has an honors MS from the Stockholm School of Economics and an honors BA from Harvard University, where he served on the board of directors for Let?s Go Publications, Harvard Student Agencies, and The Harvard Advocate.
Just one mostly off-topic comment on this otherwise insightful post:
In Buffet’s native Nebraska, I am fairly confident that a barber is always a man. Here in rural Kentucky, the last time I went to my (male) barber, he scolded me with, “Boy, have you been letting women cut your hair?”
Companies go public to rake in a few billion dollars for themselves and the underwriters. And the suckers-- sorry, investors who gobble up shares when these things come out-- usually end up losers. The stock sinks once the initial euphoria wears off. Then it levels off at a much lower price before maybe rising at a normal pace again.
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