Warren Buffett embarked on an epic diatribe against investment bankers in his latest letter to Berkshire Hathaway shareholders, published Saturday. He mentioned bankers 10 times in the long letter, not once generously. As The New York Times noted, Buffett painted investments bankers as “nearsighted and self-serving and pressing for deals that aren’t always in the best long-term interest of their clients.”
While Buffett long has jabbed gleefully at bankers, he also has tossed them praise from time to time. He also knows quite well what he’s talking about, having been closely involved in running and owning businesses with major investment banking divisions. It could be that he’s angrier than usual about the bankers. Or something else could be at work in the masterful investor’s mind: If he can convince just one CEO or owner or controlling family of a major private company to sell to Berkshire without running a banker-led auction first, his borderline intemperate jeremiad will have been a giant success.
To review, Buffett loves to take potshots at investment bankers–even when he is praising them. He singlehandedly changed the career trajectory of Byron Trott, then with Goldman Sachs, when Buffett praised the banker in 2004 for having brought him a good deal. “It hurts me to say this,” Buffett wrote his shareholders, and then wrote Trott had earned his fee. Four years later Buffett was at it again, damning investment bankers with more-than-faint praise for Trott, calling him “the rare investment banker that puts himself in his client’s shoes.”
Over the weekend, Buffett had nothing at all kind to say about any banker. (He didn’t mention Trott, who had suggested to Fortune late last year that he soon could be dealmaking with Buffett again.) Admonishing companies in which he has invested for having traded stock of greater intrinsic value for the stock of a company they had acquired, Buffett wrote, “I’ve yet to see an investment banker quantify this all-important math when he is presenting a stock-for-stock deal to the board of a potential acquirer.” The reason, of course, is that bankers are paid fees based on the size of the transactions on which they advise, not the success of the transaction for their clients. The arrangement clearly infuriates Buffett. “In striving to achieve the desired per-share number, a panting CEO and his ‘helpers’ will often conjure up fanciful ‘synergies.’ (As a director of 19 companies over the years, I’ve never heard ‘dis-synergies’ mentioned, though I’ve witnessed plenty of these once deals have closed.) Post-mortems of acquisitions, in which reality is honestly compared to the original projections, are rare in American boardrooms. They should instead be standard practice.”
In case you were wondering, the “helpers” Buffett is referring to are investment bankers.
Buffett didn’t stop there. He criticized the value of so-called fairness opinions, a document a banker prepares for a client so they can cover their rear ends with their boards regarding the price and other terms of a transaction. He mocked Wall Street’s willingness to believe in the logic of deals, especially when bankers are earning large fees. He lamented that bankers, “being paid as they are for action,” urge premium payments on their clients even if the premium destroys the investment rationale of an acquisition.
Buffett, of course, knows investment banking well. He once stepped in to run Salomon Brothers, in which he had previously invested. Goldman Sachs remains a major holding after he personally bailed out the company in the financial crisis. Wells Fargo, Buffett’s largest holding, with a market value for Berkshire of $26 billion, long disdained investment banking. But when it bought Wachovia in a firesale it retained the disgraced bank’s investment banking operation. (Wells CEO John Stumpf has publicly dismissed a desire to rank high in investment banking “league tables” of deal value. Instead, Wells aims to provide investment banking services to its banking clients who need it.)
So it’s fair to take Buffett at his word that he doesn’t much care for investment bankers, his positive experiences with some of them notwithstanding. All that said, the growth of Berkshire is predicated on Buffett being able to find more amazing deals. And if he succeeded in planting seeds of doubt in the mind of just one owner of a multi-billion-dollar private company who decides to sell to him–and not to the higher-paying corporation the bankers are recommending–he will have achieved a goal of a higher purpose, and one that investment bankers can well understand: making more money for himself and his shareholders.
