Paying M&A Bankers by the Hour

by: Felix Salmon

Should M&A bankers be paid by the hour? William Cohan thinks so, on the grounds that they would then give more impartial advice, rather than being incentivized to close every deal. The Epicurean Dealmaker, naturally, begs to differ:

The average client does not want or expect his or her investment banker to give unbiased or neutral advice in a deal context. That is what he or she has corporate lawyers for: they are the advisors who have the fiduciary duty to protect their client from adverse legal, regulatory, and environmental outcomes. In addition, the client relies on him- or herself (with the backing--or prodding--of the Board) to exercise the business judgment to say no to unfavorable business terms. In contrast, the client hires the investment banker to try and fix these problems when they arise, to keep the deal momentum flowing, and to make the deal happen...
Putting investment bankers on a time clock, as Mr. Cohan proposes, would not fix this problem. In fact, it would be entirely counterproductive, since it would incentivize bankers to find all sorts of excuses to drag out negotiations and slow down the deal process, in order to pad their billable hours. (A complaint, by the way, which many clients of mine have leveled in the past against their paid-by-the-hour outside corporate counsel.) Putting bankers on the clock would just slow down the process of getting to yes or no, not materially change the distribution of the answers.

I'm not at all convinced that corporate lawyers can or should be the people providing impartial advice about whether a certain deal makes strategic or fiduciary sense. Maybe if all corporate lawyers were Wachtell - but they're not. I'm also far from convinced that slowing down the process of getting to yes or no is necessarily a bad thing, in the context of a market where the overwhelming majority of acquisitions end up failing.

There have been many attempts over the years to set up "trusted strategic advisory" shops where bankers make their money from permanent retainers rather than success fees; to my knowledge, none of them has really panned out. TED makes some very good points, and more than holds his own in the battle of ideas. But ultimately that doesn't matter: in the real world, nothing is going to change, and both he and Cohan know it. A lot of bad deals will continue to get done, a lot of value will be destroyed, and every so often someone will blame the bankers. They're being paid enough, they'll live.