Rolf Breuer, the bronzed chief executive of Deutsche Bank, likes to lecture international audiences on the ethics of company takeovers. Alarmed about the widespread fear that mergers and acquisitions always cost jobs, he says that investment banks promoting such deals have gained a reputation similar to dealers in used cars. Takeovers, Breuer claims, are eminently defensible on the grounds that they improve the allocation of resources in capitalist societies. There is some justification in his campaign for a more positive image for the mergers and acquisitions (M&A) business. Banks which help to remove underperforming bosses and act as the go-between in logical corporate mergers are making the market work better.
Breuer is wrong, though, when he compares the M&A business with car dealerships. It may not be flattering for bankers-but we should really be compared with real estate brokers and estate agents. Why? For one thing, car dealers, unlike bankers, actually get their hands dirty. They normally buy the asset whose ownership is changing hands, a car, and then sell it at a higher price. Banks, on the other hand, like property dealers, simply act as an agent in the transaction, taking a fee as a percentage of the value of the deal. M&A business worldwide is running at $2.4 trillion a year, and growing. Since banks take 0.7 per cent to 1 per cent of the transaction value in fees, it is easy to see why bankers actively promote it.
Another point of comparison concerns valuation. Banks and estate agents both deal in assets-companies and houses-whose valuations depend on tangible and intangible components, subject to fluctuations which depend on unquantifiable psychological and human factors. The value of a company, like residential property, is in the eye of the beholder or the bidder. It is very difficult to quantify the value of the goodwill in a company brand, the strength of its management, the products in its research and development pipeline, or the future marketplace into which these products may be sold. All of these factors are somehow reflected in a company's share price. Yet the share price also depends on the market's perception of the probability that the company will be taken over, plus short-term confidence factors. All this is reminiscent of the way that similar-sized houses only half a mile from each other can vary in price by several hundred thousand euros. When an estate agent tells you there is an exact way of valuing whatever he's got to sell, he is dismissed with a cynical smile. Why should bankers be treated differently?
Both professions use similar language and techniques to promote their services, and rely on similar client motivations for buying them. Bankers use a lot of jargon to impress their clients-discounted cash flows, sum-of-the-parts valuations, market premia-but is this so different from the estate agent's patter about south-facing elevations, hot-steam jacuzzis and stainless steel piping?
Similarly, the houseowner who regards his property as too small and wants to trade upwards is analogous to the chief executive seeking higher rewards, status and market share by taking over a competing company. Inconveniently situated kitchen? Translated into the world of investment banking, this simply means the client requires access to leading-edge technologies to secure a new market niche. Property in need of renovation? In bankers' parlance, the business has been poorly run but will attain higher value once the new owners sack the management. Relocate to a new neighbourhood? Raise profits by buying higher-margin businesses.
The similarities apply, too, to the weary processes that must be engaged at all stages of house purchases and takeover deals. There are exact parallels in banking to the familiar estate agency shenanigans of credit referrals, land registry searches, survey setbacks, gazumping, contract breakdown, solicitors' queries, over-mortgaging and negative equity. The house purchaser who pays a small fortune for redecoration and extra plumbing, yet remains disappointed with the view from the patio, can surely sympathise with the BMW chief executive who has just resigned after failing to turn round the Rover group. And Deutsche Bank's plan to take over Banker's Trust is running into US legal opposition as a result of the German bank's Nazi past. Isn't this more or less the same as a would-be vendor having to stay put after the purchaser's survey uncovers a collapsing mine shaft under the foundations? Many investment banks, particularly after recent mergers in their own sector, now have names reminiscent of estate agents. If convergence continues, it won't be long before the public concludes that the two professions are really the same.
