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Fees Matter

July 24, 2014, 11:33 AM UTC
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Kyle Bean for Fortune

It’s Wall Street’s favorite locker-room double-entendre: Size matters! (Ha, ha! Get it? Big smirk from former lax bro, now bulge bracket investment banker.) Just harmless, boys-will-be-boys stuff, you say? Maybe not. There’s more harm to this macho truism than you might think, because the phrase “size matters” has been used as a long-standing challenge by Wall Street to CEOs, as well as a justification by CEOs to shareholders, to buy companies and get bigger.

How many times have you heard “We need to be a global company”? Or “In this business you have to have scale”? Of course every business has to grow, but not by spending silly money on dilutive acquisitions just to have offices on every continent except Antarctica, shareholder value be damned. This call to bigness was made famous in the 1980s by the late investment banker “Bid ’em up” Bruce Wasserstein and the “Dare to Be Great” speech he would deliver to CEOs to get them to shell out megabucks to buy a company and pay megafees to Brucie.

And that’s the real reason bankers tell executives that they need to get bigger and buy companies: so that they can collect fees. How do I know that? Because the same bankers will then turn around and tell the companies, once they become too big, they need to get smaller—again to collect fees.

Which brings us to another, more honest Wall Street saying: “They build ’em in bull markets, they tear ’em down in bear markets.” Exhibit A is Fortune’s former parent company, Time Warner (TWX), and the current deal swirl in the media biz. Some history to illustrate: Starting with the Time and Warner merger in 1989—urged on by bankers who said it needed scale—the company was built into the biggest media conglomerate in the world during the roaring bull market of the 1990s, culminating with the disastrous merger with AOL in early 2000.

The fallout was infamous and epic, as the market value of AOL/Time Warner stock went from $226 billion to $20 billion. (Oops!) Subsequently Time Warner—urged on by bankers who said it needed to be focused—embarked on a major slimdown campaign, mostly during the decade-long bear market, divesting itself of the music and cable businesses, AOL (AOL), and Fortune’s parent, Time Inc (TIME). Over that period TWX stock has performed just fine, thank you.

And now guess what? As the markets have come roaring back to life, size matters again. Once again the bankers are singing their “You have to have scale to compete” song. And so Time Warner has recently rebuffed an $80 billion bid from Rupert Murdoch’s 21st Century Fox, though TWX shares are trading above Fox’s offering prices, which is the markets’ way of saying “Stay tuned.” While Murdoch doesn’t need Wall Street to egg him on—he has always believed bigger is better—others are swayed by the bankers’ call. Further consolidation and deals in the media business are now “inevitable,” say the Wall Street analysts, because these companies—yes, you guessed it again—need scale to compete. (Just as bad as the bankers and executives, by the way, are the journalists who unquestioningly quote this drivel.)

If/when Time Warner and Fox merge, or some other combination ensues, one thing I can tell you for sure is that down the road, it will all be taken apart again. Because, as it turns out, size doesn’t matter. But fees do.

This story is from the August 11, 2014 issue of Fortune.